Let's be honest, as founders, we are masters of self-deception. Especially when it comes to the Total Addressable Market (TAM). I’ve seen it a hundred times, and I’ve been guilty of it myself. We throw around billion-dollar numbers like they are nothing, fueled by a cocktail of optimism, passion, and a healthy dose of delusion. But when an acquirer comes knocking, that fantasy can quickly turn into a nightmare.
I’ve been through the acquisition wringer twice. First with MovieLaLa, which was acquired by Gfycat, and then with RemoteTeam, which we sold to Gusto. I’ve also been on the other side of the table as an angel investor in over 200 companies, including some of the biggest names in AI like Anthropic, OpenAI, and Scale AI. I’ve seen firsthand how a founder’s inflated sense of reality can kill a deal. So, let’s talk about the founder’s real role during an AI startup acquisition, and how to avoid the common pitfalls that can send you back to square one.
The Market Size Mirage
Your pitch deck probably has a slide that says your TAM is a gazillion-dollar market. I get it. You want to show the potential for massive growth. But here’s the thing: experienced acquirers have seen it all before. They know that most TAM projections are, for a lack of a better word, bullshit. They’re not interested in your fantasy numbers; they’re interested in the truth.
Here are some of the most common lies we tell ourselves about market size:
- The “1% of a huge market” lie: This is a classic. “The global market for X is $100 billion, so if we can just capture 1% of that, we’ll be a billion-dollar company!” The problem with this logic is that it’s lazy. It doesn’t show that you have a real plan to capture that 1%. It’s a hand-wavy argument that any seasoned investor will see right through.
- The “top-down” lie: This is where you take a big market number from a Gartner report and then try to narrow it down to your specific niche. The problem is that those reports are often outdated and don’t reflect the nuances of your specific market. A much better approach is to build your market size from the bottom up, starting with your target customer and then expanding from there.
- The “ignore the competition” lie: This is a big one. You’re so in love with your own product that you convince yourself that you have no real competition. But the truth is, you always have competition. It might not be a direct competitor, but it could be a substitute product or even the status quo. Ignoring the competition is a red flag for any acquirer.
Due Diligence: The Moment of Truth
During the due diligence process, the acquirer is going to put your numbers under a microscope. They’re going to want to see your data, your assumptions, and your methodology. They’re going to talk to your customers, your partners, and your employees. They’re going to do everything they can to poke holes in your story.
For an AI startup, the due diligence process is even more intense. The acquirer is going to want to understand your technology, your data, and your team. They’re going to want to see a clear path to profitability. They’re not just buying your product; they’re buying your team and your vision.
So, how do you prepare for this? The key is to be brutally honest with yourself. Ground your numbers in reality. Be prepared to defend your assumptions. And most importantly, be transparent. If there are weaknesses in your business, don’t try to hide them. Acknowledge them and have a plan to address them.
The Founder’s Playbook for a Successful Acquisition
Going through an acquisition can be one of the most stressful experiences of a founder’s life. But it can also be one of the most rewarding. Here are a few things I’ve learned along the way that can help you navigate the process:
- Know your “why”: Before you even start talking to acquirers, you need to know why you’re selling. Are you looking for a quick exit? Are you looking for a strategic partner to help you grow? Are you looking to de-risk your personal financial situation? Your “why” will guide your decision-making throughout the process.
- Build relationships early: Don’t wait until you’re ready to sell to start building relationships with potential acquirers. Get to know the key players in your industry. Go to conferences. Network. The more people you know, the more options you’ll have when it comes time to sell.
- Get your house in order: Before you go to market, make sure your financials are in order, your legal documents are in place, and your team is aligned. The last thing you want is for a deal to fall through because of a messy cap table or a disgruntled employee.
- Don’t go it alone: An acquisition is a complex process. You’re going to need a team of advisors to help you navigate it. This includes a lawyer, an accountant, and an investment banker. These people will be your trusted partners throughout the process, so choose them wisely.
The Strategic Pivot
Sometimes, the best way to position your company for an acquisition is to pivot. This is especially true for AI startups. The AI landscape is constantly changing, and what was a hot market yesterday might be a dead end today. A pivot can be a way to reposition your company for a new market or a new set of customers.
When we were building MovieLaLa, we started out as a social network for movie fans. But we quickly realized that the real value was in the data we were collecting. We pivoted to become a data and analytics company, and that’s what ultimately led to our acquisition by Gfycat.
Pivoting is not a sign of failure. It’s a sign of agility and adaptability. It shows that you’re willing to make tough decisions to build a successful business. And that’s a quality that any acquirer will find attractive.
The Final Word
Selling your company is a big decision. It’s the culmination of years of hard work, sacrifice, and dedication. But it’s also a new beginning. It’s an opportunity to take your vision to the next level and have an even bigger impact on the world.
So, if you’re a founder who’s thinking about selling, my advice to you is this: be honest, be transparent, and be prepared. And most importantly, don’t forget to enjoy the ride. It’s a wild one, but it’s also one of the most rewarding experiences you’ll ever have.
Frequently Asked Questions
How has this view evolved over time?
My thinking on most topics has changed significantly over the years. Early in my career, I held many conventional views that experience proved wrong. I try to update my beliefs when the evidence changes.
What's the most common pushback you get on this?
People often push back by citing exceptions or edge cases. And they're usually right that exceptions exist. But building a strategy around exceptions rather than patterns is a losing game for most founders.
How can I apply this thinking to my own situation?
Start by identifying the core principle behind the opinion, not the specific example. Then ask yourself: does this principle apply to my context? If yes, test it in a small, low-risk way before going all in.
What experience informs this perspective?
This perspective comes from over a decade of building companies in Silicon Valley, two successful exits (RemoteTeam to Gusto, MovieLaLa to Gfycat), and investing in 200+ startups including Anthropic, OpenAI, and Scale AI. I write about what I've lived.