Thoughts on startups by investors that
fund them & entrepreneurs that run them

The Copper Ring

Oddly, perhaps, one of the most difficult decisions entrepreneurs face arises once the company begins to succeed.   That’s usually when the first really “strategic” potential investors start to show up, presenting the question: sell a big chunk (or all) of the company at today’s valuation, or double down and go for the life-changing money?

Very obviously, each situation has to be .

Have Your Own Definition of Success – Esther Dyson” href=”http://videos.gust.com/video/Have-your-own-definition-of-suc;search%3Atag%3A%22a-startup-is-a-newborn-baby%22″>evaluated independently.  But here’s my observation: very few entrepreneurs have been disappointed by selling “too early,” especially to a strategic who offers leverage to exploit the startup’s success.  Lots, on the other hand, have passed up attractive exits only to see the market turn against them, the model run out of steam, or a competitor pass them by.  You might well be after the brass ring… but a copper one is very often the smarter move.

This point of view gains importance as overall uncertainty continues to increase, as it will.  And by “overall”, I mean “overall”:  the rate of change for economic, geopolitical, technology, regulatory, and market conditions makes predictions radically more difficult than every.   Yogi Berra liked to say, “predictions are difficult, especially about the future”.  Today, he might say they’re impossible.  Now, a bird in the hand might well be worth five or six in the bush.

No doubt the best current example here is Groupon.  Early this year it said no to $6 billion from Google (Rule #1: for any company that’s 2 years old and gets a $6 billion offer: .

Attainable Exits – Jeff Seltzer” href=”http://videos.gust.com/video/Attainable-exits;search%3Atag%3A%22executing-towards-an-exit%22″>take it).  For a while, that might have looked “smart” to some observers; the purported value of the company ran up to 25 or even30 billion on the private market exchanges. But then, of course a huge number of things – like the popping of that mini-bubble, intense new competition, exposure of management weaknesses, and world economic conditions—have subsequently brought that number down by at least half.  Moreover, don’t be fooled by the market cap on IPO date, which might still exceed six billion: that number has nothing to do with cash that the existing shareholders get (in fact, as it now stands, they’ll get nothing then, and have to wait a year before they do. And even then it will be nearly impossible to sell any big chunk of the holdings).  That’s nothing like six billion in your pocket.

Of course, Groupon is an extreme example.  But it’s illustrative nonetheless.  Taking cash –and/or stock –from a big partner who can leverage your business, even at a number that doesn’t thrill you– allows you to put a notch in your belt, build credibility with investors, and prepare to move to your next act. Perfect really is the enemy of the good, and face it: you don’t need any more enemies.

Written by Bob Rice

user Bob Rice Managing Partner,
Tangent Capital

Bob is Managing Partner of Tangent Capital, a registered broker-dealer and merchant bank focused on alternative assets and strategies. He is the resident industry expert on early stage and other private investments for Bloomberg TV, appearing daily as Contributing Editor on “Money Moves.” Bob is a Director of asset management companies with over $2 billion in AUM. Bob began his career as a trial attorney at the U.S. Department of Justice and then became a partner at Milbank, Tweed, Hadley & McCloy, where his practice centered on financial products. He left the law in 1996 to found a 3D graphics technology startup that eventually became the publicly traded Viewpoint, provider of the web’s first “rich media” advertising platform. He has been an active angel investor and startup mentor since 2004. Along the way, Bob also served as the Commissioner of the Professional Chess Association and authored the business strategy book Three Moves Ahead.

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