Last time out, I prefaced an article on the art of getting acquired by preemptively responding to the argument that selling your company is selling out the concept of startup.
August 27, 2015
Not Every Startup Is a Home Run
Why It’s Perfectly OK To Hit a Triple
As I told these startup purists—When you don’t proactively consider acquisition, you naively leave yourself two options, going public or running a lifestyle business.
While these arguers were imaginary in my article (I do that a lot), they exist in real life, and you’ll hear their advice a lot. God knows I did. It’s the same startup elitism that says that every startup must be a home run. Swing for the fences! Go big or go home! Change the world one user a time!
Should I go on? Because there are about a million more.
Some of this I get. You should swing for the fences. All the time. You must go big or go home. Every day.
At the very least, you’ve got be invested in your startup—money, time, whatever. There has to be some risk involved. You have to make something and sell something. You have to be unique.
So if this isn’t you, good on you, I’m pulling for you. But for this article, let’s draw our definition lines there.
In that article, I argued that just because there was an acquisition doesn’t mean there wasn’t a home run. In fact, at this moment in startup history, quite a lot of acquisitions are home runs, and this is probably due to all the unicorns and IPO gating issues and lack of strength in public markets. If you want to grow, sometimes the only way to do that may be by being acquired, especially if you think that private market valuations get crazy at certain levels.
To define what a home run is, you need to remove the exit strategy. Honestly, a home run is a startup that makes a major impact on its market at a national level, preferably worldwide.
Facebook, Tesla and Netflix are all home runs. So are Uber, WhatsApp and Slack.
The counter to a home run is referred to as either a single or a double. Usually, a single is a small success that few people heard about but everybody made some money. A double is a larger success that probably should have made more money or a small success that everyone really liked.
But let me introduce you to the concept of a triple.
I’ve defined a triple as a startup that could potentially be a home run in an alternate universe, but some factor or factors—be it the concept itself, market conditions, even the founder’s personal situation or desire—have led everyone involved to agree that there is a certain growth point at which the runway will eventually run out.
But everyone involved is still swinging for the fences, so to speak.
For me, ExitEvent was always a triple because of my personal situation. I founded ExitEvent shortly before signing on with Automated Insights, and I knew that my time with ExitEvent would always be limited.
When I talk about the acquisition of ExitEvent being a no-brainer, this is why. I was stubborn about it, and put off the inevitable for at least a year or so, but I finally saw the light. In the right hands, ExitEvent can be a home run. Those just happened not to be my hands. That’s hard to come to terms with, but it’s better than the alternative.
There are a ton of triples out there at every stage. At the very early stages, they could be startups just out of the gate, looking for their market-fit or team or funding.
In further stages, triples are profitable companies with a bright future, maybe caught between bootstrapping and raising. That’s where you start to see issues, albeit normal startup issues that are still probably under the control of the founders.
This is the first decision point—continue forward on the backs of customers (which is, in most cases, the ideal way to go), start listening to the acquisition interest which is almost certainly there, or raise (more) money and go for broke.
Every time you take more money, to extend the baseball pun, you move the fence back several feet, if not yards.
In even later stages, there are triples among the companies who have raised tens of millions of dollars and are waiting by the IPO gate for a point of entry or maybe they’re thinking about yet another private round that would make them a unicorn. This is where the issues become troubles, because in a lot of cases there’s no going back and there’s no going forward.
Consider the unicorns out there today. Will all of them go public and will all of those be successful? Are the later investors just going to get screwed? Will they lose half of their market value or more after IPO?
So yes, there are even triples in the public markets, post IPO. You can guess who they are (and that can be fun). But this is not a good place to be. You can’t go public and then realize you’re a triple. Well, you can, but the path to acquisition is much tougher. You can also take the company back private, but this is also tricky.
Identifying a triple is crucial, and saves a lot of time and headache down the road. But because we misunderstand the advice—swing for the fences every time out—we tend to get caught up in that loop that says we must take on more money, we must grow exponentially, we must go public.
When it comes down to it, you can change the world without a billion-dollar-plus valuation.
All right. After writing back-to-back pieces embracing acquisition and eschewing home runs, you might think I’m advocating smaller thinking. I’m not. In fact, nothing could be further from the truth. Every time I start something or join something, it’s going to be the next Google or Facebook. But I don’t go into it ignorant of the odds.
Sure, I’m a gambler, but I’m also a card counter. In that, I don’t understand the promotion of risk-tolerance in entrepreneurism when it isn’t immediately followed by a discussion about mitigation and its real-life strategies.
Yeah, you don’t want the founder’s focus to be on going most the way instead of all the way or getting to good enough instead of great. But at some point it’s like saying that football is the greatest sport in the world, but you’re only truly a football player if you don’t wear a helmet.
For every potential home run that gives up too early by pivoting to a triple, and there are very few of these, there are thousands of singles, doubles and triples that refused to see the writing on the wall, got over-extended, over-valued, or over-indebted, and wound up in the deadpool.
I don’t tell beginning entrepreneurs that what they have won’t work. Well, I do, but those are rare cases where they’re thinking about startup in the wrong way. And truth be told, those are usually the ones trying to create the next Facebook by creating the next Facebook, if you get my drift.
What I tell them is this is how far I think it will go. You’ve got a single, you’ve got a double, you’ve got a home run. Dude, you’ve got yourself a nice bunt. Stretch it.
But keep in mind, as long as you’re going big or going home, you can still turn a triple into a home run. Let’s beat this analogy to death and call that an inside-the-park home run. That takes a lot of hustle and a lot of luck, much more so than it did to get where you are.
But the first step, the ultimate, crucial step in that process, is realizing that the ball never cleared the fence in the first place. Ironically, once you realize that that’s OK, you’re in a much better position to head for home.