Cobook was one of the first visible acquisitions in the Latvian startup ecosystem, so the news made ripples. Back then, I was Director at Deloitte and was amazed by the whole world of startups. I had an itch to start my own. Kaspars Dancis, the co-founder of Cobook, had a profound influence on me when I was starting out with my first startup, Funderful. Some years have passed since his exit, but many things take time to digest. So I knew he had a lot of valuable insights to share with other founders walking a similar path. The other day I sat down with Kaspars and here is the result.
Cobook (the acquired startup):
- Initial product: unified address book for Mac, iPhone and iPad
- Founded in 2011, and acquired in 2014 when had a team of 6
Traction at time of acquisition:
- 800K downloads
- 4% MoM growth
- Revenue: €10K/month (in-app purchases)
Deal terms: cash + FullContact stock (not options). Part of it upfront, other part vested over 3 years. Also some retainer cash bonus for Cobook employees.
FullContact (the acquirer):
- B2B company planning to expand into B2C contact management market, but more funding
- Rationale for acquisition: acquire a product that has proven traction and a talented team to continue executing
Q: A while has passed since your exit. Please tell me the backstory.
This was my second exit. The first one was also a small company where I was a CTO. During that exit, I wasn't making any decisions regarding the deal but could see it happening up close, which gave me some understanding about the whole process. People are blinded by the positive side effects of an exit, but few are aware of all the downsides.
Q: Why did you consider selling your company in the first place?
With Cobook we ran out of money. It was unlikely for us to raise funds at decent terms and we had no cash in the bank. I think it happened because this was my first real business and I felt completely unprepared. The mistake was listening too much to advisors and investors who persuaded me to take investor money while we shouldn't have raised money at all. We didn't have a sustainable business model, we just invested into growth. But the result wasn't what the investors led us to expect. So after the money was gone we had three options: (1) exit, (2) let the team go and revive the business or (3) shut down. I preferred the option of selling because that could give us a soft landing, a possibility to keep the product growing and maintain the team.
Q: Why were you an attractive target to acquire?
We already knew the company that eventually acquired us - we were in the same market and the CEO had reached out before. It was clear he was already signalling their interest to buy, because we had a proven product with much better traction than others in the market and a small, yet valuable engineering team. The acquiring company didn't have either of those.
Q: How did you end up getting the term sheet?
For an exit to work you need some kind of leverage - going straight to the acquirer and saying "I want to sell the company" would shift all the cards towards them. At first I reached out just to chat. I knew the company had some interest in acquiring us, then he brought it up in the conversation and I said: "yes, we might be interested". If you want to sell a company on good terms, you have to look for any leverage you can find.
Q: But you didn't have cash, competitive bidders, nor the promise of profit. How did you pull it off?
Well, I knew they're interested in our product and the team. It was more of a play on psychology - you don't want the other party to think you're desperate as this would allow them to dictate the terms. Ultimately, of course, they'll see the financials are not so pretty, but by that time you already have the term sheet. They might still try to negotiate, but most businesses avoid this.
Q: How did you approach valuation?
There is no science behind our approach. We asked our investor what the price should be, he said a number and we ended up proposing it. The other party made a counterproposal, but the difference wasn't significant. In negotiations, it's advisable to try to anchor the price higher than you expect to receive in the end.
Q: Did you approach other buyers?
We talked with a few other companies, such as Linkedin and Dropbox. It was clear that they didn't have the same incentives as a company in our market interested in the product would have. Two things were essential for me: (1) keeping the product evolving, and (2) figuring out how the environment would change if we end up working for the buyer. We talked a lot about this with the acquirer and it seemed like a good cultural fit.
Q: Did reality meet your expectations?
I expected that it wouldn't be as rosy as during pre-acquisition talks, but the experience was much better than the exit for my first startup. Part of the team ended up moving to Colorado, US, while we also kept growing the team in Riga. The acquisition had a positive effect on the product, even though it was rebranded, and quite a few jobs were created. I ended up working for the acquirer for three years, which was a beneficial experience for me. Regarding the exit, we agreed that we want to make it happen very fast but it still ended up being something like three months.
Q: Three months is a rather quick process, isn't it?
Maybe it was longer. When we were finally signing, lawyers in Latvia said the last time they saw this much paperwork was when they sold a bank several years ago. The other side was so cautious because they were in the US and we were in Latvia - completely different laws. The day the exit happened, we were relieved because I was living without a salary for a couple of months already, so otherwise, I would've been pretty screwed.
Q: You mentioned that looking back, you wonder whether that was the right decision because exiting is most often a failure. Is it so?
I would phrase it a bit differently. I think an exit is a failure in any case - the only exception could be, perhaps, an IPO. It is a failure because you will end up screwing somebody - customers, employees, or, to some extent, yourself. You no longer control the product, even if it stays. A lot of products keep going at first, but someday they start costing too much to maintain.
Q: Speaking about a founder's financial results, did you get anything out of the deal?
It was enough for me to start a new business, so better than nothing. I once again learned that for a founder to put their financial interests first is a big mistake. You may still end up succeeding, but if you want to build a sustainable business helping people and creating good jobs, it shouldn't be your priority. You could end up doing much better if you don't focus on that.
Q: For me, the exit was challenging emotionally and I needed a recovery period afterwards. Did you immediately feel like jumping into a new venture?
I knew I had three years of working for the acquirer. If it had gotten terrible, I would've left, but I felt like I had to keep my promise. It was also very exhausting with a lot of pressure to perform, so when I started my company I was relieved that I could focus on what I do best - building products. It might be controversial, but I don't believe the widespread assumption that entrepreneurs are risk-takers and therefore end up getting a much more significant upside when the business succeeds. Typically founders of a successful company get a thousand times more value than even the early employees. The thing is, in the long term, it's much riskier to work for somebody else because you don't control your financial success. There are two things where entrepreneurs differ: being ready to do whatever is needed and having courage. You need it to do things other people don't do.
Q: Do you have some advice to founders thinking whether selling is the right path?
When trying to sell your startup, number one, as mentioned, is finding your leverage. If you're profitable, that's a significant advantage. Growth, too, although it's kind of tricky and less important than profitability, which always provides an option to walk away. There's a growth period when everybody wants to invest and a sharp cut after which nobody does, so it's risky to rely just on that. Besides those things, there always might be some companies interested in product strengths they're lacking - like your customers or team. Another thing is that the situation post-exit will always be less pretty than you imagine. There will be a lot of unexpected things to deal with.
Q: Can you share what you're up to right now?
For two years, I've been working on a new business called Whimsical. It's collaboration software, similar to Google Docs, but entirely visual. We're profitable, growing quite fast. We are entirely self-funded and plan to stay that way, at least for the near future.
Q: Do you plan to exit?
As you could guess from my opinion on exits - no. You never know how those things evolve, but we're focused on building an excellent company to work for in the long term, not so much about optimizing for an exit. How much wealth we create in the process is secondary to us, although we want to be profitable so we can keep growing.
Q: Why did you decide to fund it yourselves?
In my previous experience, I've seen a lot of downsides of venture capital. It forces companies into short-term thinking because they're always focused on quarterly goals, like increasing revenue by X this quarter. If you keep missing the target, you'll probably lose your job or at least feel like you're not performing well. And then after 2-3 years, all the short term decisions come crashing down and the company could face some severe challenges. I don't know what the current statistics are, but the majority of venture-funded companies end up failing. I think it's mostly because of this pressure to perform, which cultivates a lot of short-term optimizations.
Q: Are you open to other founders connecting with you? If so, where can they find you?