Friday, August 26, 2011

Go big or go home

This phrase was very popular in the Valley 10 years ago, and has recently surfaced again -- unfortunately with respect to cleantech deals masquerading as early stage ventures when they are in fact infrastructure financing nightmares waiting to happen. ;-) However, "go big or go home" has always been a mantra of Silicon Valley. When I first came to the US in the late 80s, I feared the inability to compete in this market, academically and business wise. I certainly thought of a company as a startup that made a few million dollars (well, one million was a lot to me), and dreamed of one day being able to pay myself a 100k salary...imagine that. The idea that a big company might like my inventions and products enough that they would consider buying the company was almost inconceivable to me, and if by some strange chance it happened... wouldn't that be wonderful? The first time you sell a company it's a wonderful elation: It's a validation of you, your business, your team, and your vision. It's also supposed to deliver real value to the acquirer and build a long term relationship between the two of you.

I invariably sold companies too early, for many reasons: difficult investors (VCs with fins in their backs among them), bad market conditions or changes, problems with co-founders, and occasionally because I felt it was a local maximum in value and feared the market changes I imagined were coming. To me the cardinal sin was losing the investors' money, which I managed never to do. However, Valley VCs view that as "lame" -- it's losing the opportunity that is the cardinal sin. Losing a $5M investment, to them, is nowhere near as bad as losing a $500M opportunity. This, by the way, is one of the reasons that skin in the game (founders having personal cash in a deal) is often not viewed positively by VCs.

I also sold companies too late, going from $1B in 2000 to $100M in 2001, then to 50M at the end of 2001. And anyone who has sold a company for stock knows that you sell the stock ASAP -- except often when you do, the stock goes up a lot after you sell it. In one case of mine, it was a factor of 10, which was inconceivable at the time, but I can assure you that losing that money I never made actually felt a lot worse and completely overshadowed the money I made in the transaction in the first place.

Most entrepreneurs sell their company too early simply because they are faced with the risk of growing a company to the next level, taking on new investors (or changing from bootstrapped self-funded to VC investors) and suffering dilution. Most startups don't scale big: Ironically it's relatively easy to do $1M in revenue (there are usually enough early adopters to fill a niche); it's really, really hard to turn that into $10M, and somewhat easier to turn that into $30M. Then you do a trade sale because you are not sure if you can do $100M! I am told that once you break $100M it's easier to do $500M, but I don't believe that.

There are multiple dimensions to this conundrum of when to sell, but another thorny aspect is the make vs. buy decision when a company like Google or Microsoft decides they like your product and want to buy you, provided the price is reasonable...

VCs don't want you to sell -- not yet. They want to make the company as big as it possibly can be, drive profits as high as they can possibly get, and then make an acquisition feel like passing a kidney stone, or open heart surgery for the acquirer.