Hassan Jaffar and Marwan Chaar are the co-founders of Carzaty, which was acquired in 2022 by Mexico’s Kavak, a used car platform last valued at $8.7 billion.
We had often heard investors say: don’t think about the exit, just focus on building a valuable business. We disagree. For startups in the GCC, founders should keep their eyes on the finish line and be laser focused on the milestones that need to be met to achieve a financial exit.
Founders should a priori decide if they are aiming for an IPO or a trade sale. This decision allows the entrepreneurs to build a clear strategy for the venture, which impacts everything from fundraising to cash burn to recruiting.
Since the transaction volume in the region is insufficient, let us look at some US data. The odds of an acquisition for an American venture-backed tech company are 16 per cent (it is also interesting that 80 per cent of these acquisitions occur after raising Series B or sooner). The odds of going public are about 10x lower, i.e. less than one in sixty venture-backed companies. Looking further at the data, we see that the average acquisition value of a US venture-backed company was about $150 million. Considering the size and maturity of our region, we set our target acquisition value as anything above $100 million. Anything less than that would not give us the financial returns we were seeking as founders. On the other hand, anything significantly above $150 million mark could pigeon-hole the venture into going public as there are not many acquirers that can (and will) pay such large amounts to buy a business. Bear in mind the $3.1 billion Careem acquisition in 2019 should be taken as the very rare exception and not the goal a founder should strive for. A transaction value as high as the Uber-Careem deal can only occur in markets that are winner-takes-all and where the acquirer is under strategic time pressure, such as the Uber IPO that, at the time, was upcoming.
For Carzaty, on day zero our goal was to be acquired by a ‘strategic’ of which there were two potential categories: 1) a regional automotive agency (primarily new cars) that is looking to expand into used cars and 2) an international used car company that is looking to enter the GCC.
As we started fundraising for our Seed round, it was clear that the regional VCs were not a good match for our strategy as we were not meeting their Power Law (read more here) expectations and we, as founders, were not willing to take on the additional risk of faster growth and a larger exit. Founders should know that their incentives are not always aligned with the VC. For the VC, a small exit is not sufficient to make their fund economics work, but for a founder, the risk-reward dynamics are significantly more attractive to aim for less capital raised, shorter time, and a smaller exit.
Founders should approach and select investors who are strategically aligned with their path to exit. As tempting as it is to tell investors what they want to hear (and we as founders were guilty of doing so), eventually it will backfire. If your intention is a $100 million trade sale and your investor is a VC pushing for the $1 billion IPO you will very quickly face conflict. For Carzaty, the primary Seed round investors were three family offices, two of which had large automotive businesses and were aligned with our strategy.
Founders should then sketch out their growth plan to be consistent with the target acquisition. Specifically, list out what needs to be true for the acquirer to be interested in buying your venture. In our first Carzaty Board Meeting post funding, we defined the three key milestones that we believed would enable an acquisition 1) Unit Economics 2) Revenue 3) Footprint.
While the eventual execution differed from the plan, the three points remained consistent from day zero all the way to exit and were critical factors in Kavak’s decision to purchase Carzaty. This is meant to briefly discuss the exit strategy a GCC founder should consider on day zero prior to launching their venture. In another article we will discuss the lessons learned during the sale of Carzaty.