Twitter co-founder Evan Williams has identified the three reasons to sell a start-up, hoping to “create clarity” for entrepreneurs who are unsure whether an acquisition is the right move.
Williams co-founded Twitter alongside Jack Dorsey, Noah Glass and Biz Stone. In October 2008 he became chief executive of Twitter and replaced Dorsey who became chairman of the board.
Then in October 2010, Williams stepped down as chief executive. In addition to Twitter, Williams co-founded Pyra Labs, which created the Blogger service in 1999. It was acquired by Google in 2003.
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Based on his experiences, Williams has written a blog titled “When To Sell Your Company” as a way of helping other entrepreneurs who are faced with the “acquisition question”.
According to Williams, there are three reasons to sell a company. They are as follows:
The offer captures the upside
Every business has natural growth limits, says Williams.
“If someone offered you $10 million for your coffee shop that does $250,000 a year in sales, it’s pretty clear you should sell – from a purely financial perspective,” he says.
“In 2002, Google reportedly turned down a $3 billion offer from Yahoo!. That looks like a no-brainer in retrospect, because Google is such a behemoth.
“However, not every company is chasing a Google-sized opportunity. At the time, I cited Photobucket selling for $300 million to MySpace, which seemed like a huge win for that service.
“Had I been given an offer like that for Blogger a few years earlier, I would have logically said yes.”
According to Williams, you need to consider whether your business is under threat.
“Sometimes the threat is internal – an inability to execute on one’s opportunity,” he says.
“Friendster might be an example. When they turned down $30 million in pre-IPO Google stock, it was not a dumb move from a ‘capturing the upside’ perspective if you consider they were the first big social network, and they had no real competition.
“It’s not clear how obvious the internal threat was, though.”
In some situations, the founders or other key people “may just be done”, says Williams.
“This is actually quite common and drives a lot of small acquisitions. It doesn’t apply as much as companies get larger, because everyone is replaceable,” he says.
“Back in 2003, I struggled a lot about the decision to sell Blogger to Google. The financial win wasn’t clear.
“We had tons of room to grow and didn’t have any real threats. And I even had a term sheet for more funding on the table.
“But I was compelled ultimately because I felt like Google was the best home for this thing I’d built to reach its potential.
“I also knew I wanted to start another company and thought I’d come out of a couple of years at Google smarter and better. I also knew the team was going to be happy to join Silicon Valley’s most esteemed company.”
This article first appeared on StartupSmart.