When to sell your company?
In 16 years as a venture investor, the mantra that great companies are bought not sold as been one of the few guide posts that has not changed. So if you are building a great company and receive an offer, how do you decide when to sell? There is no silver bullet answer; however, the best framework I have seen was presented by Ben Horowitz in his book, “The Hard Thing About Hard Things”.
First, Ben lays out a framework for three types of acquisitions:
- Talent and/or technology. These acquisitions are typically referred to as acquihires or technology tuck-ins and range in value from $5–50m.
- Product. In these acquisitions, the acquirer usually sells the product as is via its own sales and marketing and the acquisitions usually ranges from $25–250m.
- Business. These acquisitions are for the entire business and can often have a strategic dimension that values the company witha nice premies, sometimes into the billions of dollars.
For talent, technology or product acquisitions, it helps to have connections to the acquirers either directly or via your investors. At Birchmere we regularly meet with follow on investors and corp dev groups to keep our companies on their radar.
For the rest of the post I am going to focus on business acquisitions and it is on this topic, Ben’s states:
“When analyzing whether 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 one in that market, then you should remain stand alone.”
He goes on to say:
“So, the judgment that you have to make is (a) is the market really much bigger (more than an order of magnitude) than has been exploited to date? and (b) are we going to be number one? 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 mean selling yourself and your employees short.”
The book goes on to use Google as an example and correctly states that there are many nuances to answering these questions, especially those that try to predict future competition.
At Birchmere our best example was Cvent where we had a chance to sell the company several times, sometimes to established industry players and sometimes to other SaaS companies wanting to get into our market. While we did not have this framework, we had many board discussions that effectively concluded our market was larger than most people suspected and that we would be number one. Regarding market size, we felt others did not understand the size of the opportunity based on the questions they asked and the valuations they proposed both of which indicated they felt event management software was a niche market.
The question of thinking we could be number one was more nuanced and partially based on our dominant position regarding number of customers relative to our competition, our organic growth rate which, based on the predictability of our sales and marketing engine, we felt would continue for several more years and perhaps most importantly, due to our Cvent Supplier Network marketplace which had strong network effects. CSN was a marketplace in the classic sense in that the more participants that joined on both sides, the more valuable the CSN became to all. To top it off, CSN was our newest product and growing the fastest of all of our businesses. Kudos to Reggie Aggarwal and our team at Cvent for analyzing our situation correctly.
The book goes on to deal with the very important emotional part of the decision as well as other practical advice for many situations that entrepreneurs face and most people do not talk about.