Seeking an acquisition is often the key to success for start-ups, says Sunderji
Struggling start-ups should aim to be acquired, according to Alykhan Sunderji, founder of Sunder Legal – a Seattle-based boutique firm that helps startups raise financing and negotiate their most important transactions.
“If a company has a great product and the end customers are excited about it, and there is a path that leads to positive unit economics, there is a very good chance that there’s an acquisition in store, and it generally leads to a happy outcome for the founders and the employees,” says Sunderji, a Canadian and former head of legal for Amazon Canada. “If I was a start-up founder and I had already done what I could in terms of righting the P&L, I would look for an acquisition today.”
Sunderji – who works with many new business enterprises in Canada and the US – is increasingly seeing start-ups looking to be acquired.
“They want to be bought out by somebody – and this even applies to businesses that are doing well,” he says. “We are seeing clients who may not have the runway to achieve their final goal, so they are looking to be bought out by strategics and others in the industry.” For example, last year Sunder Legal helped to raise money for a client who is now in talks with Google and Amazon for a possible buy-out.
Start-ups are also focusing increasingly on their profit and loss, and being more thoughtful about the way they are spending to ensure they can keep a core team in place, even if they have to restructure in terms of employment, Sunderji notes.
Another current trend he sees among start-ups is short-term measures such as convertible notes and bridge loans to help keep the company afloat until they can finalize a restructuring arrangement or sign a big client, for example.
A last resort can be ‘down rounds’, a type of financing in which a company sells shares of its capital stock at a price per share that is less than an earlier financing.
Having worked in-house for Amazon Canada and for Amazon Fashion, Sunderji brings a unique perspective to his clients, together with co-founder and fellow Canadian, Matt Glick.
“I think we both bring an in-house perspective that a lot of large law firms don’t have on their team,” says Sunderji. “We understand how to evaluate legal risk and how to raise issues with our clients that focus on the bottom line.” As a classic boutique, Sunder Legal is able to offer what Sunderji describes as “white glove treatment at a third of the price of a large firm.”
Coming from an in-house background also gives Sunderji an advantage in his understanding that companies do not have unlimited budgets. He aims to help clients prioritize legal spending and manage risks, rather than trying to eliminate risks entirely.
“They don’t have to take care of the entire list,” he says. “Our job is to help them understand what are the most important things that need to be done to accomplish their objectives. I’ve never seen a business that was able to reduce its risks to zero and be profitable. Lawyers need to be able to analyse risk and explain what will happen if you take a different path, and I think we do that very well.”
New start-ups should be frugal with equity grants, Sunderji advises. If they fall into the pitfall of giving away too much equity on day one, they may lose flexibility later on when they want to bring in a new hire, he warns.
Spending too much money too quickly can be another big issue for start-ups – although Sunderji is seeing less of this now in view of the current economic slump.
“The downturn has been a self-regulating mechanism for a lot of start-ups to remind them that the well is not unlimited,” he says. “There’s a reminder that cash is king in this economy, and I think we maybe lost sight of that a little bit, but that is now extremely salient in the minds of our clients.”
