The best Internet companies aren't sold for simple reasons: 1. When they are for sale, no one wants them. 2. Even the "best" company, once bought is destroyed by the act of being sold. 3. By the time it is seen that they are "best," it is too late to buy them.
The problem is that the "best" companies, if that means the ones that eventually grow the largest, are almost always market distrupters. The nature of disruption is such that it is exceptionally hard to recognize up front and desperately difficult to communicate. Thus, when an entrepreneur is trying to sell his disruptive company, it isn't "conservatism" that will cause him to fail, it is natural and expected "lack of vision." To see the future is a difficult thing. To convince others to see the same future is virtualy impossible.
Those erst-while "best" companies that do manage to get sold are typically bought for reasons other than the disruptive vision that drives their founders. They'll be bought for the "good team" or because some aspect of what they do "compliments" the purchasing company. Purchasers rarely, if ever, intentionally buy-in disruption -- for the same reasons that companies are rarely able to defend against market disruption. (See: Christensen and "The Innovator's Dilemna/Solution, etc.")
In the Internet business, the "best" companies are often those that, by creating a market disruption, end up being the focal point for a new market and are often platform providers. As platform providers, once a tipping point is reached, they grow rapidly and are strengthened by the efforts of a whole eco-system of dependent entrepreneurs that depend on them. Once this synergistic relationship takes root, the focal-point or platform company becomes stronger ever day while also ensuring that no one else in the market is able to gain enough advantage to challenge them. (For more on this, see my blog post on one of your earlier posts: http://bob.wyman.us/main/2008/04/liquidity-and-... )
In sum, you only know a company is "best" *because* it wasn't sold... The best companies can't be sold.
bob wyman
Tim Dierks
· 1 year ago
Possible alternate reasons: * Founders turn down big deals when they see huge upside. Acquirers can't have enough info to value this inside perspective, so they're unable to offer big prices. * Acquisitions are rarely to allow the company to continue to grow: they're usually to find so-called synergy in the combination. This always reduces the visible value contribution of the acquired company, making the situation self-fulfilling.
Adam Wride
· 1 year ago
It's also possible that founders turn down acquisition offers because they incorrectly value their company's potential (as in, too high). Turning down an offer only means that the founders really believe in their product. It doesn't mean their faith is well placed.
Bob Warfield
· 1 year ago
The problems are as much or more in how deals begin as they are in the endgame. Graham presents one interesting model: do a lot more cheaper deals. I present another: Google spent a fortune to build real technical barriers to entry. It's almost impossible to do that in today's funding mentality.
Forget the endgame, if you can't get started on the right track there won't be an endgame.
Cheers,
BW
Shripriya
· 1 year ago
I disagree with the tip for acquirers. There are also very many times that the outrageous price is just that - outrageous. And often that price will not at all seem like a bargain after the fact. In fact the advice only holds true if the acquirer is dealing with an eBay/Google/Facebook/YouTube... For most other companies, the acquirer should do their m&a math and figure out what to pay and stick somewhat close to that. Otherwise you'll be paying more for every startup that turns you down - not smart.
Steven Kane
· 1 year ago
as many comments have pointed out on paul's own blog, paul's logic (vis a vis behind turning down buyout offers in pursuit of bigger glory) is simply, deeply flawed
1) if/when a company takes a buyout offer it disappears from the data-set. nothing, literally nothing, can be gleaned from that company's exit about whether or not it would ever have been a bigger success.
2) flip side of that coin: of course huge successful companies turned down buyout offers along the way. unless the company's success literally came out of nowhere, and at the last moment, then its success along the way would be noticed by players in the field and buyout offers would likely ensue. but had they taken the buyout offer then... see item #1 above
3) many many more companies (i would argue) make the opposite mistake -- the tragic error of untethered ambition; saying no to buyout offers they later regret turning down, and all in the hope of grabbing that bigger brass ring just around the bend. the embers of this quixotic self-delusion are often fanned into flame by VC investors who -- because of the basic rules of portfolio management theory mixed with the scant and increasingly fleeting returns from VC investing -- would rather strike out rather than hit a double or triple, in order to quest for the home run
as an entrepreneur, i try to keep my personal success metrics about product success, personal financial gain, and providing great returns to my investors (if I have investors.) whether i achieve that quietly or noisily, or whether by building the golden gate bridge or an erector set, is irrelevant, and worse, a distraction
Christopher Mancini
· 1 year ago
Great observations. It is making me want to go read Paul's essay.
Chris
vruz
· 1 year ago
I think Paul is a natural born left-side-of-the-brain kind of person, though later in his life he made a conscious effort to develop his right side of the brain further by becoming an artist. I've made the trip the other way so I can tell how both sides work. It's pretty indicative to me that Paul uses the word "algorithmic" to describe his process when searching for the few good next companies among a sea of flops. In guise of a counter-example: Steve Jobs is the quintaessential natural born right-side-of-the-brain kind of entrepreneur. You don't hear him talking much about process, sequences, algorithms and statistical approaches to picking his right choices.
How do these guys do it ? By doing it millions of times, night and day, for decades, by being the best at what they do. When others sleep, artists stay overnight trying, and trying again because they have a physical need to succeed at conquering their own, very private kind of mount Everests. They develop their heuristics processing capabilities in a way most other people don't, tens or hundreds or times more than any other 'normal' person, by the simple reason they've worked at it tens or hundreds of times more than any other person.
There is no secret, as Paul himself told us in another of his essays when he talked about geniuses, and supported his argument by naming Mozart, who developed his insanely superhuman skills by starting at his very early infancy.
So, what does it take to recognise value, to "think different", and anticipate what's to become a new valuable and meaningful thing ? Not by process, not by algorithms, not sequentially. Hard data serves to verify your gut feeling, but it's complementary --not a substitute-- for heuristically oriented thought.
Therefore, -I argue- in order to appreciate genuniely novel creations, one should become more like the artists themselves. That's what you, Fred do with your musical inclination, you don't tell the greatest musicians of a new generation by measuring how many notes they put in a pentagram, with which frequency they play it, what's the duration of the grooves, how many disonant chords he plays per album.
Complex systems such as organisations are made of people, and many believe human beings are the most complex and beautifully perfect existing thing in this universe.
There's just no way one can accurately predict genius by algorithmically processing hard data. You look heuristically for it, and then gather data to verify its uniqueness, not the other way around.
Get heuristical. That's at least how I think :-)
(mmmm this turned into a post by itself, going to tumblelog it)
Adam Wride
· 1 year ago
One should become more like artist's yes. BUT I think to be on the valuation side, you need to maintain a user's perspective to have that gut feeling whether they have a winning product or just cool technology (which happens when you focus on the tools of the trade).
vruz
· 1 year ago
Of course, that's what I said, one should become more like artists, NOT BECOMING artists :-)
All Comments
1. When they are for sale, no one wants them.
2. Even the "best" company, once bought is destroyed by the act of being sold.
3. By the time it is seen that they are "best," it is too late to buy them.
The problem is that the "best" companies, if that means the ones that eventually grow the largest, are almost always market distrupters. The nature of disruption is such that it is exceptionally hard to recognize up front and desperately difficult to communicate. Thus, when an entrepreneur is trying to sell his disruptive company, it isn't "conservatism" that will cause him to fail, it is natural and expected "lack of vision." To see the future is a difficult thing. To convince others to see the same future is virtualy impossible.
Those erst-while "best" companies that do manage to get sold are typically bought for reasons other than the disruptive vision that drives their founders. They'll be bought for the "good team" or because some aspect of what they do "compliments" the purchasing company. Purchasers rarely, if ever, intentionally buy-in disruption -- for the same reasons that companies are rarely able to defend against market disruption. (See: Christensen and "The Innovator's Dilemna/Solution, etc.")
In the Internet business, the "best" companies are often those that, by creating a market disruption, end up being the focal point for a new market and are often platform providers. As platform providers, once a tipping point is reached, they grow rapidly and are strengthened by the efforts of a whole eco-system of dependent entrepreneurs that depend on them. Once this synergistic relationship takes root, the focal-point or platform company becomes stronger ever day while also ensuring that no one else in the market is able to gain enough advantage to challenge them. (For more on this, see my blog post on one of your earlier posts: http://bob.wyman.us/main/2008/04/liquidity-and-... )
In sum, you only know a company is "best" *because* it wasn't sold... The best companies can't be sold.
bob wyman
* Founders turn down big deals when they see huge upside. Acquirers can't have enough info to value this inside perspective, so they're unable to offer big prices.
* Acquisitions are rarely to allow the company to continue to grow: they're usually to find so-called synergy in the combination. This always reduces the visible value contribution of the acquired company, making the situation self-fulfilling.
More on my blog:
http://smoothspan.wordpress.com/2008/04/15/how-...
Forget the endgame, if you can't get started on the right track there won't be an endgame.
Cheers,
BW
1) if/when a company takes a buyout offer it disappears from the data-set. nothing, literally nothing, can be gleaned from that company's exit about whether or not it would ever have been a bigger success.
2) flip side of that coin: of course huge successful companies turned down buyout offers along the way. unless the company's success literally came out of nowhere, and at the last moment, then its success along the way would be noticed by players in the field and buyout offers would likely ensue. but had they taken the buyout offer then... see item #1 above
3) many many more companies (i would argue) make the opposite mistake -- the tragic error of untethered ambition; saying no to buyout offers they later regret turning down, and all in the hope of grabbing that bigger brass ring just around the bend. the embers of this quixotic self-delusion are often fanned into flame by VC investors who -- because of the basic rules of portfolio management theory mixed with the scant and increasingly fleeting returns from VC investing -- would rather strike out rather than hit a double or triple, in order to quest for the home run
as an entrepreneur, i try to keep my personal success metrics about product success, personal financial gain, and providing great returns to my investors (if I have investors.) whether i achieve that quietly or noisily, or whether by building the golden gate bridge or an erector set, is irrelevant, and worse, a distraction
Chris
I've made the trip the other way so I can tell how both sides work.
It's pretty indicative to me that Paul uses the word "algorithmic" to describe his process when searching for the few good next companies among a sea of flops.
In guise of a counter-example: Steve Jobs is the quintaessential natural born right-side-of-the-brain kind of entrepreneur.
You don't hear him talking much about process, sequences, algorithms and statistical approaches to picking his right choices.
How do these guys do it ? By doing it millions of times, night and day, for decades, by being the best at what they do.
When others sleep, artists stay overnight trying, and trying again because they have a physical need to succeed at conquering their own, very private kind of mount Everests.
They develop their heuristics processing capabilities in a way most other people don't, tens or hundreds or times more than any other 'normal' person, by the simple reason they've worked at it tens or hundreds of times more than any other person.
There is no secret, as Paul himself told us in another of his essays when he talked about geniuses, and supported his argument by naming Mozart, who developed his insanely superhuman skills by starting at his very early infancy.
So, what does it take to recognise value, to "think different", and anticipate what's to become a new valuable and meaningful thing ?
Not by process, not by algorithms, not sequentially.
Hard data serves to verify your gut feeling, but it's complementary --not a substitute-- for heuristically oriented thought.
Therefore, -I argue- in order to appreciate genuniely novel creations, one should become more like the artists themselves.
That's what you, Fred do with your musical inclination, you don't tell the greatest musicians of a new generation by measuring how many notes they put in a pentagram, with which frequency they play it, what's the duration of the grooves, how many disonant chords he plays per album.
Complex systems such as organisations are made of people, and many believe human beings are the most complex and beautifully perfect existing thing in this universe.
There's just no way one can accurately predict genius by algorithmically processing hard data.
You look heuristically for it, and then gather data to verify its uniqueness, not the other way around.
Get heuristical. That's at least how I think :-)
(mmmm this turned into a post by itself, going to tumblelog it)
http://vruz.tumblr.com/post/31837887