Why Wouldn't a Founder Want to Exit?
September 4, 2014
At Collaborative Fund, we’ve been talking about how investors and founders can align incentives for the long run. Conventional wisdom dictates that successful founders eventually exit (for example, going public or getting acquired) in order for their investors to get their money back. But we believe there’s a third option available to many founders: staying private and profitable.
When I tell people about this third option, the response I often hear is, “Why wouldn’t a founder want to exit?” I thought I’d take a minute to answer that question here.
Why wouldn’t a founder want an exit for their company?
Their company’s vision could be compromised by an exit.
Many founders started their companies because they had a strong vision for how the world should look.
In some cases, an exit can help a company reach its mission more quickly or effectively. For example, YouTube faced a billion-dollar lawsuit from Viacom, filed just a few months after their 2006 acquisition by Google. Such a lawsuit would have buried a young startup, but because of the acquisition, Google and Viacom reached a settlement without any money changing hands, leaving YouTube free to focus on its product.
On the other hand, there are situations where it becomes much harder for a founder to deliver upon his or her vision in the case of an acquisition (because now you’re part of someone else’s roadmap) or an initial public offering (because now you have many more shareholders to answer to, not all of which have a vested interest in your community beyond financial reasons).
Companies that fit particularly well into this category are marketplaces, products built upon communities, and peer-to-peer products, either because they tend to be revenue-generating and/or they have a strong community that they feel responsibility towards.
Kickstarter co-founder Yancey Strickler sees staying private as the best way to preserve the interests of their community:
From the very beginning we decided—my co-founders and I—that we would never sell, never go public. We viewed Kickstarter as a public trust….that’s there to represent the interests of everybody. And we think the best way to do that is to be a privately held, independently controlled organization—and that’s exactly what we are.
And while Etsy CEO Chad Dickerson says going public is a possibility for their company, he also notes that:
We’re focused on building a company. We do want to stay independent. We think it’s really important to continue to serve our community and we think independence really matters. We’re not the traditional Silicon Valley type of company, where we just have this blood thirst to go public, but it’s definitely a possible outcome.
Meetup co-founder Scott Heiferman has also said that he’s focused on keeping Meetup small and maintaining a low profile, rather than “‘flipping it’ for a profit” or going for an IPO.
Their company has been profitable from the start.
If a founder’s company is profitable, they have more flexibility in deciding how much financing to take on. They can choose whether they want to raise money through an initial public offering, and they can function independently without selling to another company.
Companies that fit well into this category are SaaS, enterprise, and other business-related products, because the success of their business often depends on their ability to generate revenue from the start. Enterprise-focused companies also receive less attention in the media and are perhaps less subject to the distractions of consumer-facing companies.
SurveyMonkey CEO Dave Goldberg understands the value of additional financing to grow his company, but doesn’t see the need to IPO:
We could go public, but the cost of going public — of running a public company — outweighs the benefits. We don’t need the cash to run; we’re profitable….For us, [debt and equity financing] affords many of the same benefits — like the liquidity — of an IPO, without the roadshow, the distractions and the demands of meeting quarterly projections.
Twilio co-founder Jeff Lawson said last year that despite a $500M valuation, they’re not in a rush to exit:
Our focus is on building a great company. IPOs are financing events on the road. If you’re successful in building a great company, you have the privilege of that point of becoming a public company if that’s what you want to do. So our focus is on building a great company. We don’t have any specific focus on an IPO.
Mailchimp co-founder Ben Chestnut and Basecamp (formerly 37signals) co-founder Jason Fried have also made it clear that they don’t plan to take their companies public. Fried believes in sticking to metrics that are meaningful:
All you have to do is read TechCrunch. Look at what the top stories are, and they’re all about raising money, how many employees they have, and these are metrics that don’t matter. What matters is: Are you profitable? Are you building something great? Are you taking care of your people? Are you treating your customers well?
There will always be a ruthless cycle of invest -> exit -> invest for some companies, especially those with high consumer growth and a delayed revenue model. But for many other companies, there are plenty of good reasons to stay private, whether that’s to maintain independence, continue to deliver on your vision, or better serve your customers. Why not try to become the next Kickstarter, Etsy, SurveyMonkey or Twilio?