The Entrepreneurs Dilemma - Sell now for $Millions or holdout for $Billions?
If you had to choose between selling your company now for $100M or continuing on for another 5 years or more and maybe selling for $ Billions, what would you do? Every entrepreneur hopes to have this dilemma, but when it happens it is a difficult decision with many different factors.
This week I had the opportunity to talk with several entrepreneurs who faced this decision. The results were different in each case, but the major factors in the decision were the same.
Competitive environment - Are you in a leadership position? If you have already carved out a dominant position in one market and could move into other market segments or geographies, that would argue for staying private and going for the big exit. On the other hand, what if the big billion dollar players are entering the market? What if the market is consolidating, and your competitors are being acquired by big players?
Financial structure - Is your company well capitalized and profitable? If so you could probably grow organically, without raising more money or taking dilution. However, even in this case you may not be able to grow fast enough to keep up with the competitors and market movement. If you need to raise more cash, or are not yet near cash flow break even, the decision is more complicated.
Economic environment - Is there a recession looming or is the market booming? If the market is booming and you have a good competitive position, you may want to raise more money and holdout for the big exit.
Age of company - Startups are full of enthusiasm, vision, and hope. After 7 years or more is the fire and passion still there? Most employees are fully vested by then. Are they still totally engaged or are they leaving? A startup can't stay a startup forever. The dynamics change. You need to keep a finger on the pulse of the whole company.
Founders - Are the founders still at the company and still passionate? Are the founders financially secure, or are the looking for an exit? Can the management team take it to the next level? These are the toughest questions to face and answer honestly.
Investors - Venture Capital investors need to answer to their Limited Partners each year. If the fund has already generated a nice return for investors they may be more inclined to holdout for a bigger exit. If the fund is not doing well they may push for an early exit. You may have several VCs on your board who have opposing views and motivations.
Employees - After 5 to 7 years many employees are fully vested. They may want to buy a house or put away money for the kids college education. Engineers and creative people may be looking for a new challenge. Keeping key employees is always a factor to consider.
Alternatives to selling out now
Raise more money - You may be able to raise more money but the valuation is likely to be less than a buyout offer. Investors may demand onerous liquidation preferences that put prior investors and employees at a disadvantage. Raising more money also means your eventual exit valuation must be much higher to satisfy all investors. This is actually something to consider at every stage of raising money.
Take some money off the table - Many times the founders have not made any money previously. They want to cash in a few million dollars so they have some financial security for their family. Then they can push ahead another five years and hope for the big payoff. Most VCs don't like this idea. They don't want the founders taking "their" money out of the company. The VCs want the founders to be "hungry" and push for the long haul. Founders Fund, and a few others, think their interests are better aligned in they allow the founders to take some money off the table. As you might imagine there are some very strong opinions on each side of this question.
Give the founder a break - Sometimes the founders are tired after 7 years of pushing hard 7 days a week. Sometimes it is a good idea to rotate the management team and give them new challenges. There are cases where the founder / CEO moves to chairman or CTO, or even leaves the company but stays on the board.
New management to take it to the next level - Many times founders are great at starting a company but not so good at managing growth, hundreds or thousands of employees, international complexities, and all the other challenges of big companies. The skills required to go from zero to $10M are very different than those required to go from $50M to $500M. So the question becomes do we sell out now for millions, or do we reorganize the company to prepare for the billion dollar trajectory?
What would you do?
One CEO I talked to evaluated the situation and decided to sell now for about $150M. The VC investors agreed that it was the right decision. Employees are happy. The merger just made sense.
The company was not profitable. He said he could have raised another $30M, but at a valuation that was 20% to 30% below the buyout offer. Raising the additional money would have raised the acquisition envelope to $300M to $500M in order for the new investors to get the multiples they were looking for. He asked "How many companies sell for $500M?" Very few. So, the investor multiples worked at $150M, but they would need to be much higher if they took on new money. He also mentioned the competitive environment with new big players entering the market and consolidation happening all around him.
Another CEO I talked to decided to take the plunge and go public now rather than wait for a better market and higher valuation. This company is a leader in their market. Going public was important for several reasons. First it gave them increased credibility with their customer base. Second, being public also gave them stock currency to make acquisitions. Third, it gave them access to raising more cash on the public markets with much lower dilution than they would get from VCs.
Another CEO said they decided to sell out in the $150M to $200M range. They had been at it for over 12 years and decided the acquisition made sense for many reasons. However, he did say the integration issues with the big company were a hassle, and that the culture of the startup company was changing.
The conversations with these founder/CEOs were fascinating. It was interesting that each of them, almost without recognizing it, had to deal with many of the factors mentioned above. I suspect that every company faces these issues when contemplating a buyout offer whether it is $10M, $100M, or $1B. No matter how many zeros you add to the number the basic issues remain the same.