Take the Money and RUN! Why StartUps Should Sell.
Google, Facebook, and other household names - would have sold out if they had only got their price along the way,
writes influential Paul Graham in the article “Why Aren’t There More Googles?” Further, he posits, had acquirers been smarter they would have paid more earlier, and of course much less later. His inferred conclusion for the entrepreneur says don’t lower your price to the acquirer’s offer – drive the company instead.
Graham is right, ONLY, for the tiniest number of startups.
And therein lays the issue, narrow, yet of critical path importance to most startUps. The companies he speaks of, and their experience, are achieved by so few startUp companies and their founders, executives, and employees. Iconic commentary from someone such as Graham is rapidly heralded across the web and read as though it is the operating direction for your startUp.
Yet Graham’s advice isn’t relevant to the largest portion of the readers since 97% of startUps don’t get an exit.
Graham’s article is persuasive, logical, interesting, compelling, but NOT RELEVANT and maybe even be bad advice for practically all startUps. For most companies – it is a dead out struggle – all the way to anywhere they get!
It’s not controversial to assume no more than 1 out of 10 companies pursuing capital get funded by VCs. If venture capital firms do as little as 4,000 deals annually that’s 40,000 legitimate startUps seeking funding – annually. From 1995 through 2007 VCs invested $351B in 39,000 companies meaning 390,000 legitimate companies pursued venture capital and 90% or almost 350,000 didn’t get funded! A non-controversial VC portfolio view might be 30% of venture investments succeed, 30% go sideways and venture capitalists close or bury 40%.
Venture capital seekers succeed 3% of the time! BUT 97% DON’T!
Therefore the straight out advice to startUps at almost anytime in their development is if serious cash or reasonably liquid stock comes your way and that makes a profit for you and your investors and you think the price isn’t high enough – TAKE THE DEAL!
All startUp numbers indicate your zenith is more than likely now – recognized uniquely by that offeror at this point and not another – and never to be as robustly valued again. If you knew that now you’d take the deal.
Graham speculates the reason many offers are spurned as “More likely the reason is that the kind of founders who have the balls to turn down a big offer also tend to be very successful. That spirit is exactly what you want in a startup.”
Graham’s startUp description happens to almost NO ONE! Big offer? How many startUps get a “Big offer”? It’s like saying what happens to Brad Pitt and Uma Thurman must happen to most people. It doesn’t.
If all of the success signs are obvious in your startUp, good buzz, potential or actual customers buying, product working, yet MAGNITUDE & MASS have yet to be achieved, the likelihood of success is only marginally better than when you started.
Google, Facebook, etc. – the Graham audience – were well financed practically from day one and they got offers once and because their products achieved magnitude & mass. Only the chosen few have that rarified combination of success indicators, together with the tipping point of magnitude, and mass. It’s so extraordinary (yet our media makes it seem common) to be at the altitude and clearly likely to continue flying higher – faster. 3 out of 100 get there!!!!!
Without achievement of magnitude and mass a startUp turning down an offer is not as Graham suggests – “they have balls” – it’s because they’re STUPID and naïve.
So few startUps have a lock on their category, their control, their expectations – they’re out of their minds if they don’t bail when given the chance. The numbers scream GET OUT! Indeed that’s what the numbers say.
So the moral of this article is that most startUp content is about what we’d like to read not what we need to read. Who wants to hear about the 90% who didn’t get funded. And when someone does get funded who wants to hear about the 70% of those who don’t make an exit.
Reading about venture capital home runs is compelling stuff, but it’s not the way 97% of startUps should or have to run their business to succeed.
Thanks to Keith Erickson,