Monday, August 22, 2011

5 Reasons To Sell Your Startup

Many entrepreneurs get really distracted when Google or Facebook or another acquirer approaches them and asks if they want to get acquired.  I frequently (a) ask - why do you want to exit?  and (b) suggest the entrepreneur stop talking to the potential acquirers - this is usually a huge distraction that does not lead anywhere.  [aside - I wrote another blog to be posted soon on moments when you should NEVER sell your company]

When most entrepreneurs approach me for advice on how to exit their startups, I usually first ask if there is a reason they should do so.  I think the following are legitimate reasons to exit a startup:

1. You are exhausted and dont want to keep going.
Sometimes you just don't have it in you to keep going.  The startup has been rough on you.  Your significant other left you.  You can't sleep anymore.  You show up at work without energy every day, and feel like you are clawing your way from morning to morning without end.

We all have periods like this as entrepreneurs (I think many entrepreneurs are a little bit manic depressive) but if you find that the startup has drained you to the point where the manic part is totally gone and doesn't feel like it will ever return, and nothing (vacations, new boyfriend/girlfriend, hiring someone to delegate to, etc.) can't fix it, it may be time to stop what you are doing and try a startup again at a later date when you have recharged.

Startups take a lot of energy and relentlessness.  If you lost both of these things, it may become impossible to roll the boulder up the hill singlehandedly anymore.

2. The founding team is about to blow up.
You and your co-founder can no longer stand the sight of one another.  You roll your eyes whenever she speaks (or vice versa) and spend long pointless days arguing.  Who is responsible for what is eroding or you can no longer do your own part effectively.

First you should talk things through and try to work it out with your co-founder.  Have a mature conversation on it.  Often you can work it out.  If this does not work, you can pull in a mentor, advisor, or investor to help work it through.  If you find things have truly eroded to the point where you can not work together anymore you need to either:
a. Leave the company (or have your co-founder leave)
b. Sell the company if you think (a) will kill the company for some reason

3. The acquirer is willing to "pay ahead" substantially.
Most disruptive companies end up with offers that look very large at the time that in hindsight don't properly value the company's potential.  E.g. Amazon's $100 million bid for Google and then Yahoo!'s conversation with Google that valued it at $1 to $5 billion.

That said, there are a number of times where an acquirer is willing to pay substantially more then a startup is likely to be worth.  Reasons for this may include:
a. The acquirers equity value will likely grow substantially faster then yours will (e.g. any company Google bought in 2003 or the early team buys Facebook made).  For example a $50 million acquisition by Facebook when it was worth $5 billion would appreciate into a $500 million deal value at current valuations. 
b. The acquirer can get more value out of your company than you can.  For example, if their larger sales force can ramp sales of your product much faster than you can you may be worth more as part of their company than as a stand alone.
c. You are in a hot space or the acquirer is desperate.  Sometimes you are just in a hot market, so people will pay for you much more then you will ever be worth - especially if they are desperate (see e.g. AOL buying Bebo for $750 million).

So the big question you should ask yourself is whether you are Facebook or Bebo? :)

4. You are about to get massively crushed by a competitor.
Sometimes there is a competitor in your market who has dirty tactics or uses a truly unlevel playing field to crush its competitors.  An example of this is the way Microsoft used to bundle multiple products into its O/S for free.  This both (a) created instant massive distribution for these products and (b) often killed its competitors by giving away the product for free, when the competitor used to charge for it.  This dried up the competitor's revenue stream leading them into a downward spiral, or the arms of an acquirer.

A great case example of Microsoft tactics lies in Microsoft versus Netscape.  Netscape was eventually bought by AOL for >$4 billion.

5. You need financial security or regular cash flow.
A family member gets sick.  You are about to have kids and can't afford it.  You need to support your family members.  There are a number of instances in which having liquidity can go a long way.  There are often alternate means of liquidity (a loan with your shares as collateral, secondary stock sales, etc.) but if all else fails, an exit into a larger company may both generate cash for you as well as provide you with a stable, higher paying job.

Any other thoughts on reasons to sell your company?  Let me know in the comments.

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