Most startups get sold instead of going IPO.
That is not failure, it is just how the competitive startup market works. 2011 will be no different in that than any prior year.
A thousand athletes compete to be chosen for the Olympic team, only a few will be chosen. Of the many striving to become the starting soccer team goalie, only one gets chosen. Others end up as backup goalies or do not make the team. We don't look down on the athletes who tried but did not make the team. Startups work the same way. As soon as a new market is sensed to be forming, a rush of startups launches a race to the top. The first to get there becomes what the venture community calls "The Gorilla".
The Prime Directive of every startup should be "Become The Gorilla" of the new market. The startup which achieves that is the startup which is Number 1 in market size and power. It finally emerges from the intense fray as THE famed company, the Yahoo, Google, Facebook of the new market. Your plan to do that is what venture capitalists want to hear from you.
So what happens to the other startups, those failing to become The Gorilla?
A couple of the competitors turn into numbers 2 and 3. They are dubbed "The Chimpanzees". All the rest fall into the category dubbed "The Starving Monkeys". The chimps compete in the same market as the gorilla yet are different in several important ways. They also have half the share of market of the gorilla but remain financially healthy and a thorn in the side of the gorilla. The monkeys are doomed to bleeding red ink month after month.
The result is the gorilla and the chimps go IPO. The monkeys are either sold to established public corporations or they are shut down when they finally run out of cash. In some cases, even the chimps get sold before they go IPO.
As a result of this startup process, mergers and acquisitions become familiar to venture investors and serial entrepreneurs. Small, boutique investment bankers specialize on valuing and fining finding buyers. Lawyers and accountants work insanely intense hours to deliver the related documents. It happens daily in every new startup market.
Why do companies sell themselves to others?
- Some startups get purchased for their technology and people. Cisco was famous for purchasing small startups with a dozen or so employees, several before they had launched a product, others after the first product launch had started.
- Other startups sell to corporations when the CEO realizes he or she cannot become The Gorilla and are in danger of not becoming a chimpanzee. Or the new market is not going to become large enough to spawn a gorilla. Selling your company is a very tricky decision to make. It is filled with intense personal emotions. It involves a lot of stakeholders. It is a very difficult decision to face, analyse and decide upon.
I found an excellent piece of advice concerning the decision to sell your company in today's blog by Ben Horowitz. In it he explains how he views the related issues, particularly how personal emotions get in the way of clear thinking. I second what he has written and so will serial entrepreneurs. To learn more, discuss this issue with some of the experienced lawyers and accountants, as well as seasoned entrepreneurs in your community.
Selling your company can be a very wise decision. It is not startup failure. It can produce value for all stakeholders.
Most importantly, sale of your startup is about realism. I find realism too often lacking in the public talks by luminaries from the venture community and momentum bloggers. Their speeches about great startups with crisp vision, big markets, and huge IPOs that lead to becoming gorillas of the past lead to a distortion of startup reality. Most startups are going to either be sold or shut down. So I recommend you add that bit of realism to your emotional thinking as you go about planning your startup. I don't mean begin by planning to be sold (The Olympic coach does not want you to say you are planning on trying to get the silver or bronze medal). I do mean add the sale of your business to the spectrum of possible outcomes for your startup. And as it prospers during the intense competitive battle for the new market, continue to be realistic about its chances of becoming Number 1 in the new market (the gorilla). That will enable you to both strive for the top spot while remaining realistic about deciding when is best to sell your new enterprise. It makes you a very wise startup CEO.
BOTTOM LINE: Your startup could become a global giant, go IPO and become famous. Or it could be sold. Put both into your mental planning as you look into the future of your infant enterprise. Continue to work hard to become The Gorilla. When that becomes doubtful, it is time for you to begin considering sale of the business. Your board of directors will expect you to lead that decision making. Your employees will trust you to make it wisely. The result can be a great victory for all the stakeholders, including yourself. When you can be that realistic, you'll become part of the club we dub seasoned entrepreneurs. You will have added a strong asset to your bank of wisdom. You will understand a lot more about what it means to build and employ an unfair advantage.
I wish you The Best on your Adventure!