Sorry First-Time Founders, Who You Know Is Often More Important Than What You Build

How do some struggling startups get bought for millions of dollars by Facebook or Yahoo, while others are left to die?

Networking is an important part of building a business. For first-time founders, who you know is arguably more important than what you build. At least it is if you're looking to get acquired for a few million dollars by a larger company - or "acqui-hired."

Josh Miller, 22, dropped out of Princeton to found Branch. He built a network of seasoned startup advisors, such as Twitter co-founders Evan Williams and Biz Stone. Facebook recently bought his startup for $15 million after multiple product pivots. Stamped, an app founded by former Googlers, was acquired by another former Googler Marissa Mayer when she became CEO of Yahoo. That app also pivoted before it was acquired.

Would either of those startups have sold for millions if the founders hadn't built strong personal networks? It's hard to say, but who they know certainly didn't hurt them.

Business Insider asked a number of startup executives which was more important for first-time founders: building a network or building a strong product?

Everyone felt both were important. But for smaller acquisitions or "soft landings," many felt personal networks trumped products. Who your investors know can also be a big factor in whether or not your startup gets acquired.

James Rainert is a first-time founder. He created a company, ThredUp, which lets you sell gently worn clothes on its marketplace. "I think there's a misconception that exits 'just happen,'" he said when asked about the importance of networking. "I'm learning that it's a long game and you need to get to know everyone." He also says product matters more when you're gunning for a larger exit.

I think there's a misconception that exits 'just happen.'

Dan Porter, who advises startups and sold his former company to Zynga for more than $200 million, has mixed feelings.

"I think it's a combination of who you know and who knows you for any acquisition under a certain threshold," he says. "In [lower threshold] acquisitions, someone is trying to either add a team, a technology, or eliminate a competitive risk. When acquirers know you, and in a smaller deal you are a critical part of the deal, that makes it a lot easier. It de-risks the deal."

Who you know within a larger company can also determine whether or not your startup gets acquired. "The smartest thing I heard someone say was, 'Our best acquisitions come to us from product managers who work with or know companies than from corporate development guys,'" said Porter. "Not just being known - but who in the company knows you - is key."

Others think product is always the most important factor, even for smaller startups. Josh Abramson created BustedTees, College Humor, and Vimeo. He sold a majority stake in them to Barry Diller's IAC. "I actually think that building something great is the most important thing, but knowing the right people is also hugely important," he says.

"I think it's pretty rare that entrepreneurs end up with a lucrative exit for no other reason than because they know the right person, just as it would be rare for an entrepreneur who has built an incredible company to fly completely under the radar of potential acquirers...You might have a harder time getting a deal done if you live in the middle of nowhere and have very few connections outside of your organization, but you will have an even harder time if you have a piece of crap company and know everyone in town."

Bryan Goldberg also feels what you build is more important than who you know. But his experience was with a larger-size exit. He sold the startup he co-founded, Bleacher Report, for $213 million to Turner.

"We knew that our startup would ultimately be acquired by a media heavyweight, and so we partnered with several big media companies along the way," said Goldberg. "As it turned out, the company who purchased us was one of the few big media companies with whom we didn't have any previous relationship.

As it turned out, the company who purchased us was one of the few big media companies with whom we didn't have any previous relationship.

"It doesn't matter who you know, nobody is going to buy you without a strategic reason for doing so. At least not for a large acquisition."

When asked if his investors' personal networks helped him land a sizeable exit, Goldberg replied, "The investors and board members were all central to the company's success, But none of them were close to our acquirers in a way that would have pushed through a deal."

One founder who knows a lot about acqui-hires is Jacob Mullins. He's CEO of Exit Round, a platform that connects large companies with startups so the two can discuss potential talent acquisitions. He's a firm believer that who you know is more important than what you build for three reasons:

1. Getting acquired requires internal champions. "The most effective way to get serious interest with a potential acquirer is to have someone from within their product or engineering group who can speak on your behalf and give you exposure to the right internal champion," says Mullins. "To execute a transaction you need a C-level or GM of a business unit to be your internal champion to build a business case about why you are indispensable and must be had."

2. Networking helps you meet buyers early. "Like fundraising, achieving an exit is a relationship building process," says Mullins. "If you're in a sticky situation where things are rushed, there's less of an opportunity to build mutual trust. If you connect early, over time the potential acquirer will see how you execute, build trust with the quality of your product, and build a stronger relationship with you, the founder."

3. Networking helps you figure out if a larger company will be the right fit before it's too late. "Nearly all acquisitions have a time-based component that incentivizes the acquired team to stay at the new company for as long as possible; typically this is where the bulk of the payout lies for the team and individuals," Mullins says. "If a founder commits a transaction where there isn't a great fit, unhappiness may ensure and people may start leaving early, thus leaving a lot of opportunity and money on the table. Know who you're going to be working with, and what exactly you're going to be doing for the next few years."

Howard Lerman is the CEO and co-founder of Yext, a company that updates local listings in real-time and is worth hundreds of millions. He sums up the importance of product versus network nicely.

"For sub-hundred-million-dollar acquisitions, it definitely matters who you know. Those are usually tech or team acquisitions," he says. "For larger exits, you have to have a real business in a market that another business is excited about. Knowing people doesn't really help that. A good rule of thumb: the bigger the acquisition, the less who you know matters."