Is It Worth Using Financing to Grow Your Start-Up Instead of Selling It Off?

The decision to sell their start-up or use financing to grow it further is a really big deal for most entrepreneurs. Growth prospects of the start-up should be well analyzed before you “engineer” an exit.
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How did you know it was time to sell your start-up instead of using financing to grow it further? Originally appeared on Quora: the place to gain and share knowledge, empowering people to learn from others and better understand the world.

Let me throw out my two experiences as a founder selling their startup, because I think this is just such an important question to think about.

In My First Start-Up, We Sold the Company After 13 Months for $50m and Did Not Do a Series B

Even in those challenging times (’02-’03), we had more capital on offer. Selling vs. Series B though was clearly the right thing to do. While we had $6m in customer contracts in just our first year — pretty amazing, looking back on it — but we really had no practical ability to deliver on those contracts. Even raising a ton of money wouldn’t have fully solved the problem. Realistically, we could not service those contracts and we would have ended up in a tough world that capital couldn’t solve. So, we sold to our direct competitor, who was able to service those obligations immediately, and preserve their market share. I would clearly do this over, knowing what I know now.

In My Second Start-Up, We Sold for Substantially More — But After 5+ Years. And We Did Only a Modest Series B

It might even be a Series A in today’s world 😉 While I am incredibly proud of how the team has done under Adobe, by the same token, there’s been so much growth since the acquisition (4x to date), that obviously — a lot of money was left on the table, at least on paper. That’s just a fact. Now, if we’d raised $20m-$30m or more in another round, there would have been not only much higher dilution, but a lot of changes. And after 5+ years, not everyone wants to change. Time is both an enemy and a boon in SaaS. SaaS compounds, so every year, your revenues go up. But also, it’s a grind on a lot of the team. So here, we didn’t really know it was time. And perhaps, it wasn’t. Years in the saddle can bias your judgment, so challenge yourself on either decision if you’ve been at it for some time.

Talk to Your Vcs but Don’t Really Listen to Them Too Much

Nothing personal — but they don’t count here because they cannot be objective. They do get a vote, of course, a critical vote. They get to decide along with you. But their advice — I’m not sure how valuable it is. Because they’ll be biased one way or another, either Go Big and raise a Bajillion Dollars, or Take the Offer.

Talk to Your Team of Course as Much as You Are Allowed To — But They Can’t Help Completely Decide Things Either

They’ll be biased as well, one way or another, it’s not their fault. Some will benefit from a sale. Some less so. Some will like the idea just as a concept. Some won’t irrespective of economics. Some will be in areas that will be more respected after an acquisition (e.g. engineering). Others are in areas that may be viewed as redundant. So it’s tough to figure it all out clearly with the broader team, even though their input is the most important of all.

What You Need to Do Is Talk to People That Have Made That Exact Decision. Especially Because Emotion in These Situations Can Cloud Your Judgment

You may think things are brighter than they actually are. Or you may be too negative on your prospects. I don’t know which. But I doubt you have it 100% right. I doubt you can be 100% objective, or at least have objective clarity, in this situation. So get the right type of help to clearly, calmly, analyze it.

Also, bear in mind M&A is episodic. It’s capricious. Its people driven, and priorities change. So pass up a bad deal and even a good deal if you are doing well. But if you do — don’t expect it to come back any time soon — if ever.

Contributed by Jason M. LemkinSaaStr Fund. Co-founder/CEO at EchoSign

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