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.
Are there any astrophysicists around? This reminds me of the bit about how an asteroid might be at 5% chance of hitting Earth, then tomorrow as it gets closer it's now at 4% chance, then a week from now it's only 1% chance... It's not what you expect, but it makes sense when you understand that the uncertainty of the asteroid's trajectory shrinks with time, dramatically changing the prediction.
(Similarly, it could be 5% today, 20% tomorrow, and 99% a week from now)
That you can adjust the curve - the curve is reality. So the only way to justify greater upside/multiple/investment is to change the discussion. Change sales strategy, change product focus, etc. etc.
In other words, 'more uncertain than 5%' wouldn't be 5±x%
, it's be, say, 6%. If you have no information at all -- you're as uncertain as you could possibly be -- the probability would just be your prior for this event, and the more data you get pointing to the event either happening or not, the more the probability will move away from your prior towards either 0% or 100%.
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.
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?
"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.
The author already had a successful exit, so they have their money. Now they want to make a difference.
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.
While I hate the idea of selling early, there is the practical matter that a small exit allows for a lifetime of future startups. If Alex didn't already have money, I think the best answer would have been to sell. You only get one life.
He chose to pass and went on to sell the company for $300M to Newscorp. Of which he owned a significant portion.
He sold Photobucket to a company that he partly owned? That sounds more like a merger..?
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)
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.
Just curious, no offense intended, but how would I go about trusting a third party company which likely has much lesser reputation than the potential acquirer.
Q: Alex - I'm curious why the company was doing such deep due diligence on you in the first place? Was this for a potential partnership opportunity (you said it wasn't a natural fit?) Or were you simply receptive to an acquisition offer at that time, even if you weren't sure you actually had a genuine interest in selling? ...
A: Thanks for the comment, Michael. The conversation steered toward a potential acquisition very quickly. I'm not opposed to exploring opportunities, so the meetings went on. It wasn't until after the offer was made that I decided to turn it down.
It’s not a company that would be a natural product partner for us.
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.
Don't they make returns anytime their money invested is less than the money gained from the sale?
I'd be very careful with "Typically". It's not at all uncommon for acquirers to write a check, and then tack on retention packages for key employees. They very easily could have intended a $12m cash buyout, with another $2m for retention, spread over the team.
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.
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.
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.
I wonder why.
EDIT: The original title said "Why Groove walked away...".