Selling Your Company

Today marks three years since we sold Visikol and I wanted to reflect on the experience and the process of selling a company. When I first started on my entrepreneurial journey and met Founders that had successfully exited their companies, the first question that always came to mind was "why did they sell their company?"

If you own and control a tool which provides much greater returns than any other investment and you believe in your ability to wield that tool, wouldn’t you be crazy to get rid of it? Through my journey with Visikol, I would ultimatly learn the answer to this question and the complexities of selling your business which is a deeply personal and emotional process. Let's dive into the mindset and factors for selling a business:

Externalities:

A question I always ask Founders who are considering selling their business is what is the probability that the entire company can become worthless and how quickly could it happen? Or less hyperbolically, what is the probability that something outside of your control can greatly reduce the value of your company and how quickly could it happen? Of course, you would want to sell your company before that happens.

For some companies and especially those in the Tech space, it's possible that the world's hottest company (e.g., Myspace) becomes quickly almost worthless when a new entrant comes on the scene. This is a tough question to answer for many Founders as they like to think their company is truly special but in reality no company has an impenetrable moat around it and the biggest companies in the world have fallen many times (RCA commercialized the TV and radio!).

When we looked at Visikol in late 2020, we identified that while we had extremely strong growth, much of our growth was from the explosion in Venture Capital Life Sciences funding which we knew wouldn’t last forever and more importantly, it certainly wouldn’t keep growing forever. Because our company was an early stage business, its valuation would be contingent upon its rate of revenue growth and therefore our fear was not that our company would stop growing but instead that its rate of growth would slow. This meant that it was possible that over a few years our company could grow but its valuation would actually decline as a business growing at 50% per year is valued vastly differently than a business growing at 10% per year.

Personal Finances:

Founders often ask what is the "fair" amount of equity to give up when starting a company and I always say the same thing which is to follow the Golden Rule. The rule is simply that the person with the gold makes the rules. If you have twenty investors interested in your company, you can of course dictate the terms and come up with a deal you think makes the most sense. However, if you are not in that fortunate position, "fair" is dictated by those who have the money (i.e., the market) and what I always tell Founders is that the valuation specifics do not matter as much as you might think but that the deal terms matter a lot.

The reason for this is that when you start a company, you set a North Star for where you want the company to go and generally you are going to come close to that North Star or you are going to fail and walk away with nothing. I find that typically most companies fall into one of three buckets when reaching for their North Star:

• Complete Failure: You return zero dollars to your investors for one of many reasons (e.g., bad assumptions, poor product/market fit, lack of customers etc.). Hopefully if you fall into this bucket you failed quickly and learned a lot.
• Founder Failure: Your company raises $50M in funds with the intention of creating a billion dollar company but instead you create a business worth only $50M that your investors decide to sell. In this scenario, the Founders are likely going to walk away with just about nothing and some investors will get some or all of their money depending on the terms (these terms matter a lot!). I find this to be the most heart breaking outcome for Founders as they build a company generating millions of dollars of revenue with 100+ employees but they walk away with nothing.
• Success: You as a Founder come really close to your North Star goal and achieve an exit in line with your original hypothesis for the company.

The success bucket culminates in a very interesting question which is this: "Will walking away with $X now instead of $Y later change your life in any meaningful way?" Because you have set your sights on your North Star, X and Y tend to be pretty close where having $2M or $10M really doesn't differ that much from having $3M or $15M. Ultimatly what is most important in launching a company is A) getting started and B) hitting your North Star as if you do A and B you are going to be happy despite perhaps "leaving some money on the table."

In my oppinion its much worse especially in high tech fields to waste six months getting the perfect deal while your competitors are already running. Therefore, my advice is to of course do your homework but worry less about the specific valuation and remember the Golden Rule. Also, Founders tend to have very unrealistic expectations for their first start up and I think it's important to keep in mind that the World's richest person Elon Musk only owned 7% of his first company and walked away with just $22M when he sold it.

With Visikol, we felt that we had gotten very close to our North Star for the company and while we could keep pushing and growing, would 50% or 100% more money for example change our lives in any meaningful way?

Investor Dynamics:

Something that one of our Mentors always told us was that "everyone is fine to work with until there is money on the table." When a company gets close to its North Star, potential acquirers will begin to appear and all of a sudden the possibility of generating signficiant real money from your venture becomes a possibility. At this point, even the most collaborative boards seem to quarrel. The reason for this is that everyone begins to internalize the possibility of selling the company where VC's see themselves realizing internal targets, Founders envision themselves driving a new car and some shareholders become terrified of losing control or missing out on future growth. I know for me personally I had never counted any of my stock as real money until someone actually said they were seriously interested in buying our company.

These specific dynamics will play out differently in every company based on a wide range of factors such as the valuation at the most recent round of funding, the specific ownership structure or the recent acquisition of a peer company. In the case of Visikol, we had shareholders pointing in all directions with opinions ranging from "Don’t sell the company because we still have not tapped our full potential" to "Sell the company urgently as the Life Sciences market is going to fall apart!" As the Founders and leaders of the company, it is important to understand all of these viewpoints and to thoroughly discuss and debate them.

Lifestyle:

When I speak to students interested in entrepreneurship and building a company, I always make it a point to explain what it means to be an entrepreneur and what it takes. While you of course need a good idea and you have to be smart and willing to learn, you need to recognize that you are David fighting Goliath. You are boldly going to battle with the world's largest and most resourced companies and you need to truly believe that you can win and hit your North Star of success. In this fight, you have almost no resources, money or team members so how are you to beat Goliath? The answer is that you have two super powers which are the ability to move extremely efficiently and your desire to just plain work more hours than your peers. If you have a team of ten engineers or scientists working 100 hours a week that are twice as efficient as their peers at a big company, they will output 5X more than their peers and over time their efforts will compound. When you factor in the bureaucracy of a large company, this translates into a team of 10 outperforming a team 10X their size at a large company.

As you can imagine though, working in such an environment is very stressful and is not sustainable in the long run. The hope with startups is that you can reach a scaling point where this inhuman effort is no longer required and you can begin to move the hours per week closer to a normal range. What I don’t normally tell folks when they start their company is that this level of effort can and normally does last 5+ years which is an immense commitment.

Summary:

If you are fortunate enough to be in a situation to sell the company you founded and further even more fortunate to be in a position to influence the process, you will work through the topics above as well as many others. When we looked at the offer to acquire Visikol, we recognized there was a non-zero chance the valuation could dramatically tumble along with the Life Science space and we felt that the valuation we received was a substantial premium on current EBITDA/Revenue multiples. As we looked at the company we had started, we also realized that we had come really close to the North Star for the business that we had defined in our original business plan when we thought up the company.

However, as leaders of a company, we had a fiduciary duty to ALL of the shareholders and thus we needed to create a deal which was in the best interest of all parties which we felt and still feel like we were able to do. In looking back on this decision after three years, I can truly say that we made the right decision to sell the company and our fear of the Life Science market falling apart was founded. Today, companies generating 50% more revenue than they did in 2021 are worth in some cases half of what they were worth in 2021.

My unsolicited advice if you find yourself in this fortunate position is to discuss the topic thoroughly with as many people who sold their companies as possible to get a wide range of perspectives. The decision to sell a company is complex and there is never a perfect time/price and no matter what you do keep in mind that not everyone will be completely happy with the outcome.