When to sell your company — Jason Lemkin

From Jason Lemkin:

When a start-up should get acquired:

1. Before you fail / run out of money / etc. If you are slightly hot but with few revenues, or have something but not enough, sell while you still have time. Don’t wait until you have 30 days of cash. Way, way too many start-ups wait too long in this scenario.

2. When the team isn’t good enough. Even if you are growing nicely and even cash-flow positive, and all the quantitative metrics look good … if the team isn’t good enough, and can’t fix itself — sell if and when you can. Bad teams kill start-ups. Every day. Sell before then if you can’t fix it. Sometimes great individuals just don’t make great teams, and it can’t be fixed. It’s sad. But not uncommon.

3. When the economics, to everyone, exceed your magic number. I don’t know what your Magic Number is. But you will. It may be $19 billion. It may be $1 million. The Magic Number isn’t rational, really, and can’t be 100% explained on a spreadsheet. It is something that makes it all right. Sometimes, there is No Magic Number. Which is great, too.

Notes:
(1) Re. “if the team isn’t good enough, and can’t fix itself”: Under what circumstances can’t you fix the team? From my experience at Seeking Alpha, fixing the team is painful and may take longer than you’d like. But it’s doable.
(2) Cf. When to sell your company — Ev Williams and When to sell your company — Ben Horowitz.

When to sell your company — Ben Horowitz

From The Hard Thing About Hard Things by Ben Horowitz:

When analyzing whether you should sell your company, a good basis rule of thumb is if (a) you are very early on in a very large market, and (b) you have a good chance of being number one in that market, then you should remain stand-alone. The reason is that nobody will be able to afford to pay what you are worth, because nobody can give you that much forward credit.

So, the judgment that you have to make is (a) is this market really much bigger (more than an order of magnitude) than has been exploited to date? and (b) are we going to be number one? If the answer to either (a) or (b) is no, then you should consider selling. If the answer to both are yes, then selling would mean selling yourself and your employees short.

Notes:
(1) This is a fascinating thought experiment for every startup. Here’s what it looks like for Seeking Alpha: we’re early on in a massive market (investment analysis via crowdsourcing), and we’re the clear leader. Ergo, we shouldn’t sell.
(2) Cf. When to sell your company — Ev Williams, and Jason Lemkin on Bad reasons to sell your startup.

Bad reasons to sell your startup

From Jason Lemkin:

When not to sell. My learnings:

1. Do not sell if you are at scale and have a committed team. This is pretty much it for me. E.g., in SaaS, if you are at $10m+ ARR, and growing nicely, and the team is killing it — just don’t sell. Once you are at Scale in SaaS, you can’t be killed. Why sell? Really.

2. Do not sell because of the competition, unless they are truly decelerating you and you can’t stop them. There is always competition. Google threatens to kill you if you don’t sell? Whatever. They can’t kill you if you are growing. A hot start-up nipping at your heels? That’s the way it should be. As long as you can hit your plan, it doesn’t really matter.

3. Do not sell because you are tired. This is the dirty “secret” of M&A. If you look at a lot of successful start-ups that seem to get acquired out of nowhere … that have traction, great customers, and all that … there’s often a story. It’s called The 5 Year Walk of Death. You get so tired after 4 years, then you stumble through the 5th, and then, you take an offer. Don’t let it happen. Bring in fresh blood, fresh capital, whatever it takes. I know of one Top Tier VC Fund that specifically targets Exhausted Founders After 5 Years, makes crappy offers but with a lot of secondary liquidity. They know it’s a weak moment.

Amazon and the “insurance policy” acquisition

In This Internet Millionaire Has a New Deal For You, Tim Rogers describes a breakfast meeting between Jeff Bezos and Woot founder Matt Rutledge soon after Amazon acquired Woot:

At length, after a bit of business talk that maybe resembled a cousin of an actual breakfast meeting, Rutledge blurted out a question that had been troubling him: “Why did you buy Woot?”

So there sat Bezos at the breakfast table, faced with a question for which he was apparently unprepared. Many painful seconds passed without an answer. Rutledge let the pause lengthen as long as he could bear it and was just about to tell his host to forget it, when Bezos finally spoke.

He looked down at his plate. Bezos had ordered a dish called Tom’s Big Breakfast, a preparation of Mediterranean octopus that includes potatoes, bacon, green garlic yogurt, and a poached egg. “You’re the octopus that I’m having for breakfast,” Rutledge remembers Bezos saying. “When I look at the menu, you’re the thing I don’t understand, the thing I’ve never had. I must have the breakfast octopus.”

…In 2012, two years into his three-year deal with Amazon, Rutledge walked.

Notes:
(1) What’s the breakfast octopus analogy? Perhaps Bezos meant this: “Woot has an approach that’s completely different to the way we think, and it seems to be working. That’s potentially threatening to us. So we bought you to understand what you’re doing. It’s an insurance policy.”
(2) If you’re happy to sell only for the money, fine. If you want your company to survive and thrive, perhaps “insurance policy acquisitions” aren’t great.

If you sell your company, use an investment banker

Excerpts from If You Sell Your Company, Use a Banker by Jason Lemkin:

You don’t get THAT much from a banker for their seemingly huge fees:
— They don’t get you another offer.
— They don’t get you a better price just by hiring them.
— They don’t do much work for you.

So why hire a banker?
— They create the illusion you have another offer, and a real sense of scarcity.
— They end up getting you a better price by “accident” — by just being there and part of the process.
— They don’t do the grind work, but they buffer some of it out.
— The entire process changes — for the better. Corporate development, CFOs, etc. just treat the process with more respect if there’s a banker.

When to sell your company — Ev Williams

From When to Sell Your Company by Blogger, Twitter and Medium founder Ev Williams:

It seems to me, there are three reasons to sell a company. Any of them will suffice:

1. The offer captures the upside
Every business has natural growth limits. If someone offered you $10 million for your coffee shop that does $250,000 a year in sales, it’s pretty clear you should sell—from a purely financial perspective. Finances are only one perspective, but if you have many shareholders, it’s one you are obligated to take seriously.

2. Imminent threat
There’s potential, and then there’s risk. And there’s always risk, even in the best situations. But there are cases in which your chances of reaching your potential are slimmer than normal and maybe even totally out of your control.

3. Personal choice
Sometimes the founders or other key people may just be done. This is actually quite common and drives a lot of small acquisitions. It doesn’t apply as much as companies get larger, because everyone is (eventually) replaceable—especially if the company is doing well.

Personal note: None of these applies to Seeking Alpha. Yet :-)

Are most acquisitions a failure?

Jake Lodwick, founder of CollegeHumor, in An acquisition is always a failure:

The party ended in 2006, when we sold our company to IAC, a conglomerate owned by media mogul Barry Diller. Bit by bit, the youthful energy that created so much value was siphoned off. Whereas we’d once been free to work on whatever seemed interesting, we now found ourselves in vaguely defined middle-management roles, sitting through pointless meetings where older doofuses who didn’t understand the Web challenged our intuitions and trivialized our ambitions…

With a fat bank account, I was pretty set to do whatever I wanted for a long time. The sale afforded me the ability to make art, invest in other companies, and unwind. But it didn’t take long to realize that my new life was a hell of a lot less exciting than running an independent company had been.

I typically refer to the IAC sale as “the worst business decision of my life.” I’m not sure IAC is worse than any other large company in this regard…

An acquisition, or an aqui-hire, is always a failure.

Many internet acquisitions have failed, but some have succeeded. What determines the outcome?