Wednesday, March 6, 2019

For YC Companies Raising Seed Rounds

In the weeks before demo day, a number of YC founders will reach out to me for advice on fundraising or early customer acquisition. In general, the same set of questions come up from the founders. Below are a set of links and takeaways that I hope will be of help to founders.

1. Fundraising.

Some takeaways (usually items discussed live with founders):

  • Every company is unique and edge cases may emerge for you. When in doubt talk to a trusted angel or advisor. If you are in YC, talk to your YC partner (they see a ton of parallel fundraises!) to get another view.
  • If your company does well, you will be working with your investors for the next 5-10 years. As such, you should optimize for (i) who can help your company and (ii) who you have good personal chemistry with. It is a long road.
  • Over optimizing for valuation and brand tends to be a common first time founder thing. The specific partner at a fund, or set of angels you work with is more important than a bit more dilution or a brand name firm with a partner you don't really gel with.
  • In reality, there is not that big a difference between SAFE notes and equity raises. SAFEs tend to be easier and faster and most (probably 70-80%) of seed companies do those. But an equity raise is OK too.
  • Ask your investors to commit time to help as part of their investment. Even the busiest people are more likely to carve out time to help you if you ask as part of them investing.
  • You usually do not give up a board seat for a seed round, and almost always do for a series A. If you add a board member, make sure to vet them with other founders. In particular focus on how they help, and also how they act if things go badly.

2. What to do once you have investors.
You spend all this time raising money, how should you make use of your investors?

Hope this is useful!

Thanks to Avichal Garg for a quick sanity check look at this post.

You can order the High Growth Handbook here.

Raising Money

Managing Investors

Tuesday, January 8, 2019

Interesting Markets: 2019 Edition

Every year I take a step back and ask if there are common themes in technology. Sometimes this creates a very backwards looking view, as the most obvious signals are in companies that have been working well for a few years and the trend is really over. Other times the signal turns out to be false or speculative. Many people five or six years ago probably thought consumer IoT was going to be driven by startups-when in reality big companies have been the key for most (but not all) consumer IoT applications.

Here are some areas I think are especially intriguing for 2019:

1. Devsumer* Products. AKA Software Eating Accenture.
One past wave of technology innovation was the rise of the professional & consumer market for tech, or the "prosumer" market. We are now seeing a new merger of the developer & consumer markets, or "devsumer".

If you are an operations or business team at a tech company, or basically anybody at a non-tech company, it is hard to get any engineering resources to help build the workflow or productivity tools you need to be successful. Companies will spend hundreds of thousands, to literally hundreds of millions of dollars, hiring the Accentures of the world to build simple applications and tools, or to perform API integrations for them.

In parallel, the average knowledge worker has gotten more savvy and hands on. A lot more people have grown up with a computer in the home, have taken a CS class in college (now the most popular major at a number of universities), or gone to a coding bootcamp or school like Lambda School. While not all people exposed to CS end up as full-fledged developers, people on average are more savvy about elements of software and simple code. People are more willing to build things, if they have simple tools available.

Just as there was a prior prosumer wave as part of IT productivity 1.0, we are experiencing a new "devsumer" wave, where consumers are more likely to take on lighter versions of developer-like work and products.

A number of products have emerged that allow people to build simple software applications, or to use templated applications for their own work flow or productivity. You can think of this as taking a SQL database or excel spreadsheet and turning it into an app platform. These companies include Airtable and, in a vertical way specific to internal tools, Retool.

In a different market segment, Notion and Coda are focused on the future of docs & productivity software, while other companies, such as Zapier and IFTTT allow you to simply stitch together APIs into workflows. There is the old saying that money is made by either bundling or unbundling products or services. Devsumer companies are virtually re-bundling disparate productivity tools into single companies.

By allowing any person to either use an off the shelf template or tool, or create their own by stitching together existing applications, the power of programming is suddenly available to anyone in an enterprise or SMB. These tools can also be used for personal productivity or enterprise productivity.

Devsumer products are driven by multiple megatrends including the overall shift to cloud based applications and platforms leading to accessible APIs for integrations plus a savvier white collar workforce that expects software tools to be an integral part of their work and personal lives.

There will be multiple $5B+ companies in this market (with Airtable already raising a round at a $1.1B valuation).

2. Real estate tech. Software eating real estate.
One of the largest TAMs in the world is real estate and much of an individuals' net worth is tied up in their home. In some sense, Airbnb was one of the earliest real estate tech disruptors in that it allowed people to monetize their most expensive asset by renting it out to others.

A new wave of real estate technology companies have emerged with Opendoor at the vanguard. Real estate technology companies are experimenting with fractional ownership (DivvyHarbor), new ways to build homes and neighborhoods (Mosaic, Katerra) and new ways to find rentals (Bungalow). There are also multiple services for home buying finally moving online - for example Qualia for real estate closings or Compass, which has been buying local real estate brokerages in a hybrid online/offline model.

3. Machine learning / AI silicon & systems.
 Every major technology shift creates a $20B+ semiconductor company.
Most major technology waves result in a new $10B+ semiconductor company. For example, the rise of the microcomputer led to Intel and AMD, networking to Broadcom, graphics processing and video games to NVIDIA, while mobile technologies resulted in Qualcomm and ARM.

Machine learning / AI is a new technology wave with its own silicon & hardware needs. While NVIDIA GPUs are used today by many in machine learning, the underlying hardware is not optimized for the fast I/O and matrix multiplication that would optimize for machine learning. Google launched custom ASICs for ML called TPUs (tensor processing units) but Google is unwilling to sell the hardware externally - in part to give its own cloud services a competitive advantage. This, plus the potential medium term rise of potentially ubiquitous AI models running in autonomous vehicles (self driving cars, drones etc.) yields a massive market opportunity**.

Companies like CerebrasGroqGraphcore, and others are potential contenders for ML market cap.

4. Transportation and logistics. Software eating transportation, logistics, and supply chain.
The way physical goods will be moved around the world is changing. The entire transportation and logistics stacks is being eaten by software. The base layer for this - autonomous vehicles is still years away from the mainstream, but has promising early signals. Companies like Embark, Kodiak, Starsky and others are building self driving trucks. On top of this, firms like Convoy and Uber are building load market places and logistics networks for trucking while KeepTruckin and Samsara deal with fleet management and compliance. Companies like Flexport are driving global freight. New robotics companies are trying to automate the warehouse and allow for small urban distribution centers (CommonSense Robotics). Finally, companies like Shippo help with the end user shipping process.

5. Crypto. Programmable money and Store of Value.
Cryptocurrencies and the underlying set of companies creating the new financial stack promise to be incredibly valuable. Bitcoin and Ethereum still hold immense promise as new forms of programmable money / store of value, in part due to their resistance to seizure and censorship. Despite the crypto winter, new protocols like Chia, Celo, Coda, Oasis, and Thunder are looking to re-invent compute and money while protocols like DIRT ask how to move data onto the blockchain. While a subset of these approaches will undoubtedly fail, there is immense room for innovation.

In parallel, a new financial stack is being build to to trade, custody, and derivative crypto in the form of Coinbase, Anchorage, and dYdX with Coinbase acting as one of the very regulatory compliant fiat/crypto on ramps. In parallel, efforts to create new ways to securitize hard assets (Harbor) or for capital formation (Coinlist) are driving other aspects of the early market forward.

I am still quite bullish that a basked of cryptocurrencies will be worth in the trillions within the next 10 years. The primary short term driver for crypto value with be the generational replacement of gold as a store-of-value for a specific subset of the population. The longer term drivers of crypto value will be new forms of programable money and on-chain securities.

6. TBD: Legal tech. Software eating law firms.
While more nascent, a new wave of companies are focused on eating away at the legal world. Atrium is the world's first tech-driven law firm, while companies like Klarity apply machine learning to legal contracts. In parallel, Stripe's Atlas allows companies to incorporate via API. Carta provides cap table management as a basis to branch into other services. It is early days in legal tech but it is possible these early seeds will form deep roots.

Given the degree to which legal services have a series of highly repetitive tasks that lawyers and para-legals would prefer not to do, it is surprising more software has not come to this vertical.

7. TBD: Defense? Big company employee politics creating a market opportunity.
Silicon Valley has its roots in the defense industry. A good overview may be found with Steve Blank. The recent Trump election helped to further radicalize US politics and this political divide has found its way Silicon Valley as well. While a strong national defense matters for the USA irrespective of who the president is, it is suddenly unpopular at a number of companies to accept defense related work. Google shut down project Maven which met with a negative employee response, and employees have protested defense contractors at Microsoft, Google, Amazon and others.

The rise of the radicalized worker has created an opportunity for startups to pursue defense work. The defense and intelligence community wants to work with major brands like Google. However, if Google is unwilling to lend its AI expertise, for example, to assess defense video feeds, startups will emerge take on this work.

To date, Anduril may be the defense company with the most interest although others like Shield.AI are also in the market. There is an opportunity here to build a next-generation defense company.

In sum, there are 5 core markets (Devsumer, Real Estate, AI hardware, Transportation and Logistics, Crypto) and 2 emerging ones (Legal, Defense) that seem quite exciting to watch in 2019. While there is a potential darkening macro economic environment, software continues to eat the world and to remake it.

*To coin a term.
** The public market caps are from November 2018 as I wrote this blog post a few months ago, but took a while to finish and post it. Since then markets have come down but these companies are all still worth a ton.

PS numbering does not imply ordering of opportunities. It was just a way to organize this post.

You can order the High Growth Handbook here.

Raising Money

Managing Investors

Tuesday, July 17, 2018

High Growth Handbook! LIVE!

After two years of hard work the High Growth Handbook is now available for sale on Amazon, Kindle, and Kobo. An Audible book will be live within a week or so. The High Growth Handbook is a labor of love. And by “love” I mean “I love that this was easier than launching a startup. Oy vey startups are hard!”.

The High Growth Handbook is based on my experiences working with companies post product-market fit as they scaled from a handful of engineers, and maybe a business person or designer, to multi-hundred or multi-thousand person organizations. The book covers topics like the role of the CEO, hiring and managing an executive team, doing re-orgs, managing your board of directors, buying other companies, raising late stage rounds, and the development of new functional areas like product management, marketing, and PR. 

My own frameworks, observations, and tactical advice[1] reflected in the book are complemented by interviews with some of the leading operators and investors in tech. There are Sam Altman, Marc Andreessen, Patrick Collison, Joelle Emerson, Erin Fors, Reid Hoffman, Claire Hughes Johnson, Aaron Levie, Mariam Naficy, Keith Rabois, Naval Ravikant, Ruchi Sanghvi, Shannon Stubo Brayton, and Hemant Taneja. I personally learned a lot from these discussions and am grateful for the time and perspectives these leading figures in technology and entrepreneurship provided.

The High Growth Handbook is not meant to be read end-to-end, although you can do that if you want (thanks mom!). Rather, you can flip to a specific section that may be relevant to something your company is grappling with, or read through all the interviews at once. Justin Kan summarized it nicely on Twitter.

In the book, I steered away from the canned, generic, useless advice found in your average business book like “A players hire A players”. I also avoided writing a 500 page book on a single concept. Instead I focused on detailed tactics for how to scale recruiting or what specifically to look for in executives. One key thing to keep in mind as you read this book—all startup advice needs to be filtered through the unique context of your own situation or company. The only good generic startup advice is “there is no good generic startup advice”.

The book is being published by Stripe, and in particular, a new experimental publishing imprint called Stripe Press. Stripe was a natural fit as a publisher given their focus on helping entrepreneurs to start and scale enduring companies. My hope is that the High Growth Handbook can be of use to entrepreneurs, investors, and people working at startups around the world. I am excited to be the first in what may end up being a long line of books about startups, business, and self learning—all crucial when kicking off a new enterprise.

Thank you to all the startups, founders, and investors, who have been kind enough to let me be part of their journey. Startups and technology are fundamentally forces for good. Literal hundreds of millions of people have been lifted out of poverty by entrepreneurship and technology and by the ability to obtain and share knowledge, to buy and sell products, and to participate in a global conversation and economy at scale. It has been an honor to be part of the technology world and many of its leading companies. 

I am excited to see what the coming decades bring and what you, dear reader, go on to create. Onwards!

[1] I joined Google at around 1500 people and left at 15,000. I sold my first startup, MixerLabs, to Twitter when Twitter was just ~90 people, and left the company at around 1500 employees. I am also an investor in companies like Airbnb, Coinbase, Gusto, Instacart, Stripe, Square, Pinterest, Wish, Zenefits and others. In some cases I invested as early as just the founder(s), and in others later in the life of the company.

Monday, July 2, 2018

Better Meetings

As a company scales the number of meetings initially grows faster then headcount. With more people comes more coordination. Most companies have bad meeting etiquette, which means an enormous amount of time is wasted. The following steps help increase meeting efficiency:

1. Determine who is necessary in the meeting.
Are there really 20 people needed in the room? Separate the must haves, from the nice to haves, from the politically expedient to be there.

2. Send out an agenda in advance.
What will be discussed? How much time do you really need to spend per topic? Maybe the 60 minute meeting should really be 30 minutes? Like wedding planning, meetings fill the time available to them.

Similarly, what preparation should people do in advance? Is there a document to pre-read or data to look at in advance so people come prepared?

3. Set up (projecting, hangout or conference line, etc.) in advance if you can.
If you are running the meeting and are able to do so, arrive in advance. Dial into the conference line or start the Hangout and start projecting. Instead of wasting 5 minutes in setup with 10 people there, do it early.

If your conference rooms are always fully booked back to back (often the case as the fast growing companies are always running out of space), it is hard to get into the room 5 minutes early. Companies can facilitate this by having an :05 policy. I.e. meetings start at 2:05 but the meeting owner books the room starting at 2:00 so has 5 minutes to set up.

4. Kick off the meeting with objectives.
Review the agenda and purpose of the meeting. Is it to make a decision on a product? To brainstorm a new feature? To review a sales pipeline and prioritize leads? If the meeting does not have a clear objective, you should cancel it. If the same topic is repeated over and over in a weekly meeting without progress, decide if escalation or another method of breaking a bottleneck is needed. The same meeting should not take place 5 times.

5. Assign a note taker.
Who is responsible for taking notes in the meeting? Any meeting with more then 3-4 people should send out notes. The meeting owner can assign/delegate note taker up front.

6. Send out meeting notes.
Meeting notes help the rest of the company know what was discussed or decided. It allows different stakeholders to follow up if they were unable to attend. Notes increase cross-company transparency dramatically [1].

Meeting notes would optimally include:
a. Subject/topic of meeting
b. Date
c. Attendees
d. Actions/decisions
e. Agenda
f. Detailed notes

7. Clean up the meeting calendar ongoing.

Unnecessary regular meetings accumulate like rust on a company. Ask all meeting owners to go through and kill meetings once a quarter. (a) What meetings are still necessary or useful? (b) Who should still attend? People can be dropped and added as well to rebalance who should attend.


[1] There may be legal reasons to not take notes in specific meetings. Consult with the company's GC or external counsel on training for meeting note etiquette.

You can pre-order the High Growth Handbook here.


Thursday, June 28, 2018

Preemptive Rounds

One of the biggest shifts of the last 6 months is the degree to which pre-emptive funding rounds have become the new normal in Silicon Valley. While pre-emptive rounds used to be reserved for celebrity or serial entrepreneur founders, they have recently become almost the default for a subset of companies. I have seen multiple seed companies receive pre-emptive series A fundings in the last few months without any specific milestones hit. Similarly, late stage companies like Bird have seen their valuations skyrocket in the course of months or even weeks. Why all the fuss to pre-empt?

Traditional venture rounds track progress
In a typical venture financing the money is invested behind a big company milestone, or due to an ongoing business ramp. The later the round of funding, the more likely it is to reflect updated progress of a company hitting its user or revenue goals.

As an example, Instagram's March 2010 $500K seed round was at a valuation in the low millions. The investment was behind a team without a launched product.

Instagram's February 2011 series A with Benchmark was in the mid-20 millions market cap which reflected a rapidly scaling, but newly launched, consumer product that had just launched. The launch of the product and early customer traction created a big step up in valuation from the seed round, which was an investment in a team.

Sequoia's April 2012 $50M series B investment in Instagram at a $500M valuation was in a company that had continued to scale its userbase exponentially and whose growth was actually accelerating with scale. Future rounds for Instagram, had it not been bought by Facebook, would likely have tracked this exponential growth.

Preemptive rounds are investments without a catalyst
In each financing round example above for Instagram, there was a clear change in progress or major milestone hit between rounds. In a pre-emptive round, there is no material change in progress between rounds. Rather, the investor is so excited to invest, or believes the company valuation should be much higher than the last investment, that she is willing to push up the company valuation without any new progress or information.

Bird's latest rounds is a good example of pre-emption. While Sequoia led an investment in Bird at a $1 billion valuation, it is rumored Bird is closing another round at $2 billion just a few weeks later.

Why more pre-emption?
The trend to pre-emption is driven by a few factors:

  • Outcomes are bigger then ever before. Technology companies can now get bigger faster and reach billions of online customers faster then ever before. As outcomes get larger, a subset of later stage rounds remain attractive from a return or cash on cash multiple perspective.
  • "Greed" worked.  Alongside outcomes that are bigger then ever, a few VCs also continued to re-up or invest large checks in companies they backed. Investors realized that Airbnb at a $5 billion valuation was actually still a great investment, so why cede that round to new investors? Public successes like Sequoia with Whatsapp and A16Z with Github showed that doubling down on the same companies can lead to outsized returns. This has led some venture funds to take the stance that they want to keep funding their winners the whole way, when before many funds stopped at the series B or C.
  • Bigger funds. More VCs are raising funds over $1 billion in size including Sequoia, General Catalyst and others. Softbank's $100 billion fund is of course the extreme of this. With bigger funds two things happen: (i) VCs want to buy more of the companies they own as they need to own a bigger proportion of the best outcomes to make money on their funds and (ii) a $10 million check from a $1 billion fund is equivalent to a $3M check from a $300 million fund. In other words, a "small check that gives you optionality" is quite large for a megafund.
  • Fewer high quality companies. The ratio of great to so-so companies has been on a negative slope from a qualitative perspective. If you ask the average investor today what are the new break out companies few would have a long list. This is particularly true of consumer where investors will quickly throw money at anything with a heartbeat and a handful of teenaged users. A lot of money is now chasing a few companies. 

While some venture funds are pre-empting gracefully, others seem to be throwing money haphazardly at companies with the hope that if they pre-empt the next Uber, the other investments won't matter. Some funds will do extremely well due to pre-emption while others will see a big negative impact to their returns. Picking, as always, matters. Picking without more data is hard.

From an entrepreneur's perspective, fast, cheap, and easy money with an investor you already know tends to be a good thing. In general, there are few negatives to a pre-emptive round from a founders perspective.

However, if it is the same firm that has led one or more rounds in the past, there are deeper implications.

A founder's plusses of a pre-emptive round may include:
  • Can stay focused on building a company. Without having to go out to fundraise, founders can keep focused on building.
  • Board & investor stability. Typically, pre-emptive rounds do not include a change in your board of directors. Often a founder will take a preemptive round from an investor they already know and trust. In some cases, this will lead to a new board seat (e.g. when going from a seed to a series A) but it will be with someone the founder already wants to work with.
A founder's negatives of a pre-emptive round with an existing investor may include:
  • Investor diversity. Investors are there to help you build your company. If you do not add more investors, you will have a more limited network for hiring, future fundraises, or customer introductions.
  • Investor control. As investors buy more of a company, they may effectively end up with control of multiple rounds of preferred of the company. Depending on the rights you give with each round, it might either benefit or harm the company to have control concentrated.
  • Fewer voices. In general, keeping private boards small tends to be a good idea. If done right, you spend less time on board management and more time on building a company. However, having multiple board members and major investors sometimes leads to stronger discussion and richer ideas for the path a company should be on. Investors may end up balancing each other out with different voices optimizing for different approaches. Having a single large investor may negatively impact this positive dynamic if carried along for too many rounds.
  • Non-competitive round. In general I would suggest a founder take terms that are good enough with investors they would be happy to work with for the next 10 years. Optimizing on valuation doesn't always yield the best outcomes. Pre-emptive rounds are definitionally non-competitive, so as a founder you may or may not get the best price for your round.
You can pre-order the High Growth Handbook here.

Raising Money

Managing Investors

Wednesday, May 2, 2018

Core Cryptocurrency Use Cases

As a market driven investor, I am skeptical of 99% of the crypto projects under development today. That said, there are a core set of use cases with massive market sizes that cryptocurrencies currently fill (and in some cases will soon fill)[0]:

1. Store of value (SoV) & investment
A digital store of wealth such as bitcoin can have multiple advantages over traditional ones such as gold ($7 trillion plus asset), USD, art, or land. This includes seizure resistance (a badly acting government or thief will find it hard to steal) and ease of transport (cryptocurrencies allow you to cross a border with literally a billion dollars in your pocket or mind).

This use case is already a real one for cryptocurrencies and generationally many millennials view cryptocurrencies as a digital asset to own. The primary drawback to cryptocurrencies as SoV is their volatility, which should decrease with adoption, liquidity, and derivatives. Until volatility decreases cryptocurrencies will still be used as an investable asset and partial store of wealth. Many people are willing to trade crypto price volatility for security or avoidance of high inflation in unstable economic or political regimes (see e.g. Venezuela). Similarly, some governments may want to hold assets divorced from the action or whim of other government-driven currencies. This is a multi-trillion dollar opportunity.

2. Offshore capital: Private assets & payments
Over $20 trillion dollars are believed to be stored in the Cayman Islands and in Swiss bank accounts. These offshore accounts are used due to their discretion and privacy. Digital privacy tokens like Monero and Zcash will subsume this use case over time[1].

On a related but different note, privacy tokens may be well optimized for grey or black market use cases. That said, it should be possible to build a privacy coin whose primary use case is discretion of assets (Cayman Islands/Swiss accounts) versus nefarious purposes (buying drugs online).

3. Money wrapped in code: Securitization platforms & asset ledgers
A wide range of assets in the traditional financial system are value wrapped in contractual code - for example a stock certificate (or electronic form thereof) is really just contractual ownership of future cash flows or value of a company. Similarly, escrows, titles, loans, mortgages, trusts, wills, and derivatives are all value wrapped in contracts. Contracts are really an analog form of code. Smart contracting platforms like Ethereum, or regulatory compliant approaches like Harbor, are going to take analog contracts and convert them to digital ones.

The nearest term example of this are ICOs, with $5.6 billion in ICOs are thought to have been raised in early 2018. Many of the tokens sold in ICOs are ERC20 tokens based on the Ethereum smart contracting platform. This is the earliest large use case in the conversion of financial contracts into code running on a blockchain, as well as unlocking global 24/7 markets. Smart contracts today are most interesting in their ability to create massive crowdfunding markets for all types of assets.

4. Persistent digital goods
Adoption of ERC721 based persistent digital goods is early (see Cryptokitties), but this area will accelerate in the coming years as traditional gaming talent enters this market. This market will be smaller then the three other markets above, but it will be in the billions of dollars in its own right. Example applications may include games, esports, collectibles, and eventually fine art.

In summary, there are multiple large, multi trillion dollar use cases for cryptocurrencies today as financial products to store wealth, to maintain privacy and discretion of assets, and to convert analog contracts to smart digital ones (money wrapped in code). Additional, a smaller but real use case exists in persistent digital goods on blockchain.

Are there any markets I missed? Let me know on Twitter.

Thanks to Avichal Garg and David King for comments on this post.

[0] Payments are an obvious large use case cryptocurrencies were originally designed for. Bitcoin and Ethereum are used to buy into ICOs or to transact on exchanges today, while Monero is adopted on some grey or black market sites. However, high scale payments for cryptocurrencies have not taken off yet.  Part of this is due to technical limiations (hooray for Lightning!), part of it is due to price volatility (hence the call for stable coins) and part of it is regulatory (tax code or other issues). I do think payments will be a major area in the future, however have focused this post on current or nearer term uses.

I also think a lot of crypto projects are too early today. More of the technology and infrastructure in general need to be built out. Just as the first internet wave contained ideas that did not work out in one form, that came back and worked ten years later in another form (e.g. Webvan and Instacart), crypto will have similar failures today that will be successful 10 years later as a new approach.

[1] You can also imagine e.g. integration of Bulletproofs, zk-STARKs or zk-SNKRs into bitcoin or other chains as well taking on this use case. For now it seems these may be different (but overlapping) use cases with different regulatory implications. There are also interesting new protocols like Grin and Signal is workin on Mobilecoin. This is an area to watch.


Monday, April 16, 2018

Sell Your Startup To A Breakout Company

A startup CEO recently pinged me about an offer their company had received from a larger, fast growing, breakout company. He did not know how to assess the offer. Here are some of the components a founder should consider when receiving an offer from a breakout company:

Financial considerations.

If you have a $100 million offer from a break out company, it is actually worth a lot more. Considerations:

1. Company upside multiplier. 
Suppose you had an offer from Airbnb a few years ago when it was worth $10 billion.  If Airbnb ends up at its current valuation of ~$30 billion (I think it could be worth much more) then the $100 million offer may turn into $300 million or so at exit as Airbnb itself has grown 3X (ignoring dilution).

2. Dilution.
If instead of selling to Airbnb, you kept going as an independent company and needed to raise money, you would experience further dilution. For example if you still needed to raise a series A, B, and C and issue more options to employees, you may dilute another 30-50%. Assuming that you will dilute on the low end of this (e.g. 25%) you will have needed to exit on your own for $400 million later to achieve the equivalent of the $100 million exit to Airbnb in the past (3X multiple, and then 25% dilution). If you experience 50% dilution then the Airbnb offer was worth $600 million.

3. Risk adjusted time value.
One key element is timeline and risk. The average M&A exit takes ~6 years from founding. During that time a lot can change in the industry. In parallel a Stripe or Airbnb has a dominant enough position that momentum will continue to carry them forward and likely increase valuation. This means that on a risk adjusted basis exiting to a breakout company is, for high dollar acquisition offers, the right thing to do. For a lower value offer (e.g. $5 million exit) depending on your financial situation it may make sense to keep going unless you are running out of money or energy.

The decision in part depends on where the acquirer's own valuation is likely to go. For example, when we sold my last startup MixerLabs to Twitter we assumed the company had a 5-10X in upside as a minimum (it is now almost 20X more valuable).

4. Vesting.
The financial downside of an acquisition offers may lie in vesting. If you leave the company that buys you before you fully vest, you may lose much of the value of the acquisition. When thinking through the value of a purchase, you should consider whether the acquirer would truly be a long term home for you.

5. Other considerations. 
Selling your company is not a purely financial decision. Impact your product could have on the world, the joy of building your own company (or selling and learning from others), who you get to work with, and other factors all matter. However, the purpose of this post is the financial aspects.

Ease of sale

Many founders fail to consider that the lower your valuation, the easier it is to sell your company. M&A offers tend to fall into a set of ranges. The higher the range, the harder it is to exit and the fewer companies can afford you.

  • <$20M. Companies with $1 billion or more can make a fast decision to buy others in this range.
  • <$100M. Companies worth $5 billion or more can make a fast decision in this range. At less then $1 billion in valuation $50 million to $100 million equates to 10% of a company and is a major buy requiring a lot of agonizing and board discussion.
  • $100M to $250M. OK for a $10 billion company but will take real discussion and back and forth. Only will happen if truly existential or strategic for a $1 billion company.
  • $250 to $500M. At this point only companies worth $5 billion or more can even consider it, and you will generally need valuations above $10 billion in many cases to pull it off. This will require real debate. For a Google or Facebook scale company, some of these buys can still happen quickly as it is small as a proportion of market cap.
  • $1B+. Acquisitions of this size are very rare and generally requires extensive discussion and few buyers can get there. In general you need to be worth tens of billions to buy a company worth a billions plus, and you must hold strategic value to the acquirer. Since exits of this size are broadly reported on they seem common. In reality billion dollar startup acquisitions are rare.

Example exits. Instagram versus Friendster.

Both Instagram and Friendster were companies that had early acquisition offers. Friendster famously turned down a $30 million offer from Google in 2003 (probably worth billions today) and then eventually sold for $26 million in 2009 after raising tens of millions of dollars. While not selling Friendster at the time was the right decision given its traction, in hindsight enormous upside was lost for the founders. In contrast, Instagram sold to Facebook in 2012 for $1 billion. With Facebook's appreciation this is now many billions of dollars. However Instagram would probably be worth tens of billions today as a stand alone. One could argue Instagram sold too early, although the founders and investors obviously did well.