Selling a Startup
Experience would suggest there is no blueprint to how, or when, to sell. In the end, it falls on your intuition as the founder, or executive. There is, however, a magical delta, a sweet spot, that you want to be considerate of.
Selling Sucuri made one thing abundantly clear.
Never sell too early, and never sell too late. If you know you plan to sell, then you sell when you believe you are at the pinnacle of what great looks like. If you don’t want to sell, make sure you realize that some day you might.
Tony
My personal learning style is to extract nuggets of information from others experiences. To do this, I will share with you the story of Sucuri, and why we sold. There is no right or wrong in this story, it’s just the story and experience that you can leverage as you see fit.
#WHOAMI
I was the third Co-Founder at Sucuri. You could argue I was actually the fourth, Karen Cid should always be considered another founder as she was there from the beginning as well.
From day one, my responsibility was operations. In short, I had the good fortune of focusing on the things that no one else wanted to. You can say I thrive in the uncomfortable.
I specifically led and negotiated the first investment round, our secondary, with TurnRiver and later led, negotiated and closed the exit.
I was the CEO at the time of the exit. Every strategic decision and tactical move we made at Sucuri was made as a cohesive unit between Daniel and myself. At the time of our exit we were in the low eight figures and employed 110 people across 26 countries.
This is the story of why we sold Sucuri, from the perspective of the guy that initiated and eventually sold it in 2017.
The Journey to Selling Sucuri
For years, when you started your employment at Sucuri one of the things we would share was this idea that this was a company that would grow to support our own kids. We truly believed this.
Man, were we wrong.
Unbeknownst to our naive selfs, we made decisions early in our inception that would lead to an eventual exit.
It was September of 2016, while speaking to our lead investor that I made the statement, “I think it’s time, Dom.”
What drove that decision was an article I had read about Digg. A news aggregation platform, at its peak it was valued at $250/$300 M, and in the end it sold for $500k. Similar stories appear all across the web ecosystem. In more recent history, there was Yahoo!.
This led into a long period of introspection for myself. One where I had to push the idea further than I wanted, but felt it was a necessity. I also had to approach my partner, Daniel, to see how he felt about it.
Sparking the conversation was a very simple question – Are we worth more today than we will be tomorrow?
Asking the Question is not Taboo
The hypocrisy of that question is not lost on me. Why would you even ask yourself that question if you didn’t want to sell?
To understand that, you have to go back to a decision we made in 2013 – raising a secondary round. Why we raised is another story, but for now just note that we did. We chose a secondary because it allowed us to continue to bootstrap, while allowing the founders to take some skin off the table. This also started a clock, one I think we realized existed, but felt we could manage.
The clock was counting down to a securities event, whether we wanted it or not. Even if Daniel and I didn’t want it, the investor would want its return at some point. I began learning a lot about PE’s, and how their funds work. I realized that most funds make most of their money on a very small percentage of their portfolio, and they typically have 5 – 7 years to yield a return.
Coincidently, and contrary to what you read online, our investor never pressured us for an exit. We pressured ourselves.
We started strong, but as we learned more about how the system works, our rationale minds took over.
The more cognizant we became of our fiscal responsibility to our stakeholders, the harder it became not to be constantly thinking about that responsibility. It was this self-awareness that led to the question.
Being True About Value
That summer in 2016 I was pacing outside, walking the perimeter of the pool thinking about the current state of affairs. I kept asking myself that question – are we worth now today, than we’ll be tomororw?.
As I looked backwards and forward in my crystal ball, I came to a simple realization – we were.
This was not about the health of the company; we had committed ourselves to building a sustainable company long before it was an epiphany to the startup world.
We had healthy unit economics, strong Y/Y growth, healthy margins (40%+) and positive cash flow. We were solving an interesting problem, and more importantly it was something we still got excited about. But as I looked forward into the future, my intimate understanding of the market would paint a very different picture. I saw competition, consolidation, and an opportunity that was fading in the near term.
My gut was talking to me. I would later learn that Daniel was feeling the same thing.
An Evolving Market Place
There were only a few, meaningful, players in our space. There were two power players, and that was SiteLock and Sucuri.
SiteLock had dominated the partnership channels, Sucuri had the direct channel. There were countless other players in the space, some were niche focused, some were copy-cats; individually they were frustrating, but as a whole they started to paint a bleak future for the space.
The other variable to consider was the undeniable relationship we needed to have with the hosting platforms, and the power they yielded around access and permission.
We couldn’t beat SiteLock at the partnership game, they had a great strategy and leader that understood that space. But they also couldn’t beat us at the direct business, we could relate and appeal to that audience, they couldn’t. Most of their partnership didn’t affect us, but the one they did in 2015 did – GoDaddy. That one partnership really messed us up, Daniel and I, we got very worried about what growth would look like in the future. Of all their partnerships, that was the only one we felt.
At the time, they dominated a pretty significant percentage of our customer base (15 / 20%?) at the time. To us they were a marketing powerhouse, there was one thing they knew well. We would often joke, “they can sell ice to an eskimo!”
That’s exactly what they did. We started to see the impact of that in our data as their engine came to life. It wasn’t enough to say we’re doomed, but it was enough to raise eyebrows about long term longevity. This, though, would eventually present us with an opportunity.
If you can’t win the battle, win the war.
A History With The Buyer
Selling to GoDaddy was a sound strategic decision. Although the close was April 3rd, 2017, the process actually started in 2010. In the product tech space, your earliest engagements might often dictate your eventual outcome.
We started M&A discussions a total of three times, the third one being the last.
The first was in 2010 after Daniel wrote a wonderful article about someone logging into his machine as a root user. Which was weird because someone logged used his root password from the an internal network. That led to their CISO reaching out inquiring about an acquisition. We declined. When that fell through, they later built and released their own security solution as a response. That later failed, but there is a great lesson we’ll pull from this in another post.
The next was in 2015, the hosting team was digging deep into their Pro initiative, and they wanted to integrate security. Their leader at the time reached out. This fell through again, we couldn’t come to terms on the economics. They partnered with SiteLock. We were good enough to buy, but not good enough to partner with. Concerns about our ability to scale and support were the main reasons why the partnership fell through.
Finally, in the summer of 2016, after the moment of introspection above, I reached out to the corp dev contact I had worked with in the past. This was about a year after their partnership with SiteLock. The inquiry, was simple:
“Hey, Just wanted to check in, see how things were going and if there was anything we can do to help.”
I might have made a passive aggressive comment about the public response to some of their support issues as of late with their new partner.
My gut told me that if there was ever a time, it’d be now. I figured that with the noise I was seeing in the space, they must be realizing that a) security is something they can sell, and b) although a great marketing engine, SiteLock product and service did not align with who they wanted to be. From what I could see, our audiences, approach and services aligned better. Both in terms of who we were serving and who we were targeting (not always the same).
I knew that eventually, consolidation in the market place had to happen.
What I would later find out, which would work in our favor, was that internally they were going through massive organizational changes that would introduce a new senior leader whom was eager to show his value. When you’re a senior leader the easiest way to do that is often through M&A activity (conversation for another post).
The Personal Dynamic
The last piece of the puzzle was Daniel and I. We were, and still are, our worst critics and enemy. The fact is, we were both tired. The market dynamics, the people dynamics, competition, self-inflicted pressure. It was a lot.
We also never really got over having investors. We wouldn’t allow ourselves to appreciate what that partnership gave us. Choosing instead, to focus on the idea that we didn’t wholly own Sucuri anymore. It would lead us down some dark paths of insecurities around where to invest, and what to do with all our ideas.
If current self could go back to past self, we’d have a very interesting conversation.
Lessons Learned on When to Sell
I was talking to a founder friend recently who expressed they had every intention of an exit, but they didn’t want to sell right now because they were doing so great (best Y/Y performance, ever!).
My response – sounds like the right time to sell.
You have to understand a lot more about the company to understand that response, but just note that it was applicable to the companies age and industry it served.
For us, I was unable to see an immediate future (< 2 years) where we could sustain the Y/Y and margin performance in our current audience. We had to pivot, and doing so would have a negative impact in the short-term (at least two years). The value tomorrow was not going to be greater than the value today.
The smarter play, under the circumstances, was an exit.
If you expect to sell, know when to Sell
If you have every intention of an exit at some point, then you have to evolve your thinking. The last thing you want to do is sell when you need to sell. If you don’t expect to ever sell, realize that at some point you might, and at least do yourself the favor of thinking of what that might look like.
Don’t be a Digg.
At Sucuri, we made a decision to exit long before we realized we did. The investment, although a secondary, affected us in more ways than we would have ever realized. This one decision, started the clock. Be aware, and honest, with yourself about the decisions your making and the impacts they’ll have in the future.
Couple this with what the environment looked like in 2016, these were the observations I made:
- Hosting providers, a key service we were deeply dependent on, were trying to get ahead of their security issues – partnering, building, consolidating;
- The platforms we supported (e.g., WordPress) were self-healing faster and faster, creating safer ecosystems;
- Providing security services to micro-businesses was becoming more ubiquitous as more copy-cats and competitors entered the space;
- We were coming to the end of our investors fund, within 2 years, which meant that some event was going to happen;
- I expected Y/Y growth to stall from a percentage perspective, which meant the story tomorrow would definitely be different than today;
- The only way to get ahead was to pivot up market, but that would take at least 24 months and would require refocusing the brand and resources – we were not built for this;
- We knew an event was inevitable, which would either see hands changed to a new investor or friction with the existing;
After Daniel and I came to terms that we were both seeing and feeling the same thing, a simple email, that leveraged years of build-up, led to what we still consider to be the best decision.
Although the inevitable happened, and neither Daniel or I, are not at Sucuri anymore, I will share why we still consider it to be the best decision in future posts. For now, know that we are leaning on a lot of those experiences as we embark on a few projects, starting with CleanBrowsing.