Nas, B Horowitz - Should You Sell Your Company? lyrics

Sittin’ up drunk shuffling thoughts
Got paper but I’m lost
Losing focus what a n#%$a still hustin’ for?
My seed is straight the family’s settled
Idle time get the man in trouble
Nas, Suicide Bounce

One of the most difficult decisions
That a CEO ever makes is whether or not to
Sell her company logically
Determining whether selling a company
Will be better in
The long term than continuing to run it
Stand-alone involves a huge
Number of factors
Most of which are speculative or unknown
And if you are the founder
The logical part is the easy part

Indeed, the task would be far simpler
If there were no emotion
Involved but selling your company is
Always emotional and deeply personal

Types of Acquisitions
For the purpose of this discussion
It is useful to think about
Technology acquisitions in 3 categories:

Talent and
Or Technology when a company is acquired
Purely for it's technology and or
It's people these kinds of deals typically
Range between $5 and $50M
Product when a company is
Acquired for it's product
But not it's business
The acquirer plans to sell the
Product roughly as it is
But will do so primarily with it's
Own sales and marketing capability
These kinds of deals typically range
Between $25M and $250M
Business when a company is acquired
For it's actual business
(revenue and earnings) the acquirer values
The entire operation (product
Sales, and marketing) not just
The people, technology
Or products these deals are typically valued
(at least in part) by their
Financial metrics and can be extremely large
(eg microsoft’s $30B+ offer for Yahoo)
This post is most applicable to business
Acquisitions with some relevance to product
Acquisitions and will be fairly useless if
You are selling people and or technology

The Logical
When analyzing whether or not you
Should sell your company
A good basic rule of thumb is:

If: A) You are very early on
In a very large market aND
B) You have a good chance of
Being number 1 in that market
Then you should remain stand-alone the
Reason is that nobody will
Be able to afford to pay what you are worth
Because nobody can give you that much
Forward credit for an easy
To understand example, consider Google when
They were very early, they reportedly
Received multiple acquisition offers
For more than $1B these were considered very
Rich offers at the time and
They were being offered a
Gigantic multiple however, given the size
Of the ultimate market, it
Did not make sense for Google
To sell in fact
It didn’t make sense for Google to sell
To any suitor at any price that
The buyer could have paid why? Because the
Market that Google was pursuing was
Actually bigger than the markets that all of
The potential buyers owned and Google had
Built a nearly invincible product lead which
Enabled them to be number 1

Contrast this situation with Pointcast
Pointcast was one
Of the first Internet applications to catch
Fire they were the buzz of Silicon Valley
And the technology industry in general
They received billion dollar
Acquisition offers that they passed on then
Due to flaws in their product architecture
Their customers started
To turn off their application overnight
Their market collapsed and never
Returned they were
Ultimately sold for a relatively tiny amount

So, the judgment that you have to make is
A) is this market really much bigger
(more than an order of magnitude) than
Has been exploited to date?
B) Are we going to be number 1? If the
Answer to either a) or b) is no
Then you should
Consider selling if the answers
To both are yes
Then selling would literally mean selling
Yourself and your employees short

Unfortunately, these questions are
Not as simple to answer as I’ve made
Them out to be in order
To get the answer right
You also have to answer the
Question: "what is the market really and who
Are the competitors going to be?"
Was Google in the search market or
The portal market? Clearly, in retrospect
They were in the search market
Most people thought they were in
The portal market at the
Time yahoo was a tough competitor
In the portal market, but not so much in the
Search market if Google
Had really been in the portal market
Then selling might have been
A good idea pointcast
Thought that their market was
Much larger than
It turned out to be interestingly
Pointcast’s own product execution
(or lack thereof) caused their
Market to shrink

Let’s look at the case of Opsware
Why did I sell Opsware? Another
Good question is why didn’t I
Sell Opsware until I did?

At Opsware
We started in the Server Automation market
When we received our first inquiries
Offers for the Server Automation company
We had less than 50
Customers i believed that there
Were at least 10, 000 target customers
And that we had a decent
Shot at being number 1
In addition, although I knew the
Market would be redefined
I thought that we could expand
To networks and storage
(Data Center Automation) faster than the
Competition and win that
Market as well therefore, assuming
30% market share
Somebody would have had to pay 60X what we
Were worth in forward credit to buy out
Our potential you won’t be surprised to find
That nobody was willing to pay that

Once we grew to several hundred customers
And expanded into Data Center Automation
We were still number 1 and were more valuable
Stand-alone than any of the
Prior acquisition offers
At that point both Opsware and our main
Competitor Bladelogic had developed
Into full-fledged companies
(world-wide sales forces
Built out professional
Services, etc) this was significant
Because it meant that a large company could
Buy one of us and
Potentially execute successfully
(big enterprise companies can’t generally
Succeed with small acquisitions
Because too much of the important
Intellectual property is the
Sales methodology and big companies
Can’t build that)

At this point
It became clear that BMC was going to
Buy either Opsware or Bladelogic as
A result, the calculus
Or whether Opsware was going
To be number 1 in the market
Needed to be redefined as follows:

1 we had to be number 1 in
The Systems & Network Management market
Rather than the Data
Center Automation market
Because like the word processor market
The Data Center Automation market
Was going to be
Subsumed by a larger market that contained it
2 in order to be number 1
We had to beat BMC+Bladelogic
Which was a significantly
More difficult opponent than
Either company stand-alone

Finally, the market it'self
Was transforming due
To an underlying technological shift:
Virtualization virtualization meant that
The entire market needed to be re-tooled
So we were embarking on a new R&D
Race to build the best management
For virtualized environments this
Meant deferring earnings
For a very long time

Based on all of these factors
It made sense for us to at
Least consider the possibility of
Acquisition and run a short
Process to understand the
Interest in the M&A market
Through that process
11 companies made acquisition offers
Of some form this
Told me that we were at a local
Maxima in terms of the market
Price for Opsware ie
The set of potential buyers
Was convinced that the
Market was very important and there was
No extra premium that we could hope
To achieve through better awareness in
The end, based on a lot
Of analysis and soul searching
I determined that the current local
Maxima was higher than we
Could expect to achieve in the next 3-5 years
And I sold the company to
Hewlett Packard for $165B
I think and hope that was the right decision

The Emotional
The funny thing about the emotional part of
The decision is that it’s so schizophrenic
How can you ever sell your company
After you’ve personally recruited every
Employee and sold them on your
Spectacular vision of a thriving
Stand-alone business? How can you ever
Sell out your dream?

How can you walk away from
Total financial independence for
Yourself and every member of your close and
Distant family? Aren’t you in
Business to make money?
How much money does one person need?

How can you reconcile Dr
Stay-the-Course and Mr
Sell-the Thing? Clearly they
Are irreconcilable
But the key is to mute them both

A few keys on muting the emotions:

Get paid
(a salary) Most venture capitalists like
Entrepreneurs that are "all in"
Meaning that the entrepreneur has everything
Invested in the company
And will have very little to show for her
Efforts if the company does not
Succeed as part of this
They prefer that the
Founding CEO have a very low salary in
General, this is a good idea
Because the temptation to walk away
When things go poorly is
Intense and total financial commitment helps
One keep his other commitments however
Once the company starts to become a
Company rather than an idea
Then it makes sense to pay the
CEO at market more specifically
Once the company has a business
(as defined above) and becomes
An attractive acquisition target
It makes sense to pay the CEO
So that the decision to keep or sell
The company isn’t a direct response to
The CEO’s personal financial situation
As in: "I don’t think that
We should sell the company
But I live in an 850
Square foot apartment with my
Husband and two kids and
It’s that or divorce"

Be clear with the company One question that
Every start-up CEO gets from her
Employees is: "are you selling the company?"
This is an incredibly difficult
Question if she says nothing
The employee will likely interpret
This to mean the company is for sale if she
Says "at the right price
" the employee will
Wonder what that price is and may even ask
If the company ever reaches that price
The employee will assume the company
Will be sold if she
Dodges the question with the standard "the
Company is not for sale, " the
Employee may feel betrayed if the company
Is ever sold more importantly
The CEO may feel like she
Is betraying the employee and
That feeling will influence her
Decision making process one
Way to avoid these traps is
To describe the analysis
In the prior section: if
The company achieves product
Market fit in a very large market
And has an excellent chance to
Be number 1, then the company will
Likely remain independent if not
It will likely be sold this is one good
Method to describe the interests
Of the investors
In a way that’s not at odds with the
Interests of the employees and is true

Final Thought

When faced with the decision of
Whether or not to
Sell your company, there is
No easy answer however
Preparing yourself intellectually and
Emotionally will help