

Why I Walked Away From a $12M Acquisition Offer 18 Months After Our Launch - nilmonibasak
http://www.groovehq.com/blog/startup-acquisition-offer

======
mattzito
The upside potential is exactly why they offered 14x revenue - they had to
sweeten the pot and make sure that they incentivize you to move _now_ as
opposed to later. They are willing to pay a little more now in exchange for
insuring that they don't miss out, or miss a huge inflection point.

However, bear in mind that as time goes on, and there's more data about
monthly run rate, that multiple will likely go down.

First, as time goes on, it will become increasingly less likely that you will
"pop", or have a huge hockey stick of growth. Part of the multiple is designed
to get you out of the game before you hit that inflection point.

Second, many companies fall down once they try to scale their business. It
requires a different set of skills, often different employees, and makes it a
lot more likely that you'll miss on execution. Once you have a few quarters in
a row of ~2% growth instead of 5%, your valuation will drop dramatically.

Third, the market moves around you. Even if you're continuing to grow, what
your competitors do can influence your valuation, to your betterment or
detriment.

I'm not saying that the author made the wrong decision, only that it's always
easier to say, "Well, if we keep growing, and wait another year, we can get
acquired for 2X more!". Heck, a year from now, that acquirer themselves might
not exist anymore.

I think that _if_ you expect you'll want to exit the business at some point in
the next few years, _if_ you are fortunate enough to get a more than fair
offer where all of your employees and investors would see it as a win
financially, you need a really compelling argument _not_ to take it.

~~~
wmeredith
TL;DR: A bird in the hand is better than two in the bush.

~~~
electic
Agreed, the more data you have the harder and harder it is to command a 14x
multiple. I have now made that mistake 2 times in my previous startups.

------
mikekij
Swinging for the fences is great, but so is getting on base.

Twelve months ago I accepted 7-figure acquisition offer for my company.
Members of our team thought the offer was too low. It was a struggle for me to
get everyone on board for the deal.

In the past twelve months, the market conditions and competitive landscape
have changed dramatically. Had we not accepted the acquisition offer, we'd be
out of business, and we would have lost all of our investors' money. This
would have had little to do with our execution, and much to do with exogenous
factors out of our control.

Just one data point though.

~~~
otoburb
>Members of our team thought the offer was too low. It was a struggle for me
to get everyone on board for the deal.

Do those same members (who hopefully cashed out) agree with the blessing of
20-20 hindsight, or do they still believe the acquisition offer was too low?

~~~
mikekij
They have each told me that they now think we absolutely did the right thing.
Being the one that pushed the deal through, this makes me feel much better.
I'm so glad I wasn't wrong!

------
DanBlake
I respect this post, but the most important thing in my mind is not mentioned:

"past performance is not indicative of future performance"

You need to give credence to the fact that you could have competitors offer
your exact product for much less than you do. That a newer, better product
could offer more for less. Or also that your product just becomes less good
over time and your customers leave. Ecosystems change as does business.

You need to account for the fact that you could be left with nothing also.
This isnt to say not taking the money was the right/wrong thing. Thats your
call alone to make.

~~~
amorphid
That is totally true. I suspect many companies sell when they know grow will
start to slow, but that trend isn't obvious yet.

------
timjahn
The real answer is a third of the way through the post: "First-time founders
care most about their exit. Every time after that, you focus on legacy."

The author already had a successful exit, so they have their money. Now they
want to make a difference.

~~~
ssharp
I saw that he had an exit, but he also said his $6 million payout if he had
sold Groove would have been "life-changing". That suggests his other exit
netted him a bit less.

As far as making a difference, I think calculating that is pretty complicated.
Elon Musk had two big exits before he did more fulfilling work with SpaceX and
Tesla. Some people want to make that level of massive impact. If that's the
case, it probably makes sense to sell, take the money and tick off another
exit on your resume, and start your next journey. But if someone is happy with
making a smaller difference (I know I certainly would be!), then this might be
your big chance to, so selling would not be personally fulfilling at all, even
if it is financially fulfilling. There's no guarantee you're ever going to
make $6 million from your company, but there is also no guarantee you're ever
going to start a company that allows you to have the kind of impact you're
having.

------
beck5
I think a key difference here is Groove is actually a real company with real
revenues which are growing. This is not true for many similar sized
acquisitions you see. Good on Groove!

------
enjo
Reminds me of a story I heard about Photobucket. The founder there apparently
had a $1M cash offer early on to sell out. At that point his credit cards were
maxed and was really struggling to keep the thing afloat.

He chose to pass and went on to sell the company for $300M to Newscorp. Of
which he owned a significant portion.

~~~
pcrh
>Of which he owned a significant portion.

He sold Photobucket to a company that he partly owned? That sounds more like a
merger..?

~~~
crazypyro
Significant portion of his start-up, Photobucket. He didn't own Newscorp...

------
chdir
> We had a handful of meetings between with their business development team
> and executive teams, and their engineering team did a thorough technology
> review of Groove.

I'm curious, why would you let them do a _thorough_ technology review of your
startup in the first place? (Edit: Because it can be dangerous)

~~~
nthj
This stuck out to me, too. This is exactly the scenario where you want to
bring in a third-party consulting team.

My team has been hired for this role several times: we receive full access to
the technology stack and the target's engineering team. We then prepare a
thorough report that the potential acquirer can ask us questions about,
discuss any concerns, and request potential solutions to any issues and
associated costs.

This has at least three benefits:

1\. Isolating the target from revealing their IP to the acquirer,

2\. We're experts in the target's stack (say Rails), whereas the potential
acquirer may be more of a Java or Django shop, and be unaware of stack-
specific issues to look for,

3\. Allowing us to offer an unbiased opinion: we don't have any vested or
emotional interest in the sale going through or not, so we can be pretty blunt
about anything that might be an ongoing issue.

I won't say how much we charge for a service like this, but it's absolute flea
spit compared to the $14 million on the table.

~~~
gbrits
Interesting. What would you the keyword be to search for such services?

~~~
nthj
I'm not sure, we received our gigs through referrals. I've long thought I
should set up a landing page for this kind of service—this seems pretty well-
received on HN so maybe I'll finally get around to it now.

------
josefresco
Can't wait for the follow up, a year from now about how things went after this
acquisition attempt and post. I'm not insinuating that they'll fail, just that
the follow up is more important than this declaration.

------
ar7hur
I appreciate you sharing your experience, this is something we founders are
not enough prepared to go through.

Two comments IMHO:

\- Would you have said yes and looked into the details of their offer, you
would have realized that the $12M are not upfront. Through retention packages
and revesting, most of the price is typically paid over 3 or 4 years. So the
offer was probably less attractive than it initially looks.

\- $12M is _never_ a good outcome for investors (at least big angels and VCs).
They make their returns only on big exits.

~~~
jf22
>They make their returns only on big exits.

Don't they make returns anytime their money invested is less than the money
gained from the sale?

~~~
mhartl
In a narrow sense, yes, but virtually all investor returns typically come from
a few big winners. For example, although many Y Combinator startups have
achieved great success, most of YC's returns come from just three companies:
Airbnb, Stripe, and Dropbox. If all an investor's winning startups exited at
the ~$10m level, their returns would be anemic at best, and would quite
possibly be negative after factoring in losses from failed companies. I think
that's what the grandparent comment was getting at.

~~~
psykovsky
And let's be honest, AirBnB will go the way of Uber, regulated out of
existance. I honestly don't know why it didn't happened yet, for both.

~~~
no_future
They're both multibillion dollar backed companies, so more likely the opposite
will be true: any regulation against them will be lobbied out of existence.

~~~
psykovsky
Please...

------
mbillie1
With respect to the 5 questions at the end, it seems arguably that the
author's own evidence demonstrates the incorrectness of the decision for
everyone except current customers. Interesting path to take, and nice to read
the thought process. How did the rest of the Groove team react?

------
softdev12
"Our monthly revenue was around $70K at the time, making $11.8M a 14x multiple
on our annual revenue. Even in SaaS, that’s on the very high end of the norm,
and a multiple generally reserved for highly profitable companies (or ones
with massive user bases)."

Congratulations to the company for the growth after only a handful of months.
Very impressive.

Using multiples always seems a bit odd for me in super high growth early stage
companies. If a product really takes off the early small numbers can really
skew things in comparison to later big ones. It's like seeing a 10,000 percent
growth rate in the first month on a tiny base.

~~~
mattzito
Multiples are a convenient way of benchmarking deal performance, and it tends
to work out very well for typical deals. Successful series B startup with a
consistent growth rate? ~10x trailing 12 months revenue. High-growth series A
startup? ~15x. Mature post-series C startup with large customer and revenue
base? ~8x.

Obviously, the excitement in the market, the competitive landscape, bidding
wars, etc. can all screw with those points, but time and time again you see
those general ranges for acquisitions.

~~~
WillieBKevin
Good points. Keep in mind the OP is talking about a 14x multiple of annual run
rate, rather than trailing 12. He's calculating annual run rate as 12x his
most recent month. Considering it's a quickly growing company, if he were
calculating his multiple as a multiple of trailing 12, it would be higher than
14.

------
not_that_noob
It takes a lot of guts to do this. Only time will tell if this was a genius
move or... I am rooting for genius. Good on you for swinging for the fences.

Also, smart to talk about this publicly. Of course, it's good reading. But
also many people like buying from those who care about the product they build
than from a faceless bigcorp. You can't buy that sort of credibility.

------
DubiousPusher
I don't understand why so many here are questioning this move. You can shoot
down his logic about the future upside but clearly it wasn't about the money
anyway. Call me crazy but I find it encouraging that this guys is measuring
the success of his business not just by how much it makes but also by whether
it produces a good product that people actually want to use.

~~~
markgavalda
I couldn't agree more, DubiousPusher.

------
egregiouscoder
Congratulations to you! I think it's good to iterate that you said you love
what you're doing. That's what matters most. When I was a kid and someone
offered to by my paper made ninja stars, for $5 (it was a lot of money as a
kid and still is) I couldn't sell it because I loved it! even though the
materials probably added up to couple of cents.

~~~
KRUKUSA
Haha ninja stars!

------
GreenPlastic
Curious what your team thought was a good exit and what your definition of win
handsomely is. For me, I'm at a startup where I gave up 75k-100k in salary for
the first 2 years. Owning 1.5% of the company, <20M exits only make sense the
first 6-8 months. At 2 years, I would have done much better elsewhere.

------
debacle
I wonder how many first-time founders would have made the same decision. My
guess is very few.

------
yuhong
"Products that founders swore they built to be “simple” got bloated,
overdeveloped and lost sight of their vision."

I wonder why.

------
uptown
I'm guessing Salesforce. Anyone know the bidder?

~~~
AznHisoka
doubt it, since he says its not very related to his industry. I'm guessing
someone like SAP.

------
ainiriand
Congratulations for the good job GrooveHQ.

------
mkaziz
Did the headline change from a normal one to a clickbait?

------
codingdave
I thought Groove was Ray Ozzie's old company that he formed before Microsoft
acquired it. I had no idea there was a new startup re-using the name.

EDIT: The original title said "Why Groove walked away...".

