I sold my first startup! That’s often a moment of rejoicing, especially for a first-time entrepreneur, especially when you’ve sold your company to an awesome acquirer (check), who is keeping your entire team (check), who offered a good price (check), and is keeping your product alive and building upon it (check). In the spirit of celebration, I’m sharing some of what I learned in the process. There are endless posts on when to sell your startup and why, so this post will focus on what it is like to sell a fintech startup in particular.
First, it’s important to note that we sold for pretty much the same reason that most startups sell–the price beat the risk of raising capital and executing. In our case, though, there was an additional complexity: In order for our revenue model to work, we needed to handle consumer funds. Initially, we built Prism so that we would never touch our customers’ money; we just automated a pre-existing relationship between our customers and their billers. It was elegant, fast, and secure. Unfortunately, it turns out that unless you just want to slap a fee on your app, it’s hard to make money in payments without interacting with users’ funds. And if you want to do that? Congratulations! You just became a Money Transmitter.
The prize? A multi-year, multi-million-dollar journey through 48 separate state licensing bureaus. So for us, our risk was increased multifold. We needed to raise substantially more capital to prove out our revenue model than would a typical startup, and we had almost no control over our licensing timeline. That makes VCs very nervous, especially when a functioning revenue model is so important, which leads me to my next point.
We never truly cracked the growth nut. Don’t get me wrong; we did a lot of things right. The team built an extraordinary product that our customers loved, and our support team worked around the clock to make sure that our customers were taken care of. As a result, we grew organically at a great clip of several percent per month. For a fintech product, that’s pretty strong, but it’s not the exponential blow-your-socks-off growth that allows you to disregard the business model (and even some of the companies who thought they could disregard their business models in service of growth are struggling now).
When an acquirer showed up who loved our business, who had the tools for us to realize our revenue model, and who could capitalize all of those efforts, it was a pretty straightforward decision.
I could spend tons of time talking about lessons learned from my startup (and maybe we will on this blog someday!), but while it’s still fresh in my mind, here are a couple very simple, tactical things that I wish I would have done differently, directly related to the sale.
First, if you’re a fintech company, hire someone to prepare GAAP financials for you annually. These financials are worthless from the standpoint of helping you run your own business, but if your buyer is in any way regulated, they probably need to submit GAAP financials (most likely audited ones at that) to their regulators. Thus, they’re going to want GAAP financials from you. I never had them prepared, and while it wasn’t the end of the world, their absence added several weeks to the closing. I also felt like an idiot answering, “uh, we don’t do that” every time someone asked how we accounted for some obscure accrual. Besides, it wouldn’t have cost us any extra; the amount of cash required for two weeks’ burn while the acquirer wades through your bank accounts is, for most mature startups, well beyond what paying an accountant to produce statements will cost you.
My other big takeaway from the process is to take some time to see what platform your market segment uses and build on that if possible. Our entire code was built on the Microsoft stack, and while it was a convenient solution for us, it isn’t what most other companies in this space use. That we had a meaningfully different platform and codebase represented friction with almost every buyer we encountered. Ultimately, just like financial reporting, this is something that a genuinely motivated buyer can look beyond. That said, I found that the mismatch killed some discussions surprisingly early, before a buyer even had a chance to learn enough to get genuinely excited.
Life After the Sale
Without going into too much detail, I finally took my long-delayed honeymoon and enjoyed some spectacular SCUBA diving in Hawaii. And now I’m joining the Financial Solutions Lab–the very organization that Prism was so fortunate to be a part of last year–as its first-ever Entrepreneur in Residence. I can’t think of a better vantage point from which to share what I’ve learned and see what’s coming up next in fintech. Bonus: I’ll get to work closely with the companies in Financial Solutions Lab’s next class, support the community of fintech entrepreneurs, and even blog a little. Stay tuned.
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