In the FounderSensei workshops, we focus exclusively on business model validation by running customer experiments. It's the right focus for us and we love it. To differentiate our stuff from accelerators, we don't focus on pitch training or understanding the early-stage investor market. Our hypothesis is if you create a great business, the investor stuff takes care of itself. While I still believe this is true, I've recently uncovered another process for validating enterprise value of a startup.
About 45 days ago, I decided to sell my SaaS startup, a16e.com. There were a lot of reasons for this decision, and I don't want to get into them here. Like most entrepreneurs, I had a lot of questions about the sales process and I wondered if I could get a deal done. The dominant question in my mind was, "Does anybody want this thing that I've created?"
Our current situation with my startup is not good, in my view. We lost an important customer at the end of the year. We ran out of resources I was trying to execute an important pivot. I think our vision is good for where we want to take the business, but much of it is unproven. In addition, I had to move back to Chicago from San Francisco. In the process, I'm virtually eliminating the process of attracting venture capital as the Chicago venture market is practically non-existent. This is a normal part of the startup cycle, when things are not going terribly well. Sometimes, when it rains, it pours. I've seen this movie before.
Stepping into the unknown, I quickly created a list of companies who might be interested. To my surprise, I came up with about 18 names in a few minutes. With some additional research, the target list of companies grew to 30.
I sent an email to 30 CEO's. The email message looked exactly like this.
I've decided to sell the Acquisition Science (A16E) business, formerly LegitLead. In summary, the technology platform we built works really well. Every customer test we ran was wildly successful. However, we’ve stumbled on our go-to-market strategy. I’ve learned the resources required for enterprise sales exceed what we have available at this time. Therefore, I think it makes more sense to put the technology in the hands of another company who has existing customer relationships that would benefit. Velocify came to mind as a potential fit.
Some of the key assets include:
- Break-through machine learning technology that builds predictive models without human intervention
- Intuitive quality dashboard with conversion optimization, rules-based filters and other features that measure lead and data quality in real time
- The world’s largest consumer known fraud database
- Massive multi-channel consumer database containing 240 million unique permission emails, name and valid postal fields on every record
I’m attaching an executive summary and a customer pitch deck with screenshots. Please let me know if you are interested in exploring this opportunity in more detail.
LegitLead Overview New Customers
Founder & CEO
Acquisition Science, LLC
Within 24 hours, I had received 10 responses from CEO's who wanted to look at the business. In the next two weeks, I set up meetings with each and filtered out those who were serious from those who were just kicking the tires. At the end of this process, there were three companies who were seriously interested.
I now had an answer to my question, does anybody want this thing? The answer was yes. Cool.
So the deal is still pending and I'm in the middle of negotiations so the outcome is not clear as I'm writing this post. But, I wanted to share my positive feelings about this process and highlight what I've learned. In general, I think this exercise was invaluable for measuring whether we are creating value with our startup, and where we are not.
Here's what I've learned.
1. Founders, and employees in general, tend to undervalue their company. Entrepreneurs are problem solvers. One of our strengths is that we quickly see problems and immediately start thinking about how to solve them. There is a downside to this skill. The downside is we see problems everywhere. This can give us a negative view of the business.
Outsiders almost always view the business more positively than the Founders do. This is especially true with strategic acquirers because they understand very well how difficult it is to acquire customers and make them happy and profitable.
This might be a humble Midwestern thing, but I think it's true that Founders tend to undervalue the businesses they are creating.
2. Learning who is interested in buying your company opens up new market opportunities. This was a surprise to me. I didn't expect the M&A process would uncover new insights on market opportunities and validation of our new ideas.
Let me share specific examples. Of the 30 companies I contacted, the three most interested were as follows:
- A lead aggregator in the education market
- A data enhancement company
- A lead management software company
The key strategic question is, why do they want to by my business? After a few conversations, the rationale for each one became clear to me. This rationale was enlightening in every case.
For the lead aggregator, they have a low-margin business reselling leads to for-profit schools. Since DeVry was our first customer on the platform, the customer segment fit made sense to them. They are exclusively in the same market.
Importantly, this company competes with Quinstreet, a publicly-traded lead aggregator. Quinstreet has not done well in the public market and their business is struggling. Quinstreet's gross margins are 15% and they've been plagued by quality issues from the jump. A few years ago, I was trying to convince Quinstreet to use our technology to predict lead conversion rates, as a way to solve their quality problem. They decided to build their own, to my great disappointment at the time.
Two years later, Quinstreet now has a predictive analytics platform, and they are very proud of it. In my opinion, they didn't implement the solution properly within their business model. As a result, revenue, margin and unit prices have all gone in the wrong direction. This is not good for them.
The lead aggregator, who is interested in buying my predictive analytics platform, is at a competitive disadvantage versus Quinstreet. Even with Quinstreet's problems, the sense is this lead aggregator is behind the eight ball. So, they are actively working to fill this gap. Their options are a) buy a platform that they can afford b) parter with a leading lead scoring company or c) build their own.
It's clear we are their best strategic option for balancing the competitive dynamics against Quinstreet. I was able to validate this by making a strategic argument to the CEO and CFO about why buying my company was their best option. They agreed completely. That is why they want to buy my company. We have a shared vision for the market and the fit is obvious. Very cool. I never would have learned this had I not tried to sell my company to them..
These insights open up new possibilities and a big idea - Should we market our platform directly to all the lead aggregators that don't have an in-house predictive analytics capability? I think this is 90% of of the market. Could we own this space? What is the market opportunity? How would the pricing model work? I've tried to do deals with lead aggregators before and we could never figure out the pricing model. Our pricing model is designed for lead buyers, not lead sellers. Is it time to take a fresh look at this and come up with a completely different approach, customized for lead aggregators?
There are similar stories with the data enhancement company and the lead management software company. The implications are similar.
Should we launch our own data enhancement platform? Our current product does data enhancement as part of our conversion optimization process. So, we are already doing this. What we aren't doing is selling just data enhancement on a stand-alone basis. Should we enter this market? Interestingly, I think this opens up an entirely new market in consumer e-commerce. That's an intriguing idea. I've actually sold one of these already and fulfilled it manually.
Is it possible for us to sell our AI Platform as an app within lead management and CRM applications? Salesforce certainly has an app store. What does it take to get into their store? What about lead management platforms like Velocify, Active Prospect, Sparkroom? Would they see our platform as a competitive threat or a partnering opportunity? These are intriguing questions because they could lead to an entirely new distribution channel for our product.
I never would have learned any of this had I not tried to sell my company.
3. Market validation from acquirers and potential partners can help reinvigorate your energy and enthusiasm for your business. To my surprise, the process of trying to sell my company has reinvigorated my enthusiasm for the business.
As Founders, I realize it's absolutely essential that we believe passionately in what we are doing. Without passionate energy and drive, our businesses aren't going anywhere. That's just a fundamental law of the startup universe.
I am also aware that we are human. Failure is an integral part of the startup process. As resilient and as relentless as we are, failure does take a toll on our emotional well being.
I teach entrepreneurs that customer validation is imperative. But what happens when we don't get validation from customers? It's disappointing. It sucks. It's draining. I teach how important it is to turn these temporary set backs as energy to fuel your next move, and the pivot you need to make. That simply doesn't change the fact that it hurts. That understates it. It's more accurate to say that it really fucking hurts.
When your startup is struggling, you will eventually lose your passion for the project. Every one does. Every one of us is a human being. We can only handle so much rejection. I think this happens somewhere between year two and year three of a struggling startup. At this stage, if the light ahead looks dimmer than it once did, you are losing your passion for the project.
Sometimes, this is a good thing. There is an opportunity cost to everything we do. It's ok to fail. It's ok to give up when you no longer believe the venture is worth your time, money and energy. Startups fail all the time and we shouldn't lose the perspective that this is a high-risk/high-reward game.
But sometimes, you are just one pivot away from taking off. You might be just two inches away from striking gold.
Knowing the difference between ultimate failure and being two inches away from gold takes tremendous entrepreneurial judgement. This judgment only comes from doing startups, again and again and again.
As I've engaged in strategic discussions with potential acquirers and partners, I've gotten a glimpse at how they view the market opportunity for predictive analytics. They are talking to customers every day. They too are trying, succeeding and failing. They have market insight and they will reveal their beliefs in their words and in their actions. Knowing these companies are interested in us is validation that we are on to something. When you are struggling, it's good to learn you're not completely crazy.
And if we are on to something, we should keep going.
Sometimes that's enough to pick ourselves up and try again, this time more intelligently.
In conclusion, the decision to try to sell my company was a good one whether I close a deal or not. I've learned a tremendous amount about the market, the competitive landscape, and how other players in the ecosystem view the market opportunities in front of them. The learning alone is worth its weight in gold.
I now believe everyone should try to sell their company once a year. It's not a distraction and it's worth the effort you put into it. It helps you understand the value you are creating the marketplace. It opens up ideas for new market opportunities. It helps build trusting relationships with potential partners and acquirers. Finally, it can invigorate your energy for your startup, especially when you are feeling down about it.
Give it a try and share your experiences with the FounderSensei tribe. I think you'll find it's worthwhile.