Nivi · October 17th, 2007
Q: Should I sell my company or raise capital and go for it?
Sell if it dramatically changes the lives of the founders and the early team. Every dollar after your “fuck you money” is icing—get your financial independence first and make the icing at your next company. You can also use an earn-out at the acquirer to capture some of the potential upside of raising money.
If you raise capital, you risk your current value for a chance to capture your future value. Is there a difference between capturing future value at your current company and your next company? You can create future value at your next company after you’ve captured your current value and done your time at the acquirer.
Also consider selling if you are at a local maximum, e.g. your company or market is going sideways and the company will be worth less before it is worth more. Of course, smart buyers will wonder if they should be buying when insiders are selling.
One alternative to an acquisition is to cash-out some of the founder’s shares so they’re wealthy enough to feel comfortable with the risk of building a bigger business. I’m guessing the Facebook founders have been cashed-out to some degree.
Q: What does it take to be a successful entrepreneur?
Successful entrepreneurs delight their customers, execute relentlessly, and enjoy lots of luck. You recognize great entrepreneurs when you see them (like porn) and you get better at recognizing them every day.
Q: What does it take to be a successful investor?
To be an investor, you need access to capital. There is no IQ test.
To be a successful investor, you also need great dealflow, good judgement in picking companies, and, in competitive markets, the competitive advantage to win deals.
Note: These excellent questions are adapted from Ashkan Karbasfrooshans’s Venture Hacks interview.
Image Source: Richard Seaman.
Topics Entrepreneurs · M&A · VC Industry
Having been through one startup venture I learned lots of the lessons (the hard way) articulated on this excellent site. With respect to this specific post I’d like to hear more about earn outs. What insight can you give on the terms and tradeoffs of earn outs?
Its important to know there are many kinds of investors – not just VC’s. We are a private equity firm that invests in businesses that don’t fit the profile of typical VC’s (10x cash on cash return potential) but are too small for typical Private Equity firms ($5mm in EBITDA min).
We offer our portfolio company management teams two bites of the apple – sell some to me now, then let’s work on growing and exiting together later. Typically some or all of the money we put in goes out to the existing management team/shareholders.
There are also mezzanine lenders who give you subordinated debt, where sometimes you only need to pay interest and can pay all the principal in a balloon payment 2-5 years down the road. This can be a really attractive form of capital – and the amount of equity dilution can be very small. BUT you need to have a business with good cash flows. Most mezz lenders won’t touch anything less than $3mm EBITDA
Finally, you have senior lenders. If you are growing rapidly and have turned profitable but have more and more cash getting tied up in AR, an alternative to raising more equity is getting a line of credit collateralized against your AR. No dilution and pretty cheap cash (especially in this interest rate environment).
Its always amazing to me how little the VC and Private Equity communities work together and also how often entrepreneurs make a beeline towards the VC community without considering whether there are other sources of capital that could be better alternatives.