With the recently announced acquisition of our portfolio company MakerBot, the conversation invariably turns to “was this the best time for the company to sell?”
It’s a question that is asked every time a company sells and it usually creates a lot of noise by people whose opinions are usually misinformed and even more so, irrelevant. The question is asked over and over and over again: “When is the correct time for a startup to sell itself?”
The answer is simple: “When the founders want to sell.”
Unfortunately, many investors do not feel this way. Clearly, a VC can be very helpful in advising the founders about past experiences, the current state of the M&A market and their thoughts around valuations, but when the founders want to sell, it’s time to sell the company. Who are we to tell the founders that they aren’t allowed to fulfill their dreams and create an event that will change their lives?
Brad and I have written a lot about venture term sheets. (Plug: buy our book!). One thing we haven’t written about, however, is what we call “The VC Bargain.”
We believe this “bargain” is inherently created when VCs invest in a company. And no, this isn’t in the legal documents, but should be part of a mutual understanding by both parties. (Note, however, we’ve seen some VCs and many late stage funds actually try to draft into the documents at what valuations founders may sell at and we find this practice distasteful).
If a VC is playing for a longer / bigger outcome, then it is the responsibility of the investor to create some financial liquidity for the founders and employees that makes them feel secure. The situation we hate is one where the founders and employees receive nothing except the message “no, you can’t sell, keep running the business.”
But this isn’t solely as one-way bargain. If you take venture money, you have a duty as well. You have a duty to actually work toward a liquidity event.
From time to time, we’ve encountered entrepreneurs who really aren’t interested in selling their company. This has been expressed both explicitly “I have no intentions of ever selling my company” to more implicitly whereby an entrepreneur continually finds fault with potential buyers (“I hate their culture,” “I don’t like big companies,” etc.).
Few companies can expect to go public. Therefore, the acquisition market is the only way for investors to create proceeds to return to their limited partners. And everyone should know that our job is to take our investors money, invest it and return a lot more money to them. Without acquisitions, we can not do this.
It amazes us, but we find that some entrepreneurs don’t actually realize (or respect) this when they take on investment. Yeah, we know you don’t normally gravitate working for big companies (otherwise, why start your own?), but at some point, if things go well, BigCo may be correct path of the company.
Bottom line is that this VC Bargain is an important one in the startup ecosystem, but one that is not well understood by some.