Build to Flip = Build to Fail

There are a bunch of blog posts flying around on the subject of flipping companies. Yes, we’ve been here before, 5 years or so ago, and yeah all the same issues remain.

The interesting difference this time around is, thanks to the world wide everybody talking to/about/for everybody/everything, there is a ton of material for you, the start up, to absorb in your quest for world domination or just a bigger house.

Some notable blog postings out there are Don Dodge’s notes on selling your start up. Smart guy, worth reading and listening to. He makes the point about talent and does it in a way that shows his experience and professionalism.

“One superstar engineer/visionary like Ray Ozzie is worth 100 really great engineers. And, one really great engineer is worth another 100 good engineers. This is the normal order of things, yet few CEOs understand this. The truth is you need all levels of talent to build out a team, but without the superstar it will be tough to win.”

Don’s post is great.

He was responding to Dare Obasanjo’s post on building a company to flip it. The so-called 101 missive tries to point out the raw, unvarnished thinking that is likely to go into big company munching little company.  The current example of the month is a company called Meebo. Meebo is a nice app that brings all the IM things you have into a nice single interface.

Dare’s commentary is fairly straight up until we hit this really nifty quote:

“That leaves the people,  according to the Meebo team page there are three people; a server dev, a DHTML/AJAX dev and a business guy (likely to be useless overhead in an acquisition). The question then is how many million dollars would Google, Yahoo! or Microsoft think is worth for the skills of both [most likely excellent] developers?”

Some will probably argue that Dare is just telling it like it is and others will might draw the conclusion that Dare is an arrogant jerk. Most of the non-tech/biz people are likely to slide toward the jerk part.  I lean toward the “tell it like it is” view but judging from my “did you see this” email count, there are mixed views.

Anyway,  I’ll stay out of the jerk/no jerk debate and point out a few other things.

In my world, the VC world, we evaluate the whole team to see if they can be effective in accomplishing what they set out to do. And, much to Dare’s possible shock, the VC community, weird though we may be, actually value business people highly.  In fact, I’d argue that since my neighbor’s 13 old year has shown me six different AJAX/RUBY gizzmos that are clones of existing services, business guys (and gals) are even more important in helping the technical talent rise above the noise, guide the product toward what customers want and, maybe bring in a little business. Give me those super stars but toss in some superstar “overhead” while you’re at it.

For sure you should read all of Dare’s post because it does point out, in straight language, the meat market which is big corporations and that’s okay. It’s data you should have and it should keep the pixy dust from scrambling your brain. Plus he, like Don, is a smart guy.

My guidelines for flip thinking:

1. If you want to work for Microsoft/Google/Yahoo, do a mash-up, do a .net widget, do whatever, get it out there and call HR.  The odds of your company getting bought as a statistic of all the companies started up filtered by the ones that one of the 60,000 MSFT employees knows about, filtered by the ones anybody cares about, filtered by those that have a financial value, well, you get the point. The odds suck.

2. Build to solve a problem and see how many people share the pain. Love those customers, make a small amount of coin and feel the love. Here are some very simple numbers to help guide your thinking:

– The average cost of a person is around $100k, fully loaded.

– Expenses, all in, are normally budgeted at two times payroll. In other words figure out what everybody is going to be paid, double it and that’s the general expense guideline. Below that, you are golden.

– a 10 person team should cost around a million bucks. Less is good, just don’t be shocked when the real math happens.

– at 1 yankee dollar per month per user, you need just shy of 100,000 happy people to keep the lights on, pay the ten person team some salaries and live to play another day. Smaller team, cool, less money required, etc, etc, don’t get all math crazy on me.

If you are working from home, no salary, free hosting, free this, low cost that, these numbers will go down for sure. And, for sure, if your team all agrees to take no salaries, no offices, etc, there is almost no cost, I get that, the numbers above are just examples to point out it isn’t that hard to put together a serious team and get going.

Also, I point this simple math out because you can dig into your passion, make it amazingly great, and knock one completely out of the park without worrying about a flip, being crushed or ripped off.  Keep it personal, grow the business, and let the big guys come knocking on your door.

3. Don’t make a flip the cornerstone of your business plan. If you’d like to come by for a no harm/no foul meeting and you’d like to talk about how to get bought by Microsoft, I’m happy to regale you with stories and walk you through the companies/technology I personally bought while in Redmond as well as what many of my friends are thinking about these days.  Happy to give you any and all of my thinking but not much, if any, of my money because I don’t believe that a business built upon the objective of a hail mary pass is sound and I would question the judgment of the team. I’d be impressed with the honesty but want to be very candid about my thinking.

4. Build to enjoy. Companies that love what they are doing have that attitude shining through loud and clear. Customers will pick up on it and a certain percentage will, in fact pay for it.  Tomorrow, Microsoft could put every feature of TEO into Outlook and I’ll stay with Josh Einstein’s implementation. Why? He loves the customers, it’s personal, and it shows. I may be in the minority but I have this sneaky feeling that there are going to be lots of 100k happy customer businesses out there which make good money, return good value to customers and have a reasonable shot at growing and morphing into even more successful companies.

5. Get some good business people. I know I’m picking on Dare’s comment way too much but it’s such a good target. More to the point, great business people are important for any business endeavor to be successful. Don’t get all hung up on why your code rocks or smokes anything out there because the other guy is probably going to hire a killer sales/biz dev gal and she is going to kick your technical ass.

If you are a Microsoft business guy and you are feeling a little useless, call Dare, he wants to buy you lunch. He will make you feel better.

 

Comments

[Stuart MacDonald]

Great post. I could not agree more. Shorthand: solve a real problem, make customers lives better and do it with a smart team committed to the project -- and to each other's success. Result? Heck, you will likely be doing so well and having so much fun that you won't even want to sell the darn thing.

(You likely should anyway...but that's another discussion :-))

- Stuart

[Dave A]

As an budding entrepeneur, and a product/business guy at that, I really appreciate what you are saying. One of the reasons I am starting my own company is so I don't have to go back to work for the "giant software company" or even smaller company where you are just a cog in the wheel and spending more time playing political games than building great products. I'm surrounding myself with developers who buy into my vision and business people that will help me see the "light" as I know I can get emotionally attached to ideas.
On a side note, I also really appreciate your blog, as well as the other "really smart" people who blog about VC's and financing, etc. Coming up with a great idea is hard enough, but learning about the financing options and how those that are doing the financing are thinking has been a great learning experience. Thanks!

[Matt]

Well, I certainly agree with what you're saying here about the disadvantages of focusing on selling the business before you have a business worth buying. (On the other hand, if as Dare does you _assume_ you're building to flip, then it makes a certain amount of sense to accept the notion that the buyer will have their own sales and bizdev folks and won't want to pay a premium for yours.)

Any programmer who thinks sales and bizdev aren't important should try eating code sometime. And any programmer who thinks sales and bizdev are important but too easy to be worthy of top-flight personnel should try _doing_ them sometime. (And yes, I come to the table from the programmers' side...I know whereof I speak...and the day my business finally made enough money to hire full-time staff for these jobs was without doubt the happiest day of my life.)

But I suppose it's only natural for me to agree...I'm an entrepreneur who's decided long ago not to bother seeking out VC funding, because VCs tend to have institutional assumptions about business life cycle that don't match what I want for my company.

But...you're...a VC. Which leads me to wonder...

If you don't want your portfolio companies to be focused on selling themselves to bigger firms...what sort of liquidity event _do_ you prefer? I mean...I'm sure you enjoy your work, but I find it difficult to believe you're not ultimately in this game for the money. _I_ would be (and indeed am) perfectly fine with continuing to run my business at a tidy and growing operating profit into the indefinite future...but that route will never yield the level or speed of return that a VC would need, which is why I've never sought VC money. What's different about you?