Should Entrepreneurs Bet It All On The Billion Dollar Exit, Or Cash Out Small?(techcrunch.com)
techcrunch.com
Should Entrepreneurs Bet It All On The Billion Dollar Exit, Or Cash Out Small?
http://techcrunch.com/2010/10/03/should-entrepreneurs-bet-it-all-on-the-billion-dollar-exit-or-cash-out-small/
33 comments
He's local to me (at least when he's at Duke) and was a guest speaker at one of my systems engineering classes at NCSU (a class on knowledge dynamics and learning organizations). The professor had sent us two of his previous posts on Techcrunch (http://techcrunch.com/2010/02/27/can-entrepreneurs-be-made/ and http://techcrunch.com/2010/03/06/replicators-innovators-and-...).
I had sent some critical comments back but it seemed the rest of the class, which didn't have any real-world experience whatsoever, took all of Wadhwa's essays as gospel.
I had sent some critical comments back but it seemed the rest of the class, which didn't have any real-world experience whatsoever, took all of Wadhwa's essays as gospel.
Yes, the founders level of motivation is a key factor of risk for a startup company, one thing is early after the creation and another ten years after, even if your company is profitable. One test is how motivation works after macro/micro economic cycles (i.e: dot com) or inflection points (crisis or growth). Also excelent moments in a company gives a false sense of security for the inexperienced management, so... I'll get the money if I have the risk of being out of business and without some personal financial security
"in practice that usually reduces to doing what you prefer"
Unless a set of investors with board control want to sell and the Founder/CEO does not. They can then sack the CEO and replace them with a Yes person. Right?
Unless a set of investors with board control want to sell and the Founder/CEO does not. They can then sack the CEO and replace them with a Yes person. Right?
I never really understood this debate... as if all companies should go big, or all companies should stay small/medium. Every business is different. Businesses have varying amounts of potential for growth, varying numbers of possible revenue streams, and even varying numbers of directions in which to pivot should things hit a wall.
If you're selling people hands-on classes in underwater basket-weaving, it's probably not a good idea to make all your classes free so you can chase VC money. On the flip side, if you've created a social network that's on track to become the biggest website ever, it's clearly unwise to sacrifice that massive potential by cashing out early. One-size-fits-all arguments ("All companies should go for the gold!") don't make any sense, and are probably issued by people who have a direct incentive for their arguments to become reality.
If you're selling people hands-on classes in underwater basket-weaving, it's probably not a good idea to make all your classes free so you can chase VC money. On the flip side, if you've created a social network that's on track to become the biggest website ever, it's clearly unwise to sacrifice that massive potential by cashing out early. One-size-fits-all arguments ("All companies should go for the gold!") don't make any sense, and are probably issued by people who have a direct incentive for their arguments to become reality.
The debate is for people/companies who have a choice-- obviously you're right about the fact that there's no debate where there is no choice. Mint sold for $150m, but perhaps could've aimed bigger. Blogger sold pretty early-- perhaps they could've been/beaten WordPress. Google famously tried to sell for $1m to Excite. LOTS of companies who sell early have an opportunity to aim bigger.
I think partial cash-out Series B rounds are a good development which allows founders to have their cake and eat it too. Aaron Patzer probably could've raised a big Series B, pocketed a few million for himself and retained a fairly massive chunk of ownership.
I think partial cash-out Series B rounds are a good development which allows founders to have their cake and eat it too. Aaron Patzer probably could've raised a big Series B, pocketed a few million for himself and retained a fairly massive chunk of ownership.
The problem with the Mint example is that the acquisition price was really quite high. Patzer's personal stake was $40 million(!). That's in the same ballpark as he might make in an IPO 5 years later, after being diluted to hell. It's FU money 4-6 times over.
I think cashing out a couple million only works when a) the founders are obsessed with the company's mission above all else b) the acquisition offer is small enough that VCs can give the founders ~20% of their would-be cash now.
I think cashing out a couple million only works when a) the founders are obsessed with the company's mission above all else b) the acquisition offer is small enough that VCs can give the founders ~20% of their would-be cash now.
It's not rational, but part of the Silicon Valley mindset is "go big or go home" and oftentimes people don't stop to think whether it's good for their business, they just accept it as fact.
See also "Rich vs. King in the Real World: Why I sold my company"
http://blog.asmartbear.com/rich-vs-king-sold-company.html
There are more choices than just those two, you could simply build a solid business with respectable turnover and a good profit margin.
If you're not looking for your exit too hard it just might come your way anyway, and building a solid business is one way to work towards that goal.
If you're only focused on your exit and it doesn't happen or the timing is off you are probably in a lot of trouble.
If you're not looking for your exit too hard it just might come your way anyway, and building a solid business is one way to work towards that goal.
If you're only focused on your exit and it doesn't happen or the timing is off you are probably in a lot of trouble.
+1
Too many founders are focusing on the big exit. Survivor bias really feeds this too, as we hear all these great "I got rich" stories from successful exits, and never hear the "I failed hard" stories from failed startups.
Tuning your company for acquisition instead of profitability is stupid. Don't do it. Cashing out for $10M or $1B are probably not options you actually ever have, so don't fixate on them.
Too many founders are focusing on the big exit. Survivor bias really feeds this too, as we hear all these great "I got rich" stories from successful exits, and never hear the "I failed hard" stories from failed startups.
Tuning your company for acquisition instead of profitability is stupid. Don't do it. Cashing out for $10M or $1B are probably not options you actually ever have, so don't fixate on them.
I don't even understand the debate:
Your lifespan, healthspan, lifetime happiness and ability to run a company will only go up once you cash out for 4-10 million or more. You've literally solved the money problem at that point.
Why would you risk that on a vanity billion dollar exit?
Your lifespan, healthspan, lifetime happiness and ability to run a company will only go up once you cash out for 4-10 million or more. You've literally solved the money problem at that point.
Why would you risk that on a vanity billion dollar exit?
Some people would rather be famous, be the toast of the town, be adored by who they perceive as their peer group, leave who they perceive as their peer group, be on the front cover of Newsweek, get a movie written about them, etc... than have life, or health, money, or a successful business.
It is basically the Achilles question, right? Durable since the classics: would you like to live long or die gloriously?
(Like most dichotomies, there are almost certainly options in the solution set not mentioned.)
It is basically the Achilles question, right? Durable since the classics: would you like to live long or die gloriously?
(Like most dichotomies, there are almost certainly options in the solution set not mentioned.)
If you're doing what you love, why give that up for money and the chance to find another thing you love? Lightning doesn't always strike twice.
Also, to rip off Sean Parker's character in "The Social Network", do you want to end up like Roy Raymond, who committed suicide after selling Victoria's Secret on the cheap, watching with regret as it grew into the billions?
http://en.wikipedia.org/wiki/Roy_Raymond_(businessman)
Also, to rip off Sean Parker's character in "The Social Network", do you want to end up like Roy Raymond, who committed suicide after selling Victoria's Secret on the cheap, watching with regret as it grew into the billions?
http://en.wikipedia.org/wiki/Roy_Raymond_(businessman)
That scene with Parker was one of my favorite in the movie. I liked how after telling Roy's story to Mark and then talking about how Facebook was a once in a lifetime opportunity, and seemingly after he was done talking about Roy, he tossed out the line, "The water under the Golden Gate bridge is cold." Awesome line. Then not a minute later he told Mark that he wanted him to be able to say, "I'm CEO, bitch."
Regardless of whatever imperfections the man may have had, he clearly knew how to motivate people. As portrayed in the movie, he seemed to have a powerful effect on Mark and the rest of the Facebook crew.
Regardless of whatever imperfections the man may have had, he clearly knew how to motivate people. As portrayed in the movie, he seemed to have a powerful effect on Mark and the rest of the Facebook crew.
Absolutely. I found that speech very inspirational. I'm aware that founding a startup isn't really like that (not usually, at least), but it still threw some coals on the fire.
Agreed. Though to your comment about what startups are like in real life, I'd say that based on my experience, in the real world, startups can be exactly how it was portrayed in the movie. Yes the movie was optimized to be more dramatic and "perfect". But in broader strokes, and in terms of the kinds of incidents and patterns and relationships that happen, I've found startups to be a lot like how early Facebook was portrayed. Been there, done that, even have the t-shirt. Just don't have the billion dollar valuation... yet. ;)
Cool, thanks. Best of luck to you on that valuation!
Maybe some would say I lack ambition, but I wouldn't even need millions. If my start-up was acquired for enough to pay off the mortgage and toss a bit of funding into the next venture, I'd be happy, but I'm looking at it from someone in the perspective of being in a very low cost of income area, who's building up a business from $0 in outside funding.
Do I think our product has potential for more? Yeah, sure (though it's still in development at the moment), but I'd rather have the security of having "enough" than the risk of waiting for a top-dollar offer and ending up with nothing if it never happened.
Which maybe means the start-up scene isn't the best fit for me in the first place, but I love what I do.
Do I think our product has potential for more? Yeah, sure (though it's still in development at the moment), but I'd rather have the security of having "enough" than the risk of waiting for a top-dollar offer and ending up with nothing if it never happened.
Which maybe means the start-up scene isn't the best fit for me in the first place, but I love what I do.
Well, a billion dollar company might enable you to make a 'bigger' difference. You help make your employees wealthy (Google's millionaire emplyees), you help shape whatever sector you're in (hopefully for the better). You create value for you shareholders. Everyone's a winner, theoretically.
Your argument is only true for people who have only one business idea. If you have a wealth of ideas, you can execute one and sell at a point that gets security for your self and your family, then execute another and aim bigger, but with your downside risk eliminated.
Is that common, though? When I think of companies that shaped the tech industry in a huge way, very few are companies founded by people who had already had a big exit and were on to their second or third company after already becoming millionaires. Impact on the scale of Apple, Google, Microsoft, Sun, nVidia, Oracle, etc., seems to involve founders who stay with their companies and guide them over a period of decades. Jobs did try the second-company route via NeXT, which had some impact, but he eventually had to return to Apple to get the kind of impact he wanted, which he wasn't able to do via NeXT (though he brought a good part of it back with him).
You can't compare (or compare in an unfavorable way) the fundamentals of these companies with the fundamentals of hyped web companies, also many of those companies were profitable quickly and follow the IPO way. FourSquare will be here in ten years? Twitter? Zynga? M&A can make them durable but IMHO their fundamentals are more volatile: Google is not just a company who configured open source software and develop some scripts, some of their processes (adwords) can't be even copied with virtually infinite money (microsoft=>adcenter, yahoo=>overture, Apple=>iAds). We can argue that you can't copy/trash the network effect of facebook but we are in the prehistoric moments of the hypercompetitive web and their fundamentals are more volatile.
Elon Musk. PayPal, SpaceX, Tesla.
Jobs also had Pixar, which had an undeniable impact in it's field.
Here's a question to test if you really believe the argument you seem to be making:
You have the idea of your lifetime. It's a billion dollar idea. You are looking for a co-founder, and find two amazing prospects.
They are equal in every way (education, drive, interests, etc) except one: Jim spent the past five years working at a startup that he just sold for $20m. Tim spent the past five years working in an office job.
You can only pick one of them. Do you prefer Tim or Jim?
Here's a question to test if you really believe the argument you seem to be making:
You have the idea of your lifetime. It's a billion dollar idea. You are looking for a co-founder, and find two amazing prospects.
They are equal in every way (education, drive, interests, etc) except one: Jim spent the past five years working at a startup that he just sold for $20m. Tim spent the past five years working in an office job.
You can only pick one of them. Do you prefer Tim or Jim?
I don't think that's really testing the argument he's making. He's arguing that people are more likely to start giant companies on their first go round, not that they're more likely to prefer cofounders who're on their first go round.
When you're looking for a cofounder, you're naturally biased toward someone with relevant experience, because the whole point of recruiting them is so that they can add value to the business and increase its chance of success. But when you're the initiator, a large portion of your contribution is picking the initial direction of the company, and what it's trying to accomplish. It's quite possible for first-time entrepreneurs to pick more ambitious goals and yet have less of a chance of success than repeat entrepreneurs.
When you're looking for a cofounder, you're naturally biased toward someone with relevant experience, because the whole point of recruiting them is so that they can add value to the business and increase its chance of success. But when you're the initiator, a large portion of your contribution is picking the initial direction of the company, and what it's trying to accomplish. It's quite possible for first-time entrepreneurs to pick more ambitious goals and yet have less of a chance of success than repeat entrepreneurs.
Glory!
Life changing money is important.
Life changing work is more important.
Life changing work is more important.
That is a personal question. However, here are two books that might help you answer it: (1) The Black Swan and (2) Early Exits: Exit Strategies for Entrepreneurs and Angel Investors (But Maybe Not Venture Capitalists)
Maximise your utility function. Duh.
"And if you’re lucky enough to get a life-changing acquisition offer like Mike Arrington just did, follow his example. Go for the billion dollars when you start your next company—by then you’ll have more experience and you won’t be risking the kids’ college education."
His mistake is to forget that the two options aren't exclusive. A large percentage of founders in startups successful enough to be on their way to being worth a billion dollars manage to cash out partially en route. So you don't have to choose between trying to make the company a big success and your kids' educations.
How do you decide whether or not to sell? There are two factors to consider: how much you like the work, and how good the offer is. If working on the company is what you want to do with your life, as it seems to be for Mark Zuckerberg for example, then you shouldn't sell unless you need to. Whereas if someone makes you an offer so good you'd be crazy to refuse it, then you might want to take it, even if you hadn't planned to sell.
(Strictly speaking, if you have shareholders, you have a fiduciary duty to do whatever's right for them. But since the founders' level of motivation is usually the dominant factor in the future value of early stage startups, in practice that usually reduces to doing what you prefer.)