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June 02, 2005



You said: "I just don't see how you can successfully build a company to flip it and make reasonable money doing so (reasonable meaning that the founders end up with windfalls of at least several million dollars)"

But your examples (Bloglines, Flickr, etc) seem to prove otherwise. Neither had taken a venture round and both were acquired for numbers in the 8 figures. Unless they had the worst angel deals in history, the founders each made at least several million.

Jeff Clavier

Dan> Very good remark. I don't think they were built to flip per se, and both could have received substantial VC investments to define and implement a "real" business model.

David McClure

note: another option is that those deals (or similar ones) could have been done as earnouts, with a 'floor' price as an up-front payment, and a performance-based 'ceiling' payout over the first 1-3 years based on adoption / revenue / other metrics.

when my first company was acquired (consulting company, small deal), the acquisition was structure as an earnout over the first 18-24 months. it worked out fairly well for both parties, in that it allowed the acquirer to make the acquisition at a low # to start, and defray risk. at the same time, we were able to perform relatively well and maximize the value over time.

particularly for smaller technology companies being acquired by larger portal players, this strategy makes a lot of sense -- the big benefit to the startup is not having to do a big marketing spend to get to a lot of customers, and the benefit to the portal player is the possibility to sell a new service to existing customers & [re-]monetize their usage.

however, the uncertainty of adoption rate / future revenue is the big question mark for setting a value too early / at the time of txn. An initial downpayment, plus a performance-based payout over time allows both parties to minimize risk & maximize potential, and get past the hassle of a long, drawn-out negotiation and a price that might seem too hight to the acquirer.

the only caveat to this is the acquired company should make sure earnout metrics & control options are clearly stated & maintained, so that they aren't squeezed out. however in most cases this will occur only when the acquisition isn't working, in which case the "floor" downpayment made initially pretty much becomes the purchase price anyway.

Jeff Clavier

Dave> Yes, earnouts are ways to make some deals "work" on valuation and incentives of the acquired team - but they can't be applied to all cases.

Unless the acquired company is ran as an independent subsidiary of the buyer, these types of earnouts are difficult to implement for early stage companies where the growth in traffic/usage/revenue/users (pick the metric) may depend from the parent to deploy integration, marketing, co-sale efforts.

I have actually seen occasions where acquirer and acquired ended up fighting in court claiming both that the other party had not implemented their side of the bargain, etc.

Clarence Wooten

Very good post. I have read all of your and Om's discussions on this subject. It is a subject that is near and dear to my heart. So much so, that our firm has built a large part of our strategy as a venture fund on the opportunity that this creates. I would love to get your feedback on our postings. They address many of your concerns related to "build-to-flip" as a viable opportunity for venture investing.


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