Traditional Sale Process vs Magic Box Paradigm

Introduction

The goal of this document is to provide a framework for considering when a startup founder might proactively seek an exit, whether to entice a buyer vs run an open auction and the sequence of steps to both. This document can either be used directly by an Enjoy The Work partner as a facilitator guide or shared directly with a founder.

Founders often find this topic difficult for a variety of reasons. Attempting to sell the company can be a one-way door with a real chance of failure. Founders also often can’t imagine life on the other side of the exit raising identity issues. Not to mention that many people are simply uncomfortable discussing money. This is to say that a founder might be ready to sell their business on Monday and feel differently by Tuesday (and that’s ok).

When to seek a sale

Under what circumstances might a founder make the choice?

• Market hype cycle - Operating in a hot space where acquirers feel pressured to buy rather than build competing technology.
• Market Timing – Consolidation is coming to the market and there are a limited number of acquirers; a game of musical chairs might mean that the slow startup is left without a viable buyer.
• Growth Plateau – Your company's growth slowed and the growth potential appears capped.
• Competitive Landscape – Competitors are outpacing you in product, market share, or funding and catching up no longer feels plausible.
• Capital scarcity - If cash reserves are dwindling (< 12 months) and likelihood of future capital is low.
• Founder Fatigue – Are you, as the founder, emotionally or physically drained? Is continuing the business becoming detrimental to your well-being?
• Investor pressure – Investors expect a return soon, or pressures to deliver liquidity.
• Technology Disruption – Is there upcoming technology that could make your product or business model obsolete?
• Personal Financial Goals – Does selling now align with your own financial or lifestyle goals, considering the potential payout versus future upside?

How to sell

There is announcing your startup is for sale, and there is subtly enticing a buyer. We will refer to the former as a “traditional sales process” and the latter as “magic box” (in reference to the book by that name).

What does a traditional sale process look like? It typically involves aligning with your board of directors on running a formal auction. It often starts with an investment banker.