“Don’t think about an acquisition right now, just keep building your business.”

Most investor advice, most of the time, boils down to that.

At many early-stage founder events I attend, a mildly annoying topic tends to come up: when founders are not fundraising, how actively should we maintain relationships with investors? Answers run the gamut: some founders eschew non-raise meetings completely, some passively take a handful per quarter, and some swear by their efforts to actively build relationships between raises.

The debate is helpful, but I find it annoying because of how often VC relationship hygiene comes up relative to a very similar topic: strategic relationship hygiene. Maintaining relationships with VCs might make your next raise slightly more or less successful, but maintaining relationships with strategic players could mean the difference between a successful exit and everyone going home empty-handed.

It can feel unnatural for a founder to be thinking about an exit while still in company-building mode. We get it pounded into our heads that we shouldn’t build with an exit in mind (good advice) and that strategic partnerships can be dangerous for a young company even if they materialize (also true). But those conversations focus on the outcome of a process

Let’s say that you run an HRIS company. You’re in a crowded space, but you believe your technology could be transformative. You’ve just raised a healthy seed round and are taking the product to market yourself, but you could be of strategic interest to everyone from Rippling to Workday to ADP.

CompanyContactCountryAlfreds FutterkisteMaria AndersGermanyCentro comercial MoctezumaFrancisco ChangMexico

Outcomes

Failure (bottom 50%)

Modest success (50%-90%)

Breakout success (95%+)

Strong strategic relationships

Company shuts down

Base hit exit (<1x valuation)

Good exit (>1x valuation)

Weak strategic relationships

Company shuts down

Company shuts down

Good exit (>1x valuation)

If your company is a breakout success, you’re going to start driving for a top 10% outcome and every strategic is going to start noticing you. This is the path that all of your investors dream about and they want you to focus on. But in the event that your GTM motion struggles, 12-18 months from now you might be starting to look for an exit. By that point, if you haven’t actively built relationships with strategics, it’s unlikely they’ll know who you are. In that scenario it will be very difficult to pull off anything resembling a decent exit – the company will look weak, desperate and uninteresting. It’s incredibly difficult to get a large strategic to wrap its head around any transaction on a startup-sized timeline, let alone one that gets introduced in what looks like a fire sale.

For that reason, the time to begin talking to strategics is when you have a fresh funding round, appear strong and don’t need any relationship you might build with them. Not only will you be giving your relationship the time it needs to mature, you’ll be making a strong, lasting first impression.

The common counterargument from investors is that building strategic relationships can be a distraction and can decrease the chances that a company is a breakout success. Because the breakout success category is the only one investors care about, it makes sense that they would push that direction. However, that advice highlights the difference in incentive structures between investors and founders: investors focus on top outcomes, but even a modest exit can be life-changing for the founders and the team. Going from zero to a <1x a company’s valuation is essentially meaningless to a VC. It’s fair for them to act in their own best interest, just as it’s fair for founders to do the same. It’s up to each founder to manage their headspace effectively and maximize their company’s potential, but it could be that the expected return on relationship-building is hugely positive for founders, even if it isn’t for investors.