Google Would Have Bailed Too!
StartUp entrepreneurs seek achievement. They pursue because they see value, accomplishment, reward, and recognition. Many of them expect to succeed when they start - few of them do.
For the largest group of startup people economic success is a derivative of great product development, deployment, and customer satisfaction. That formula for business or startUp success isn’t new.
Paul Graham expresses his views about the path of venture capital while Umair Haque goes on to confirm and expand . Both views are well thought out and make lots of sense. However both views really leave the entrepreneur out of the liquidity equation. At the least, both commentaries seem to reduce the critical path nature of the entrepreneur and the factors motivating them.
The web as a delivery platform and its inherent qualities magnifying delivery and access options - that’s the new game in town, of course. What both posts seem to ignore is the opportunity to remove risk in the startUp pursuit by shifting that to a much larger player. Does the risk of continuing outweigh the benefit of security? Most startUps never even get to consider this equation. But for those that do have a choice - there’s little other they focus on. Ignorance, inexperience, ego, they can all get in the way - but nonetheless every entrepreneur is constantly working the cost and risk to continue versus the benefit of getting out.
Certainly startUps are weighing their risk and reward 24×7 on practically 360 degrees of their startUp world. Before the startUp person even began the company and didn’t do something else safe and ordinary - the entrepreneur made this calculation. Despite how terrible the odds are, the entrepreneur actually, without hubris, comes to believe they can and will get there - then they do their startUp.
StartUp founders constantly know and evaluate the stages they progress through. Despite varying success and failure indicators, they know when their grip on their position is tenuous and high risk. They know when they’ve become a leader, albeit small and have a likelihood of some success. And they know when they are positioned to become dominant and command their product or category. Haque states the business of venture capital firms saying “You may disagree with me - but I think they’re in the business of creating new industries, markets, categories, and value chains.”
WHAT? Venture capitalists? Is he really saying that? SO the guys that pay for the boats and aircraft should sail and fly them? WHAT? No one would use those transports if they knew that was the deal.
This is what’s wrong with venture money. Venture money used to be money that supported the entrepreneur and brought resources to the benefit of the company and stakeholders. It accelerated rather than directed. In many ways what venture has become is an architecting exercise with a poor performance record executed more and more by large venture firms with large headcounts, with large funds, operating a mechanical investment design and deployment. Their returns are pretty much guaranteed since the vcs design and control the cost of capital based actually SPECIFICALLY on their poor performance record. The allure and the need for capital is so strong, the entrepreneurs are the only payers in this inefficient process.
In some ways Haque has upside down what really happens. His first mistake is when he states “The answer’s very simple. Because every company that had the potential to be economically revolutionary over the last five years sold out long before it ever had the chance to revolutionize anything economically.” And then he states “Think about that for a second. Every single one: Myspace, Skype, Last.fm, del.icio.us, Right Media, the works. All sold out to behemoths who are destroying, with Kafkaesque precision, every ounce of radical innovation within them.”
Who cares what the acquirer does? Acquisition and integration whether soon and voluminous or later and little is really irrelevant. Whether the value transfer is feature or solution driven isn’t really relative either. In a rapidly changing technology environment large players simply don’t have the management skills, technical resources, nor the exclusivity of thought to generate and deliver all of the newest requirements that may protect or leverage their numerous competitive positions. They need to buy what they lack in capability or were late to build.
Paul Graham says “Corporate M&A is a strange business in that respect. They consistently lose the best deals, because turning down reasonable offers is the most reliable test you could invent for whether a startup will make it big.” Paul is an astute observer with many valuable things to say - but not this one. More often than not Corporate M&A overpay for their targets - witness the Haque brief list above. And when those offers are rejected the guys rejecting often have little additional knowledge of success but more alternatives than bailing out then. Right? Wrong? You just don’t know.
It’s exactly upside down. Sellers sell out because they don’t have a grip on their category. The only responsible thing they can do for ALL stakeholders is to sell out or continue to increase risk of the ALL value they have built. Assuredly sellers know better than the buyers they will not maintain their footprints in the future.
If Haque were a mutual fund shareholder with a 401k would he keep HIS money in a fund manager who didn’t understand the staying power of their investments. He’d be writing blogs excoriating the elite fund manager for not paying attention and not getting out since their positions were not sustainable.
His second mistake strikes when he says “Let’s replay the Google story. Google, despite serious interest from Microsoft and Yahoo - what must have seemed like lucrative interest at the time - didn’t sell out. Google might simply have been nothing but Yahoo’s or MSN’s search box.”
And then Haque takes an extra whiff of the bat to strike out with “Why isn’t it? Because Google had a deeply felt sense of purpose: a conviction to change the world for the better. Because it did, it held on and revolutionized the advertising value chain - and, in turn, capital markets gave Google an exuberant welcome.” Deeply WHAT! Again and for the hell of it WHAT AGAIN! ARE YOU CRAZY? There was no altruism being executed when Google management spurned the paltry offers.
They knew the massive size of the application they had written - they knew its performance and extensions. They knew what came next for them and how long the competition would take to get where they were and how far they’d get in the mean time and so on. They were being undervalued by those suitors and they knew that too.
WHAT ARE YOU SAYING? Whew! Google had an absolute lock on their product and category. They had mass, magnitude, and growth and they knew it and everyone else did too.
And therein lies the hook. Myspace, Skype, Last.fm, del.icio.us, Right Media, doesn’t the evidence drive home the correct calculation of the sellers? The buyers didn’t squeeze any life out of the sellers. The buyers bought at the last moment the seller could hang on. Why else would the seller sell?
Some of the answers Haque suggests are interesting. And Paul too. But they’re older suggestions. Trading cows that couldn’t be liquid in M&A or IPO instead on a secondary market is 5-10 years old and only for benefit of the tinkering of portfolio accounting of the venture firms themselves.
Someone may recognize the upside down qualities venture firms have created feasting on the flesh of startUps. Venture as an industry is pretty young. The opportunity in the venture business is to provide a lot more access to funding, designing less with lower investment costs, smaller bets, and lots more of them.
The venture business is a lot like sport or entertainment, and at the end of the day the inventory goes home and if they won’t come back - you’re out of business. A realignment of the performers’ share and the promoters’ share is bound to occur.
Thanks to Keith Erickson, Corrine Wyard, Alex Magary, and Janey Levine for reading drafts of this.