I was in Boston this week and popped into Momentum Summit, an annual event that looks at how small startups turn into big businesses. At the end of the conference I sat down with a small group of people led by Founder Collective‘s Eric Paley. The topic? When to sell your business.
This is an important and emotional topic for all stakeholders in a startup. Founders and early investors might be happy with a wide range of outcomes. Later stage investors with large funds might push to hold out for “big” outcomes only. How do you reach a decision that works for everyone? How do you “know” if now is the right time to sell?
For example if you get an offer to sell for $100M and two years later that company was worth $1B was it right to sell? Was it the buyer who created that extra value or was that just the trajectory your business was on anyway? If only we had a crystal ball.
In our talk together Eric gave us a great framework for making this important decision. In his case, he sold his company pre-revenue. When he talked about why they took the deal he talked about the number of years of risk that were being offered up.
Say your company is worth $10M today. You’re early into goto market and starting to build some early momentum. A buyer comes along and offers you $50M. What do you do? Under Eric’s framework you would look at what your company is likely to be worth next year, the year after and the year after if you can see out that far. If you’re only being offered what you are presently worth or a premium to account for what you might achieve in the next 12 months, maybe you just keep going. But if a buyer is giving you a price that would take you 2 or more years to achieve on your own, perhaps you should take it. That’s the take away from Eric’s experience with Bronte Technologies.
There are of course many variables, both objective and subjective, that go into this decision. Just a few of the big ones include:
– Are you a 1st time founder? If so, getting $1M – $5M now can be life changing and hard to pass up.
– How big are your VCs? A large fund will hold out for large exits that can “move the needle”. Let’s say for example that a $500M fund invests $5M for 30% of your business. Two years later you have the chance to sell your company for $50M. You and your early angels and employees will net $35M. Jackpot! Your big VC will get $15M. They triple their money, but $15M is irrelevant to a fund of that size.
– Lifecycle of the funds: If a fund is near the end of its 10 year term (normal time for funds), they will want the exit even if they are leaving value on the table (in practice they will ask for 1 or 2 year extensions rather than lose value, but you get the point). If a fund is new, they are in no rush and will hold onto growing companies as long as possible.
– Economy: Some people worry that the tech market is experiencing a bubble. Others worry that the economy at large is vulnerable and that changes in oil supply, consumer debt or other key factors could cause problems. For these and many other reasons, some investors may take an exit when it comes rather than hope a bigger one comes later.
There are few decisions as life-changing for founders as when to sell your company. And rest assured, if and when you get to make that decision, you will have to weigh many factors and deal with multiple competing interests. I found Eric’s framework to be a useful tool in that process. To learn more about it check out his excellent post on the topic here.