

Should Entrepreneurs Bet It All On The Billion Dollar Exit, Or Cash Out Small? - bond
http://techcrunch.com/2010/10/03/should-entrepreneurs-bet-it-all-on-the-billion-dollar-exit-or-cash-out-small/

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pg
This is wrong:

"And if you’re lucky enough to get a life-changing acquisition offer like Mike
Arrington just did, follow his example. Go for the billion dollars when you
start your next company—by then you’ll have more experience and you won’t be
risking the kids’ college education."

His mistake is to forget that the two options aren't exclusive. A large
percentage of founders in startups successful enough to be on their way to
being worth a billion dollars manage to cash out partially en route. So you
don't have to choose between trying to make the company a big success and your
kids' educations.

How do you decide whether or not to sell? There are two factors to consider:
how much you like the work, and how good the offer is. If working on the
company is what you want to do with your life, as it seems to be for Mark
Zuckerberg for example, then you shouldn't sell unless you need to. Whereas if
someone makes you an offer so good you'd be crazy to refuse it, then you might
want to take it, even if you hadn't planned to sell.

(Strictly speaking, if you have shareholders, you have a fiduciary duty to do
whatever's right for them. But since the founders' level of motivation is
usually the dominant factor in the future value of early stage startups, in
practice that usually reduces to doing what you prefer.)

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eitally
He's local to me (at least when he's at Duke) and was a guest speaker at one
of my systems engineering classes at NCSU (a class on knowledge dynamics and
learning organizations). The professor had sent us two of his previous posts
on Techcrunch (<http://techcrunch.com/2010/02/27/can-entrepreneurs-be-made/>
and [http://techcrunch.com/2010/03/06/replicators-innovators-
and-...](http://techcrunch.com/2010/03/06/replicators-innovators-and-bill-
gates/)).

I had sent some critical comments back but it seemed the rest of the class,
which didn't have any real-world experience whatsoever, took all of Wadhwa's
essays as gospel.

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csallen
I never really understood this debate... as if _all_ companies should go big,
or _all_ companies should stay small/medium. Every business is different.
Businesses have varying amounts of potential for growth, varying numbers of
possible revenue streams, and even varying numbers of directions in which to
pivot should things hit a wall.

If you're selling people hands-on classes in underwater basket-weaving, it's
probably not a good idea to make all your classes free so you can chase VC
money. On the flip side, if you've created a social network that's on track to
become the biggest website ever, it's clearly unwise to sacrifice that massive
potential by cashing out early. One-size-fits-all arguments ("All companies
should go for the gold!") don't make any sense, and are probably issued by
people who have a direct incentive for their arguments to become reality.

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webwright
The debate is for people/companies who have a choice-- obviously you're right
about the fact that there's no debate where there is no choice. Mint sold for
$150m, but perhaps could've aimed bigger. Blogger sold pretty early-- perhaps
they could've been/beaten WordPress. Google famously tried to sell for $1m to
Excite. LOTS of companies who sell early have an opportunity to aim bigger.

I think partial cash-out Series B rounds are a good development which allows
founders to have their cake and eat it too. Aaron Patzer probably could've
raised a big Series B, pocketed a few million for himself and retained a
fairly massive chunk of ownership.

~~~
staunch
The problem with the Mint example is that the acquisition price was really
quite high. Patzer's personal stake was $40 million(!). That's in the same
ballpark as he might make in an IPO 5 years later, after being diluted to
hell. It's FU money 4-6 times over.

I think cashing out a couple million only works when a) the founders are
obsessed with the company's mission above all else b) the acquisition offer is
small enough that VCs can give the founders ~20% of their would-be cash now.

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gvb
See also "Rich vs. King in the Real World: Why I sold my company"
<http://blog.asmartbear.com/rich-vs-king-sold-company.html>

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jacquesm
There are more choices than just those two, you could simply build a solid
business with respectable turnover and a good profit margin.

If you're not looking for your exit too hard it just might come your way
anyway, and building a solid business is one way to work towards that goal.

If you're _only_ focused on your exit and it doesn't happen or the timing is
off you are probably in a lot of trouble.

~~~
Rantenki
+1

Too many founders are focusing on the big exit. Survivor bias really feeds
this too, as we hear all these great "I got rich" stories from successful
exits, and never hear the "I failed hard" stories from failed startups.

Tuning your company for acquisition instead of profitability is stupid. Don't
do it. Cashing out for $10M or $1B are probably not options you actually ever
have, so don't fixate on them.

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shafqat
Would be interested to hear how many funded entrepreneurs on HN were able to
cash out some shares at any point in their company's history (similar to what
the Foursquare guys did)...

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makmanalp
Rather, would be interested to hear from entrepreneurs who cashed out and then
regretted it.

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gte910h
I don't even understand the debate:

Your lifespan, healthspan, lifetime happiness and ability to run a company
will only go up once you cash out for 4-10 million or more. You've literally
solved the money problem at that point.

Why would you risk that on a vanity billion dollar exit?

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Psyonic
If you're doing what you love, why give that up for money and the chance to
find another thing you love? Lightning doesn't always strike twice.

Also, to rip off Sean Parker's character in "The Social Network", do you want
to end up like Roy Raymond, who committed suicide after selling Victoria's
Secret on the cheap, watching with regret as it grew into the billions?

<http://en.wikipedia.org/wiki/Roy_Raymond_(businessman)>

~~~
mkramlich
That scene with Parker was one of my favorite in the movie. I liked how after
telling Roy's story to Mark and then talking about how Facebook was a once in
a lifetime opportunity, and seemingly after he was done talking about Roy, he
tossed out the line, "The water under the Golden Gate bridge is cold." Awesome
line. Then not a minute later he told Mark that he wanted him to be able to
say, "I'm CEO, _bitch._ "

Regardless of whatever imperfections the man may have had, he clearly knew how
to motivate people. As portrayed in the movie, he seemed to have a powerful
effect on Mark and the rest of the Facebook crew.

~~~
Psyonic
Absolutely. I found that speech very inspirational. I'm aware that founding a
startup isn't really like that (not usually, at least), but it still threw
some coals on the fire.

~~~
mkramlich
Agreed. Though to your comment about what startups are like in real life, I'd
say that based on my experience, in the real world, startups can be exactly
how it was portrayed in the movie. Yes the movie was optimized to be more
dramatic and "perfect". But in broader strokes, and in terms of the kinds of
incidents and patterns and relationships that happen, I've found startups to
be a lot like how early Facebook was portrayed. Been there, done that, even
have the t-shirt. Just don't have the billion dollar valuation... yet. ;)

~~~
Psyonic
Cool, thanks. Best of luck to you on that valuation!

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alexcharlie
Life changing money is important.

Life changing work is more important.

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kallena
That is a personal question. However, here are two books that might help you
answer it: (1) The Black Swan and (2) Early Exits: Exit Strategies for
Entrepreneurs and Angel Investors (But Maybe Not Venture Capitalists)

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anthonyb
Maximise your utility function. Duh.

