Earlier this month Ed Sim, a founder and managing director at NYC-based Dawntreader Ventures, offered advice about how to sell your startup. But why sell your startup at all? Shouldn’t you build for the long haul and swing for the fences? Ed’s advice: The more buzz you have, the harder it is to build a company that delivers on that buzz. Be honest with yourself and think carefully. You can read a longer version of this post at Ed’s blog BeyondVC.
If you have a tiny Web startup, this seems like a great time to be a seller. Last week Google bought Jaiku and CBS announced that it is buying Dotspotter, a 10 month old gossip blog. Expect more soon. But the flip-or-build question is harder to answer than it looks.
Put yourself in these entrepreneurs’ shoes: You’ve launched a great product or service, usage is growing, revenue is nil or minimal, and cocktail party chatter and buzz are at their highest. You have the opportunity to sell today at a pretty good number, but you’ll give up your chance of building a huge business. What do you do and how should you think about it?
As I started thinking deeper about this question, I was reminded of the old Gartner Hype Cycle chart. If we use this as a backdrop, perhaps I could show a framework to use for this important decision. According to Gartner, “A Hype Cycle is a graphical representation of the maturity, adoption and business application of specific technologies.” Similarly, I have graphically represented the choices an entrepreneur has to make in the continuing saga of build or flip. Let’s call this the “BeyondVC Startup Cycle.”
Gartner says there are 5 phases in a Hype Cycle (my comments in parentheses): Technology Trigger (product launch), Peak of Inflated Expectations (height of buzz), Trough of Disillusionment (this is harder than I thought), Slope of Enlightenment (the broad market is finally ready), and Plateau of Productivity (better have my next product ready). Now superimpose a startup lifecycle on the same graph.
If you look at the build-or-flip question in this context, it is obvious that an easier, less risky choice to make is best done at the Peak of Inflated Expectations/height of buzz. Here’s where an entrepreneur can maximise short-term value as acquirers will buy more on vision and technology than on business fundamentals. If you decide to build for the long haul and go for the home run, it will take you a fair amount of effort and time to create the same value that acquirers will pay today; they will expect more mature companies to have more established products or services and more milestones reached
Companies that sell here should understand that while they may forego going big, if they do not sell today then they will have to live up to their hype in the future. As companies mature the valuation of a startup turns from pure strategic value to one where it is based more on actual revenue multiples and market comps.
What are the chances you can do that? You may have built a nice service or product, gotten a number of users, but have not really monetized it or created a scalable business model that can drive profits. Can you really build a company or is this just a feature for a bigger player? If you choose to go for it and raise VC funding, you have to really believe that the capital you raise will help you create a much larger pie in the end. Do you want a larger percentage of a smaller pie or a smaller percentage of a much larger one?
Since I never like to make decisions in a vacuum, if I had an offer, I would test the market to get a read from VCs, and also poke around and speak to a couple of other strategics to see if I could extract more value. In the end, this data will help you make a more confident decision — if no VCs bite, then it is an easy decision for you.
At the end of the day, it comes down to two things. First, what is your appetite for calculated risk? If you want the big payday, you are not going to get it investing in risk-free bonds. Secondly, it comes down to your passion. Building a company is about more than just the money. Money can be fleeting — remember the last bubble. The real success stories have focused on a broader and bigger goal: Building an insanely great product or service for their customers and keeping them incredibly happy. As you do the right thing for your customers, you will do right for your investors, your employees, and ultimately yourself.