Justin Kan sold Twitch to Amazon in 2014.
- Twitch founder Justin Kan sold his company to Amazon in 2014.
- Kan said the best time to sell your startup is when you don't need to and you have some leverage. You don't want to wind up selling because you're running out of cash and you're desperate.
- Research suggests that it helps to start planning early for your eventual exit.
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In 2014, Justin Kan sold Twitch, a live-streaming platform for gamers, to Amazon for $970 million.
Several years later, after he'd launched his next company - Atrium, a law firm for startups - he published a guide to selling your startup.
Right at the beginning of the guide, he tells readers: "The best time to sell your startup is when you don't need to or want to."
In other words, the most successful startup acquisitions happen when things are going well. The startup is realistically able to negotiate an offer because it has interest from outside investors or other potential buyers.
One way to set yourself up for an acquisition that benefits you and your employees is to start planning early.
You'll want to be in a position of leverage when you're evaluating an acquisition offer
Kan shared more about the best time to sell your startup in an interview with Business Insider.
Ideally, he said, you should be in a position of leverage when you sell. That could mean your company is growing rapidly; you have offers from other potential buyers; or you've been given term sheets for your next round of financing.
Twitch, for example, reportedly had acquisition offers from Google and Yahoo! before Amazon swooped in.
"If you're running out of money, your company hasn't been growing, and you're desperate to sell it, then you don't have any leverage," Kan said. Partners aren't just looking for a proven record of success. They also want to see the potential for continued success.
Founders who make strategic decisions early on are more likely to go public or get acquired
To minimize the likelihood of a desperate sale, you'll want to start planning for your eventual exit earlier than you think.
According to a report from market intelligence platform CB Insights, 44% of all tech startup exits in 2016 - including but not limited to acquisitions - involved startups that had not raised beyond Series A funding. That's partly because it gets harder to scale and raise money in later rounds, and partly because acquirers are more interested in buying at lower valuations, according to TechCrunch. (Twitch, however, was acquired by Amazon after raising a Series C round.)
Meanwhile, Business Insider's Sherin Shibu reported on research suggesting that the decisions a startup makes early on are closely linked to later business outcomes.
Jorge Guzman, a professor of entrepreneurship at Columbia Business School, tracked over 10 million startups and found the companies that reached an "equity growth event" - like an IPO or acquisition - greater than $100 million were more likely to have a "proactive" orientation. For example, the founders were more inclined to trademark their ideas and register their company in Delaware, where the legal system and corporate-tax policies are easier to navigate.
Still, some startup founders hesitate to identify a specific direction for their company. Silicon Valley Bank surveyed 1,377 US startup executives in 2019 and found that half said their realistic long-term goal is to be acquired. However, 15% said they don't know what their goal is, up from 9% in 2018.
Bottom line: While your answers may change over time, it's worth considering what value your company could provide a potential acquirer. In the guide, Kan says it might be that your company can help the acquirer stay competitive in a certain business area.
Selling your business because you're losing traction and running out of cash isn't ideal, Kan writes. "You will have few bidders and be more likely to acquiesce to the demands of anyone who does show up."
