BUSINESS BLOGS
BUSINESS BLOGS
category: business
10 Apr 2008

Fred Wilson asks a very good question:

So if you can’t take a company public, how do you get out? M&A has been the primary answer in the web/tech sector for the past eight years. And it’s been a great period to sell companies. We’ve sold three in the past couple years out of our Union Square Ventures portfolio, delicious, FeedBurner, and TACODA, to Yahoo!, Google, and AOL, respectively. Were we happy to take their money? Yes. Were we happy with the outcome? Yes. Were they good buys for their new owners? On the face of it, yes.

But if you look deeper, I wonder. Delicious grew nicely for a while under Yahoo!’s ownership but recently the user base has fallen off pretty dramatically. I double checked this chart in compete and alexa and they all show the dropoff.

Here’s what I think:

The major problem entrepreneurs face is knowing that the IPO market isn’t an option.  They also know that their companies aren’t necessarily IPO-worthy.  But because their companies operate in segments that have little barriers to entry and Google/Yahoo/Microsoft can always launch a competitor… so on the first semblance of an exit, they take it.

Do I blame them?  Yes and no.

An alternative would be for VCs to come along and give some liquidity to the founders to take some of the risk away and give them the appetite to continue to treck along.  VCs generally are against founder liquidity clauses - something I called the biggest mistake VCs and entrepreneurs make.  If VCs let more entrepreneurs take money off the table in subsequent Series B, C, D, E etc., rounds, they would be able to see beyond those initial M&A term sheets and go long.

Of course, this is a path to liquidity for entrepreneurs, not necessarily one for investors.  However, it’s easier to take a company from $10M to $100M than it is to take a company from $0 to $10M.  Ok, they’re both equally hard.  But the drive and determination to take a company from $10M to $100M is easier to come by when the entrepreneurs aren’t being distracted by a low-ball buyout offer.  And to do that, you need some liquidity for entrepreneurs.

In this content, if an entrepreneur has some of the risk removed, then it’s easier to use the subsequent funding to roll up some companies.

For example, imagine this scenario:

Delicious does not sell to Yahoo!, but instead raises $20M in funding and the founder gets $5M (for example).  But then Delicious uses $10M of that to buy or merge with Flickr.  In this scenario, Delicious and Flickr combine their respective expertise in tagging and image-sharing to develop a solution for videos… and presto: you have YouTube, basically… but with a deeper bench, diversified away from user-gen videos alone, etc.  I am not saying that Delicious + Flickr applied to video would be an IPO play… but if you start to add on bells, whistles, people, backers, etc., you can lay out a map to do just that.

This is a very quick and somewhat asinine example… but the point is: both Flickr and Delicious sold to Yahoo! (probably prematurely) but they could have easily gone on to bigger and better things had they remained independent or merged operations with other best-of-breed feature companies.

Just a thought.  I wonder what Fred would think.