To Sell or Not to Sell: Silicon Valley Acquisitions Market Heats Up

That is the question in Silicon Valley as the acquisitions market heats up. And with it, another head scratcher: Are acquisitions good for anyone?

Aaron Patzer twice walked away from a potential deal with his archrival. During months of deliberations about whether to sell Mint.com, his much-celebrated personal-finance startup, to Intuit, Patzer held out for the keys to the kingdom. "Then all of a sudden Intuit says, 'Not only will we buy you, but we will let you and your team run our personal-finance division,' " Patzer says. Under the terms of the proposal, Patzer would manage not just Mint but also Quicken's online and desktop products. He would be in direct contact with CEO Brad Smith and chairman Bill Campbell, and would have free rein to restructure the flagship of Intuit's flagging empire.

Patzer finally acquiesced. Intuit announced the deal on the two-year anniversary of Mint's debut. It was the ultimate success story. Mint's $170 million payday was exactly the exit every tech entrepreneur dreams about.

Or was it? Even Intuit's press release — headline: "Tried and True Combines With Fresh and New" — underscores the central difficulty of the acquisition: Will Mint, one of the most innovative companies to emerge from the Web 2.0 boom, be subsumed by Intuit's staid tech 1.0 culture? Several bloggers lamented what the Mint deal portends — that daring entrepreneurs with world-changing ideas might instead end up as middle managers at old-guard firms. "Is that the best the next generation can do? Become part of the old generation?" wrote Jason Fried, cofounder of the Web company 37 Signals and one of the most vocal critics of the Silicon Valley venture-capital scene. "How about kicking the shit out of the old guys? Whatever happened to that?"

Not long ago in the Valley, winning nearly $200 million for a fledgling company would have earned universal acclaim. In the tech world, selling out wasn't a gibe; it was the whole point. But now, as the acquisitions market once again heats up after a prolonged downturn, instant giddiness over the prospect of getting bought out may be fading. An uncomfortable question hangs over the fun: Are acquisitions actually good for the acquired?

Mint is the latest in a spate of recent high-profile pickups. Amazon's humongous catch — the $847 million purchase of its budding rival Zappos — stunned everyone. Google purchased the video-compression firm On2 for $106.5 million in stock, and CEO Eric Schmidt has said that the search company will start buying companies again at a rate of about one a month. Its foes — Facebook, Amazon, Microsoft, and perhaps even beleaguered Yahoo — seem certain to join the race for the brightest new tech stars.

Yet the history of small Internet companies being snapped up by large ones isn't pretty. Just in the past few months, eBay has had to unload both StumbleUpon (the Web recommendations engine it bought in 2007 for $75 million) as well as the Internet-phone service Skype (purchased in 2005 for $3.1 billion), each for a loss. Yahoo is looking to rid itself of several properties, including Zimbra, the email company it snapped up in 2007 for $350 million. FeedBurner, Jaiku, and Dodgeball are only a few of the startups languishing in obscurity under the Googleplex.

The great expectations in the wedding announcements tend to fizzle under the daily reality of life in a corporate bureaucracy. Engineers find themselves with less leeway to experiment than they enjoyed during the startup days; product development slows to a crawl. Frustrated, the startup's founders — having fulfilled their obligation — check out.

One of the Valley's recent poster boys for this phenomenon is Joshua Schachter, who sold his social bookmarking service Delicious to Yahoo in 2005 for a reported $30 million. This summer, on an online discussion board, he told a commenter that Yahoo has "killed a lot of good startups, wasted a lot of engineers' time, etc." In summation, he added, "I wish I hadn't sold [Delicious] to them."

Fried blames the startup financing system for such failures. With the IPO market dead, he says that VCs have an interest in encouraging founders to take early buyouts. Fried argues founders would be better off never taking a penny from VCs and charging for their products — in other words, they need to act like every other business in the world.

Needless to say, this sort of advice doesn't go down well in the Valley. Fried's post on Mint raised a spirited defense from venture capitalists. "The cause of the problem is many entrepreneurs want to cash out when they can," says Fred Wilson, a principal at Union Square Ventures whose investments include Twitter. As angel investor Ron Conway points out, "In many cases, investors would have made more if the founder waited to sell." To take one obvious example: Facebook would have left a lot on the table in 2006 had founder Mark Zuckerberg accepted Yahoo's $1 billion acquisition offer.

Mint's Patzer doesn't necessarily disagree with Fried's skepticism; he pushed for better terms from Intuit precisely because of the failure of other tech acquisitions. "True, maybe they're promising everything in the world, and then it'll be pulled out from under us," Patzer concedes. "But," he adds, "I don't have the personality that caves easily. I intend to misbehave." For Mint's sake, let's hope he does.

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4 Comments

  • Carlos Tobin

    My vote is he shouldn't have sold, but in order to "not sell" he would have had to finance his completely different. He chose to go the VC route (giving up ownership). There are other ways to finance a company that increase the odds of it becoming an independent and great company.

    The first problem entrepreneurs make is taking on too much supply (money) before they need it (demand). If a burn rate is only $300k a month, one only needs to bring in funding at $360k a month. If you accept more you give away far more of your company than you need.

    Using back of the envelope calculations Aaron walked away with $10m cash for his 2 years of work. Since I could only find the post money valuation on the C round I used "typical" pre-money valuations for his industry, stage of funding, and revenue for the other 3 rounds.
    Pre-money valuation: Angel-$2.5m*; A-$8.3*; B-$48m*; C-$126M
    Investment Asked for: Angel-$750k; A-$4.7m; B-$12.0M; C-$14m
    Pre-Money equity: Angel-30%*; A-73.6%*; B-56.5%; C- 11.2%

    Founders/employees equity Post Money: Angel-76.923%; A-34%; B-22%; C-19.69%

    So an estimate of Aaron's and the employee equity upon exit is 19.69% ($20m)It appears from his candid accounting talk that he have away about 10% of the company to his initial team. Now, I know I should have included their numbers in the equation when I started calculating at the angel round but I didn’t. So it appears Aaron ended up with 10% equity at exit or $10m cash.

    What did he pay for Mint.com? I'm estimating he gave 1% in stock in exchange for the domain name. Based on these valuations, the “substantial” equity he gave to the owner of the domain name (Hite Capital) would have been 1%, valued at $1.7m upon exit.

    I used the following 3 expressions to complete the calculations:
    1. PreMV=I*(Total shares/add. Shares) ; 2. PreMV= PMV-i; 3. Founders shares/Total shares = New founders equity
    I used 3 sites for calculating, valuations, and average deal size by stage. One of which are https://www.pwcmoneytree.com