A few months ago, Dell picked up venture-backed Equalogic for $1.4B in cash. As I thought about how many ways $1.4B can be divided, it reminded me of the decision all companies & founders face at some point: do you take it all the way or do you sell out early?
There’s no right answer to this. It’s a highly personal decision, based on many variables. Let’s look at this from a founder/ management perspective:
Go big
Let’s look at Equalogic: This was a solid, well run and well-backed company with a clear market niche and robust product line. The company had raised $53M in capital. As a result, it’s investors owned 85% of the company. Many founders might bristle at the notion of “giving up” so much of their company. But look at the value that was created here. The non-VC shareholders still split $210M between them. In the process, they built a real company and significant value.
Sell out
The chance of a sure thing now, vs. a potential bigger thing down the road is a tough one. At my last startups we faced this dilemna. Weeks before closing a $10M ‘B’ round, we received an offer to sell the company for $47M. This was a relatively small transaction. But, having raised only $4M, the founders/ management stood to make real money. In our case, the temptation was too much to pass up, and so we sold.
So, what should you do when it comes to building out your own company? That’s for you to decide, but here are some points to consider:
- Stakeholders: Your investors are (likely) in this for the big win. If you have venture capital and they are early into their own fund, they’ll probably want you to ride it out and go for it. If they are winding down this fund or if they’re raising a new one, an exit now might be very timely. You need to consider what they want and where they see this company going. These discussions should take place well in advance of an exit opportunity.
- Your chances: Do you have a truly compelling market leader on your hands, or is your company just an interesting add on to the value of another incumbent? If the former, you may want to go big, if not, then take the deal.
- Your net worth: It’s easy for the VCs to tell you to go big, they have many investments and get to split 20% of the return on each of them. For you, all you have is your startup. Unless you’ve done this before, chances are your interests are not aligned with your VCs when it comes to deciding when to exit.
Many founders bridge this gap in interests by selling a small portion of their stock each time they raise money. According to Ventureone, this happens on 16% of all deals. Doing this gives you some liquidity and induces you to keep riding the roller coaster.
My feeling on all of this is that most startups sell out too early. I don’t blame them, but there could and should be more independent technology companies in the market. I’d love to see more founders take their companies all the way. The good news as a founder / company operator is that the further you take this one, the more opportunities and experience you’ll have when it comes to building your next one.