A long time ago in an economy far, far away. . .
Listen my children and you shall hear
Of IPO dreams once held so dear
Our forefathers’ jackpot, guaranteed to arrive
Hardly a founder now alive
Can remember that famous yesteryear
So begins, of course, one of the most famous poems of the entire startup canon. And, a bit misty-eyed, this old war veteran can actually remember the glory days: Venture capitalists would commit tens of millions for a startup to buy expensive infrastructure; hire sales and marketing teams as products were still being built; and lease out big slugs of office space for the coming hiring spree. And it was all fully justified, because the inevitable IPO would repay those investments many times over, and quite soon indeed. Ah, thanks for the memories.
Today, we do still see, very rarely, a superstar company launched towards the IPO heavens. But, frankly, even these look more like sparklers than fireworks. Their miniscule floats are tightly managed to artificially inflate the offering price and maintain it briefly; then, a slow (or sometimes fast) descent to earth begins. The locked-up founders may never realize more than a tiny fraction of their paper net worth on that day they smile and ring the opening bell. Make no mistake: even if Facebook goes out near its absurd $100 billion target, the odd exception cannot possibly justify a rationale expectation that your new startup will eventually make its way public. Those opening lines refer to an entrepreneurial Camelot now barely visible through the mists of time.
But, there’s no reason to long for the past. Today’s exit path of choice is quite attractive, easier and faster: a sale to a strategic buyer. In nearly every case, this is your best risk-adjusted goal.
Why? Established companies are sitting on absolutely mind-blowing amounts of cash, and many are in wars for critical market leadership. That translates into something very, very important: relatively low level executives who can write good-sized checks without insane internal approval processes. The division manager at Google who’s tasked with driving more mobile ads can drop $17 million on your social network that makes it happen. That group lead at Microsoft will cough up $8 million for a feature that lets Windows Mobile steal a march on Android. For these guys, and countless others like them, they have a job to accomplish, and time is far more valuable than money.
And for you, it’s just easier. Iterate as rapidly as possible, and worry less about the organizational build out required for a permanent stand-alone company. Focus maniacally on customer experience. Keep capital expenses and long term obligations to a minimum. Watch what the big boys are fighting about, and try to insert yourself in the right parts of those organizations at the right time. Be willing, even anxious, to take a solid exit when the opportunity arises.
It’s a great time for startups. Sixteen million back on a $3 million spend, or 7 back on 2, can absolutely happen, even fairly quickly. But IPOs? Well, talk about those with your grandfathers, if you want; just don’t plan on one this decade.
All opinions expressed are those of the author, and do not necessarily represent those of Gust.
Written by Bob Rice
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