The Science of Selling Your Startup
An increasing number of Hong Kong startups have hit the headlines for achieving superb sale prices. Jumpstart spoke to some of their founders about how you can join their ranks. A quick trawl through the business news from the past few years sees prominent coverage of some serious acquisition deals for a handful of Hong Kong entrepreneurs.
In April 2014, the sale of Taxiwise for an undisclosed sum saw backer Bigcolors make a staggering return of 22 times on its original investment. Although unusual in scale, this sale is one of many to hit the headlines, and there will be many more with an increasing number of VCs and investors looking to Hong Kong for opportunities. In a report on the startup ecosystem of the SAR, government initiative Startmeup.hk states that the city is a “gateway to 4.7 million high net worth individuals in Asia Pacific with wealth totalling US$15.8 trillion.” Is there a magical formula for attracting this money? Are there specifics that founders can do to make their business more saleable? The answer is no or, to be more precise, they shouldn’t be building a company with the intention of selling. Kevin Huang is the CEO of Pixels, the multi-screen advertising company that was acquired by Gravity4 in November 2015. He started the company 13 years ago. He offers this advice: “build a profitable and desirable business with strategic market positioning. With that, there are more options than selling it. An IPO could even be one of those options.”
This sentiment is echoed by Truong Lam, co-founder of Taxiwise and now working for Cisco in San Francisco. He mentions that “getting an exit should not be the ultimate goal! Building a great company with great people should always be your passion. Make sure you know what your goals are. Stop reading TechCrunch on exits. The news always portrays a sale of a company as very grand, but you do not know what goes behind the scenes, and all the bad things that a team may have experienced before the sale. Of course, you never hear any of that because it’s kept out of the limelight. Get the thought of an exit out of your head right now.
Focus on the product, market and how to make it fit. Focus on your team and learn how you can help them reach their goals. When the time does come to make that decision then think about it.”
James Giancotti is CEO of Oddup and a founding partner of the seed investment company Bigcolors. He was involved in the sale of Taxiwise to Ikky and Australian outfit Crowd Mobile’s acquisition of mobile dating app Kiss Hugs. He says that the offer for Taxiwise came direct from the buyer while the Kiss Hugs team had more of an input in the final sale price. He continues that a familiar gripe from startups is that they can’t access funding. He argues that actually, there are some companies “...that are getting money thrown at them” - and has been through two acquisitions that prove this. Buyers will find you if you have something they want, Giancotti continues, whether your team, the IP around your product or the traction and revenue you have garnered. He says: “If you look at high profile acquisitions like that of Whatsapp by Facebook, it had such a huge customer growth, especially on mobile. You need to have a company that is worth buying.”
Social media and eCommerce specialist Michael Michelini founded Social Agent, a SaaS lead generation platform, which he sold to software development startup Unchained Apps. He mentions that “for our deal, a lot of it was the team. Companies in Hong Kong and China are starving for developers, and are willing to buy up companies for the talent. There were also some skilled and connected marketers on the team to help as well. But not just the team, we had a mobile app developed that fit into their portfolio and we were able to synergize on the code and make efficiencies in development.”
Before a sale is in the cards, he argues that startups should just focus on getting a balance between growth and earning money. He states: “Everyone says, “Get bigger, don’t worry about revenues”, but in the meantime, you have got to pay your bills. I am now of the mindset that you are better off solving a problem and getting a solution that people are willing to pay for straight away rather than getting millions of users.”
In fact, says Huang, just focus on making your outfit a model company. Although you may not be working with the intention of attracting a buyer, if you do, and everything is in order, it will pay dividends. He explains: “As a best practice, I think that all businesses should follow good housekeeping rules from both a legal and finance perspective. When an opportunity arises, then these aspects of your business won’t become road blocks for a trade sale. Belinda Montes, our CFO and my co-founder, has, for years, done a great job maintaining our financial framework and legal structure so when the opportunity with Gravity4 came up, this was not an issue at all. My advice to all startups and businesses is to ensure you hire a good finance manager, accounting/audit firm and lawyers. One day, you’ll find out that it’s money well spent.”
Get your company in order and then spend time talking about your venture openly with both competitors and complementary companies alike. You never know what kind of opportunities may arise. Jennifer Cheng is the founder of cosmetics startup Glam-it! but is also a serial entrepreneur. She was director of Business Development APAC for Rackspace, and vice president of uBuyiBuy and BEECrazy - both of which were sold. One sale, she recounts, came about after a chance meeting at a startup conference. She explains that you don’t need to shout about your worth, just go out with the mission of finding “good people with good companies.” She says: “If you put yourself up for sale, the analogy is a girl shouting out that she’s very ready to date. That puts people off. You need to be the last person standing with something special to offer and then people will approach you. You should be building value to the point where you have to bring in other people to help you grow it more. There is only so much marketing and fluff will achieve. You need to build a company that is sustainable and scalable.”
Michelini says, “A lot of people just don’t reach out. All you have to do is just be human and personal. Don’t just send out blanket emails. Write something personal and researched. The digital world is still very human.” As well as business opportunities, this approach might lead to the discovery of a synergy between two companies, which could lead to a sale. Michelini notes that “many entrepreneurs dream of exiting their company. But do they even know who would be a suitable suitor? Keeping a list of who you could work together with is key.” He adds: “For us, we started offering our service to a few potential suitors. We kept the option open to either raise another round of money, or to exit the business and merge with a bigger company.”
This is exactly what happened with Pixels, says Huang. He says, “We had a joint discussion about potential synergies and how we can leverage our expertise in the respective regions and expertise in ad tech. As the discussion progressed, it became apparent that Pixels becoming a part of Gravity4 Inc would be the best way forward.”
Lam says that Taxiwise’s acquisition was also as a result of synergies. He explains: “Originally, Taxiwise was quite successful in the enterprise and SME category. However, we even saw more potential if we joined up with another startup that has the same vision as us. We didn’t see it as a sale. For us, we saw it was teaming up and joining forces. It was the marriage of two startups who share the same vision with a common goal in mind.”
Salvador de la Barrera founded Flipter, a social network, which he describes as “...a global repository of opinions and collective knowledge pool, with the purpose of providing a place for reference and insights where people could discover what and how people around them thought and felt about important topics around life.” It was bought by 1WorldOnline, but de la Berra describes the sale as the coming together of like-minded people. He says: “In a way, it felt more like finding a cool group of people who shared an interest and the desire to impact the world with technology via polls, quizzes, etc and then deciding to work together. You could say that polls and quizzes are our “rocket” that we like to work on. It’s great to work everyday with people who share your passion.”
Mawgan Batt decided to sell her business, thehkhub.com, in October 2015 to spend more time with her sons and opted to advertise the business on Facebook. She says: “In Hong Kong, Facebook is a very useful tool for making connections. I was already an active member on a number of entrepreneur, parenting and writing groups, and decided to pursue that route first to see if there was any interest.” There was. She continues: “I received around 50 requests for further information on the business, which I initially followed up with a non disclosure agreement (NDA). Once I received a signed copy, I then sent out details of the sale including valuation, transaction information, etc...This then resulted in a number of meetings with interested parties over a few weeks, and then I agreed an offer with one of the parties.”
Once you have a buyer, then the negotiations and paperwork processing can start. Batt appointed a consultant “who drew up the sale and purchase agreement, and compiled all of the necessary paperwork.” She says that the process was simple and took only three weeks from offer to completion.
Lam reiterates the advice of having your housekeeping in order as this will help the process. He says: “If you have paperwork ready and your accounting work is legit then you shouldn’t have a problem. Though finding and documenting everything can be a pain, doing it early on and keeping paperwork at hand helps a lot. The other part is the agreement of the startup itself. Make sure everyone is on the same page and all the founders have a common goal and interest. I do warn you that it could take some time because a lot of paperwork is involved - a lot of signatures and company chops. It was a headache, but besides that it should be a piece of cake if both parties have all the paperwork ready.”
Making sure everyone in the company is happy is key here - take this approach or keep quiet until the deal is a definite. Michelini recounts: “We told some of our team that we were considering some suitors, and it actually caused at least one person on the team to leave beforehand. He didn’t reveal his reasoning, but his reaction seems to be related to the prospect that we were going to ask him to work for the potential new owner for a certain amount of time if the deal went through.” Michelini is blunt: “My advice to other founders who are looking to merge or sell their companies is that you need to keep your mouth shut! It can affect your team, your customers and your morale. There are high chances that these deals may not go through (a few got close but no cigar) and then how do you tell the team that it fell through?”
Hopefully it won’t. If a deal looks certain, the founder needs to decide what they want. Do you want an asset sale or full company sale? Do you want any involvement in your company after the sale? Once the decisions are made, the discussions can push ahead and then a memorandum of understanding can be drawn up. Michelini also recommends adding “an attachment with various milestones and events that would happen at certain parts.” He says though that there is a certain degree of trial and error, that “business transactions are not like programming - there isn’t a hard and fast ‘code base’ with hard rules. It is what the buyer and seller both agree on and accept.” Remain patient throughout, he continues, relaying that the sale of his company took between five and six months.
After the sale, you can opt to stay on either as a member of the staff or as an advisor like Batt, who provides “input and support where needed.” Salvador de la Barrera is still 100% involved with Flipter, managing the Latin America operations now under the brand 1World. He has watched his company go onto greater things thanks to the acquisition. You can cut ties and move onto new projects like Cheng and the Taxiwise team. Whatever your choice, if handled well, a sale could offer the financial security to pursue new projects or opportunities within a larger and more established outfit. Maybe it could be your startup hitting the headlines in the coming years, and hopefully for a sale that will get investors within and outside of Hong Kong talking and looking our way.
Katie Scott is the former News Editor of Wired.co.uk in London. Now living in Hong Kong, she has written about everything from 3D nature documentaries to nanosatellites to the ramifications of Edward Snowden's brief visit to the SAR, but is driven to find stories on innovation and innovators of any kind.