On Selling Your Company

The most important financial decision you will ever make as an entrepreneur is when to sell your company.  What amount of money to raise at what price from whom pales in comparison.  For venture capital firms, picking companies that will grow fast is much easier than deciding when to sell them.  Misjudging exit timing can be the difference between top decile fund performance, and shutting the firm’s doors.  We struggle with this across every one of our portfolio companies.  That said, it is much easier with the ones that are running out of money with no real recovery prospects – you sell them and get what value you can.

It is the great ones, the ones that achieve something special, where we really think carefully.  And for every example of a company that refused a good offer and ended up struggling (Digg comes to mind, but there are so many others I hate to single them out), there is a company that sold too early and left 10x or more in value to the acquirer.  VM Ware comes to mind – sold for $750 million to EMC and is now worth $46 billion.  Hard to say which hurts more.  What would YouTube be worth now if it were independent and going public?  More than what Google paid?  Enough more to justify waiting?  Or would Google have bought a competitor and crushed YouTube?  Hard to say.

So, when I read the criticism of the Instagram founders for “selling out” I cringe.  The “right” course of action is never as obvious as observers will opine.  For insiders, when a good offer comes in, it is up to the board to consider it, and pursue or reject it.  Here is what we consider when having these discussions:

1) Growth prospects.  Do we really have the means and team to scale the business?  Or is our growth heading for some real challenges.  Are competitors looming that will eat our lunch?  Are we really a stand-alone business long term?  Good companies tend to believe they can overcome any obstacle and the world is all figured out.  It is the  job of the board to bring a sober assessment to the companies prospects.  This is why it is so important to have a truly independent director on the board.

2) Price.  Obviously, if the offering price is some high multiple of some yet to be achieved revenue target, you are probably going to sell.  If the price is a low multiple of some already achieved revenue number, then you are probably going to reject the offer.  Usually, with good companies the price is somewhere in between these extremes.  Generally, we tend to hang on to our winners if the offering price is close to the price at which we could raise capital.

3) Management Recommendation.  If management is eager to sell, then that is a big factor.  We try to structure our investments so management keeps a higher percentage of the winners at higher exit values.  Participating preferred with a cap accomplishes this well.

Back to Instagram, would I have sold?  Did the founders sell out or sell smart?  The answer is clear to me – that was a smart sale – as close to a no-brainer as I have encountered.  I wish they were all that obvious, and I hope to be having a similar discussion as the board of Instagram with one of my companies down the road.


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