The start-up dilemma: Sell up or remain solo?
It is a dilemma for every start-up. The business is set up with a vision, a small but talented team and it will make a difference in the marketplace.
The founder, who has a dream, is then approached by a big company offering bucket-loads of money, in some cases even shares. What do you do?
An "acqui-hire" is when a company buys a start-up to obtain the start-up's team. It’s easier than owning or developing its products or technology.
It’s now becoming a trend. Acqui-hires in recent times include Facebook’s acquisition of Instagram and Twitter’s acquisition of blogging platform Posterous.
It’s a tough choice. There is the prospect of money and rewards for all that hard work and creativity.
On the other hand, you are losing control.
The company’s founder is losing their baby. And when a company has been taken over, certain roles may no longer be tenable.
In general, the executives at the company doing the buying – the ones with the money – keep their roles and those at the company being bought are at a disadvantage.
Work out what you value
Some start-ups reject these offers. One of them is Halfbrick Studios, a video game developer based in Queensland, which has developed the Fruit Ninja and Jetpack Joyride franchises.
Halfbrick has been approached many times by overseas and local companies. It’s not interested in becoming part of a bigger company. It has knocked back every offer because it does not want to lose that creative drive.
Halfbrick executive producer Ben Vale says the company would be suspicious of any predator that told them they could keep their entrepreneurial drive. The money, he says, is less important than the creativity.
“I don’t think there would be anyone wanting to acquire without having some control over the creativity,” Vale says.
“We are trying to keep that creative control to make sure our products are as good as they can be.”
So what would a predator have to offer to get them over the line?
“They would have to have something we don’t have already,’’ he says.
“We are quite comfortable where we are and, up to this point, we have been doing it on our own and that’s worked out really well for us. It would have to be something crazy to get us acquired by someone else.”
“There are always a lot of offers coming in, but it doesn’t seem like there is anything extra we are going to get out of it.”
“Monetary goals aside, it’s not going to give us any more freedom over what we create and there aren’t any markets we can’t get into already.”
The problem, he says, is that a larger business is working to a different agenda.
“Usually it’s about working out if their goals align with our goals, where our goals maybe aren’t as aligned,’’ he says.
“We’re all about making good quality games and a bigger business would be trying to make the most out of profit and be taking those deals that wouldn’t give us the best quality product.”
He says keeping autonomy is everything. Without that, the business is not enriching and it’s not worth doing.
“It’s about making sure we have the independence to work on the right things and choose what we think is a good idea and make it the way we want to make it. It’s hard to let go of that creative control to someone else.”
Know what you’re getting into
But some have accepted offers. By doing that, they grew their company beyond what they had ever expected.
The key for them is that they were allowed to keep their business and entrepreneurial activity in place. But that meant assessing the offer carefully, and knowing exactly who they were joining.
One example is Paycycle, a Melbourne company that builds online payroll software. Just over 12 months ago, Paycycle was approached by Xero, a New Zealand listed company that builds online accounting software.
For Paycycle co-founder Stuart McLeod, the deal, concluded in August last year, was a nice little earner worth $1.5 million, comprising $500,000 in cash and $1 million in stock.
The stock at the time of settlement was worth $2.13 – it’s now trading at around $5.
McLeod says it was a big decision. To make it work, he negotiated something that would ensure he would still be running the Paycycle end of the business.
“It always is hard to let go of your baby. But what it came down to for us was could we create more value either by ourselves or as part of a bigger unit?’’ McLeod says.
“Xero was already publicly listed at that stage so we thought we would enjoy an important role in a bigger organisation that is already creating a lot of value itself.”
How did they negotiate terms and conditions to keep their entrepreneurial independence? To begin with, the power dynamics were different.
Xero needed an online payroll system so that it could compete with MYOB and QuickBooks. Also, McLeod and his team of six had been working with Xero as partners.
They had already formed a relationship and they were working well together.
McLeod says you have to know who you’re dealing with. Still, he was working with them already as a partner, which made the decision easier.
“We knew very well what we were getting into. We budgeted and scoped to achieve that so we were very happy with the outcome,’’ he says.
“In our case, because we positioned ourselves as partners, we genuinely wanted to be closely aligned with Xero, not only for the revenue aspect, but also because we enjoyed working with them and, as soon as you do that, anything can happen.”
His advice for start-ups is to focus on building the business and making sure they have the same values as the acquirer.
“If you genuinely believe that the path you’re on holds the best value, then keep going.
“We thought we could create more value as part of Xero than we could ourselves and, if you don’t believe, you shouldn’t be a shareholder.”
Thrust into the big time
Dan and Elise Gold from Mumgo tell a similar story. Elise gave up her job at the Commonwealth Bank last year to set up a company, Ladybub, which sold baby gear at 70% discounts with time limited offers.
In March this year, she and her husband Dan, who had worked at Macquarie, set up a website. In the first week, they were approached by eCommerce specialists Catch of the Day, which is run by two brothers, Hezi and Gabby Leibovich.
Catch of the Day has taken the market by storm. It had been doubling its revenues every year. It was on track to make $250 million turnover that year.
A little start-up run out of an apartment was suddenly thrust into the big time.
“It was in the first week that we received a LinkedIn note from the Leibovich brothers and we couldn’t believe what we were reading. We pinched ourselves,’’ Dan Gold says.
“They asked us to come in for a meeting and we had a suspicion that it was for this type of reason. After three months and fifteen meetings, we finally got to the position of this aqui-hire.”
Negotiating the deal while running the business was a challenge, he says.
“It was interesting, attempting to grow Ladybub on one hand and focusing on all the operational aspects of the business and, at the same time, be negotiating this deal with a very large intimidating eCommerce group that is also interested in their slice of the pie.”
How did they know they weren’t making a mistake and ending up in a place that would destroy their dream?
“It was definitely something we considered,’’ Elise Gold says.
“I think in these situations you really have to take a leap of faith and put a certain level of trust in the other party.”
“But, in this case, we were able to judge that we were a really good cultural fit with the team here at Catch of the Day and we had an almost identical vision in terms of what we’re building here.”
“You can always do a lot of due diligence on the people you’re dealing with. Melbourne is a pretty small place and we have people who had had dealings with the Leibovich brothers and other people involved in Catch of the Day and everything we heard was positive. That was part of the due diligence process.”
Dan Gold says those meetings over the three month period was critical.
“All of that builds a level of rapport and gives you confidence in the people you are likely to be spending more time with should anything progress and develop,’’ he says.
“That was the nature and tone of the discussions: this worked so well. We not only had the same vision but we’re fairly easy going folk and I think Catch of the Day are too.”
“There were 20-30 people we met over those three months. We just got along with them fantastically well.”
“We have similar backgrounds and ultimately we share a similar passion for commerce, so that makes things quite easy.”
What sort of terms and conditions did they negotiate to ensure their entrepreneurial activity was preserved?
Dan Gold, who has plenty of experience in mergers and acquisitions from his time at Macquarie, says it was standard stuff.
“Going into the discussion, we had some idea of what a reasonable expectation might be on a number of different levels, like an equity component of the business that might be retained.
In terms of employment contracts; that can follow as part of the new business as senior employees and about how those arrangements could be structured.”
“There are a number of particulars within these employment contracts that are fairly standard in those transactions,” he says.
The business is now thriving. Before, it was run out of the Gold’s apartment, now it’s located in Catch of the Day’s Braeside office. It has employees.
There has been one big change: the company changed the name to Mumgo, something that came out of a Catch of The Day brainstorming session.
Now the business not only sells baby gear but also goods for busy mothers, including jewellery, clothing, accessories, shoes, homewares, towels and linen. Its market has expanded.
Was it hard giving up the name? Dan Gold says something like that had to come with the deal. It’s called compromise.
“In any negotiation, there are things you win and things you lose,’’ he says.
“With the sentimental value attached to the name after six months, it’s not that great [a compromise]. When you’re dealing with financial metrics not only around equity ownership and employment contracts but also an up-front payment for the acquisition, these are the types of things that you’re willing to negotiate on.”
Neither is prepared to talk about how much they made on the deal. Still, they are both happy and comfortable. Enough said.
In the end, making that decision comes down to what the start-up entrepreneur wants.
“People need to understand their motivation as to why they started up their venture,’’ Elise Gold says.
“Are you starting it up to be your own boss and that level of control is extremely important for you?”
“If being your own boss and controlling your employees 100% and your own business is why you’re starting up your own company, then obviously this arrangement might not be something you would be open to.”
“But if you want to build a big company and you believe this idea has legs, then engaging in these sorts of discussions makes sense.”
Four top tips when being acqui-hired:
- Know who you’re dealing with. Make sure you do a complete due diligence.
- Negotiate something that will ensure your company is still operating within the larger group.
- Equity and employment contracts are an important part of that negotiation.
- Stay true to what you set out to achieve.