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Why I Walked Away From a $12M Acquisition Offer 18 Months After Our Launch

236 points by nilmonibasak 12y ago

beck5 12y ago
I think a key difference here is Groove is actually a real company with real revenues which are growing. This is not true for many similar sized acquisitions you see. Good on Groove!
DanBlake 12y ago
I respect this post, but the most important thing in my mind is not mentioned: "past performance is not indicative of future performance" You need to give credence to the fact that you could have competitors offer your exact product for much less than you do. That a newer, better product could offer more for less. Or also that your product just becomes less good over time and your customers leave. Ecosystems change as does business. You need to account for the fact that you could be left with nothing also. This isnt to say not taking the money was the right/wrong thing. Thats your call alone to make.
- amorphid 12y ago
  That is totally true. I suspect many companies sell when they know grow will start to slow, but that trend isn't obvious yet.
softdev12 12y ago
"Our monthly revenue was around $70K at the time, making $11.8M a 14x multiple on our annual revenue. Even in SaaS, that’s on the very high end of the norm, and a multiple generally reserved for highly profitable companies (or ones with massive user bases)." Congratulations to the company for the growth after only a handful of months. Very impressive. Using multiples always seems a bit odd for me in super high growth early stage companies. If a product really takes off the early small numbers can really skew things in comparison to later big ones. It's like seeing a 10,000 percent growth rate in the first month on a tiny base.
- mattzito 12y ago
  Multiples are a convenient way of benchmarking deal performance, and it tends to work out very well for typical deals. Successful series B startup with a consistent growth rate? ~10x trailing 12 months revenue. High-growth series A startup? ~15x. Mature post-series C startup with large customer and revenue base? ~8x. Obviously, the excitement in the market, the competitive landscape, bidding wars, etc. can all screw with those points, but time and time again you see those general ranges for acquisitions.
  - WillieBKevin 12y ago
    Good points. Keep in mind the OP is talking about a 14x multiple of annual run rate, rather than trailing 12. He's calculating annual run rate as 12x his most recent month. Considering it's a quickly growing company, if he were calculating his multiple as a multiple of trailing 12, it would be higher than 14.
codingdave 12y ago
I thought Groove was Ray Ozzie's old company that he formed before Microsoft acquired it. I had no idea there was a new startup re-using the name. EDIT: The original title said "Why Groove walked away...".
ainiriand 12y ago
Congratulations for the good job GrooveHQ.
mattzito 12y ago
The upside potential is exactly why they offered 14x revenue - they had to sweeten the pot and make sure that they incentivize you to move now as opposed to later. They are willing to pay a little more now in exchange for insuring that they don't miss out, or miss a huge inflection point. However, bear in mind that as time goes on, and there's more data about monthly run rate, that multiple will likely go down. First, as time goes on, it will become increasingly less likely that you will "pop", or have a huge hockey stick of growth. Part of the multiple is designed to get you out of the game before you hit that inflection point. Second, many companies fall down once they try to scale their business. It requires a different set of skills, often different employees, and makes it a lot more likely that you'll miss on execution. Once you have a few quarters in a row of ~2% growth instead of 5%, your valuation will drop dramatically. Third, the market moves around you. Even if you're continuing to grow, what your competitors do can influence your valuation, to your betterment or detriment. I'm not saying that the author made the wrong decision, only that it's always easier to say, "Well, if we keep growing, and wait another year, we can get acquired for 2X more!". Heck, a year from now, that acquirer themselves might not exist anymore. I think that if you expect you'll want to exit the business at some point in the next few years, if you are fortunate enough to get a more than fair offer where all of your employees and investors would see it as a win financially, you need a really compelling argument not to take it.
- wmeredith 12y ago
  TL;DR: A bird in the hand is better than two in the bush.
  - electic 12y ago
    Agreed, the more data you have the harder and harder it is to command a 14x multiple. I have now made that mistake 2 times in my previous startups.
  - ThrustVectoring 12y ago
    That, and you have to actually go into the bush to get them. If you can successfully start businesses, a year of founder work is itself worth a significant amount of money.
mkaziz 12y ago
Did the headline change from a normal one to a clickbait?
josefresco 12y ago
Can't wait for the follow up, a year from now about how things went after this acquisition attempt and post. I'm not insinuating that they'll fail, just that the follow up is more important than this declaration.
chdir 12y ago
> We had a handful of meetings between with their business development team and executive teams, and their engineering team did a thorough technology review of Groove. I'm curious, why would you let them do a thorough technology review of your startup in the first place? (Edit: Because it can be dangerous)
- mattzito 12y ago
  Depends on what their definition of "thorough" is - it's very standard to have architectural and design discussions pre-term sheet. However, you defer any deep dive into code or structure or "secret sauce" until a term sheet is signed and you're in the due diligence process (and typically you'll have a neutral third party due any direct code reviews).
- atmosx 12y ago
  Because they wanted an exit? Or because the other party asked nicely!!!
- melvinmt 12y ago
  I suspect it was allowed to foster a potential partnership.
  - chdir 12y ago
    The blog says: It’s not a company that would be a natural product partner for us.
- creeble 12y ago
  I'm curious about this as well. It would be good to know how groove sorted out whether the company was just kicking tires, or looking at potential competition, thinking about a partnereship, or considering an acquisition. At some key point, it must have dawned on groove (or maybe not) that they were going to receive an offer. I think the context of that happening would be educational.
  - chdir 12y ago
mbillie1 12y ago
With respect to the 5 questions at the end, it seems arguably that the author's own evidence demonstrates the incorrectness of the decision for everyone except current customers. Interesting path to take, and nice to read the thought process. How did the rest of the Groove team react?
mikekij 12y ago
Swinging for the fences is great, but so is getting on base. Twelve months ago I accepted 7-figure acquisition offer for my company. Members of our team thought the offer was too low. It was a struggle for me to get everyone on board for the deal. In the past twelve months, the market conditions and competitive landscape have changed dramatically. Had we not accepted the acquisition offer, we'd be out of business, and we would have lost all of our investors' money. This would have had little to do with our execution, and much to do with exogenous factors out of our control. Just one data point though.
- otoburb 12y ago
  >Members of our team thought the offer was too low. It was a struggle for me to get everyone on board for the deal. Do those same members (who hopefully cashed out) agree with the blessing of 20-20 hindsight, or do they still believe the acquisition offer was too low?
  - mikekij 12y ago
    They have each told me that they now think we absolutely did the right thing. Being the one that pushed the deal through, this makes me feel much better. I'm so glad I wasn't wrong!
uptown 12y ago
I'm guessing Salesforce. Anyone know the bidder?
- AznHisoka 12y ago
  doubt it, since he says its not very related to his industry. I'm guessing someone like SAP.
debacle 12y ago
I wonder how many first-time founders would have made the same decision. My guess is very few.
not_that_noob 12y ago
It takes a lot of guts to do this. Only time will tell if this was a genius move or... I am rooting for genius. Good on you for swinging for the fences. Also, smart to talk about this publicly. Of course, it's good reading. But also many people like buying from those who care about the product they build than from a faceless bigcorp. You can't buy that sort of credibility.
timjahn 12y ago
The real answer is a third of the way through the post: "First-time founders care most about their exit. Every time after that, you focus on legacy." The author already had a successful exit, so they have their money. Now they want to make a difference.
- ssharp 12y ago
  I saw that he had an exit, but he also said his $6 million payout if he had sold Groove would have been "life-changing". That suggests his other exit netted him a bit less. As far as making a difference, I think calculating that is pretty complicated. Elon Musk had two big exits before he did more fulfilling work with SpaceX and Tesla. Some people want to make that level of massive impact. If that's the case, it probably makes sense to sell, take the money and tick off another exit on your resume, and start your next journey. But if someone is happy with making a smaller difference (I know I certainly would be!), then this might be your big chance to, so selling would not be personally fulfilling at all, even if it is financially fulfilling. There's no guarantee you're ever going to make $6 million from your company, but there is also no guarantee you're ever going to start a company that allows you to have the kind of impact you're having.
- jkarneges 12y ago
  The fact that the author already had an exit really stood out to me. Many early startup founders struggle just to pay rent. While I hate the idea of selling early, there is the practical matter that a small exit allows for a lifetime of future startups. If Alex didn't already have money, I think the best answer would have been to sell. You only get one life.
ar7hur 12y ago
I appreciate you sharing your experience, this is something we founders are not enough prepared to go through. Two comments IMHO: - Would you have said yes and looked into the details of their offer, you would have realized that the $12M are not upfront. Through retention packages and revesting, most of the price is typically paid over 3 or 4 years. So the offer was probably less attractive than it initially looks. - $12M is never a good outcome for investors (at least big angels and VCs). They make their returns only on big exits.
- jf22 12y ago
  >They make their returns only on big exits. Don't they make returns anytime their money invested is less than the money gained from the sale?
  - mhartl 12y ago
    In a narrow sense, yes, but virtually all investor returns typically come from a few big winners. For example, although many Y Combinator startups have achieved great success, most of YC's returns come from just three companies: Airbnb, Stripe, and Dropbox. If all an investor's winning startups exited at the ~$10m level, their returns would be anemic at best, and would quite possibly be negative after factoring in losses from failed companies. I think that's what the grandparent comment was getting at.
    - psykovsky 12y ago
      And let's be honest, AirBnB will go the way of Uber, regulated out of existance. I honestly don't know why it didn't happened yet, for both.
      - no_future 12y ago
        They're both multibillion dollar backed companies, so more likely the opposite will be true: any regulation against them will be lobbied out of existence.
enjo 12y ago
Reminds me of a story I heard about Photobucket. The founder there apparently had a $1M cash offer early on to sell out. At that point his credit cards were maxed and was really struggling to keep the thing afloat. He chose to pass and went on to sell the company for $300M to Newscorp. Of which he owned a significant portion.
- pcrh 12y ago
  >Of which he owned a significant portion. He sold Photobucket to a company that he partly owned? That sounds more like a merger..?
  - crazypyro 12y ago
    Significant portion of his start-up, Photobucket. He didn't own Newscorp...
- hkmurakami 12y ago
  I remember that Tony Hsieh had a similar experience with Linkexchange.
DubiousPusher 12y ago
I don't understand why so many here are questioning this move. You can shoot down his logic about the future upside but clearly it wasn't about the money anyway. Call me crazy but I find it encouraging that this guys is measuring the success of his business not just by how much it makes but also by whether it produces a good product that people actually want to use.
- markgavalda 12y ago
  I couldn't agree more, DubiousPusher.
yuhong 12y ago
"Products that founders swore they built to be “simple” got bloated, overdeveloped and lost sight of their vision." I wonder why.
egregiouscoder 12y ago
Congratulations to you! I think it's good to iterate that you said you love what you're doing. That's what matters most. When I was a kid and someone offered to by my paper made ninja stars, for $5 (it was a lot of money as a kid and still is) I couldn't sell it because I loved it! even though the materials probably added up to couple of cents.
- KRUKUSA 12y ago
  Haha ninja stars!
GreenPlastic 12y ago
Curious what your team thought was a good exit and what your definition of win handsomely is. For me, I'm at a startup where I gave up 75k-100k in salary for the first 2 years. Owning 1.5% of the company, <20M exits only make sense the first 6-8 months. At 2 years, I would have done much better elsewhere.

236 points by nilmonibasak 12y ago

beck5 12y ago

I think a key difference here is Groove is actually a real company with real revenues which are growing. This is not true for many similar sized acquisitions you see. Good on Groove!

DanBlake 12y ago

I respect this post, but the most important thing in my mind is not mentioned: "past performance is not indicative of future performance" You need to give credence to the fact that you could have competitors offer your exact product for much less than you do. That a newer, better product could offer more for less. Or also that your product just becomes less good over time and your customers leave. Ecosystems change as does business. You need to account for the fact that you could be left with nothing also. This isnt to say not taking the money was the right/wrong thing. Thats your call alone to make.

amorphid 12y ago
That is totally true. I suspect many companies sell when they know grow will start to slow, but that trend isn't obvious yet.

softdev12 12y ago

"Our monthly revenue was around $70K at the time, making $11.8M a 14x multiple on our annual revenue. Even in SaaS, that’s on the very high end of the norm, and a multiple generally reserved for highly profitable companies (or ones with massive user bases)." Congratulations to the company for the growth after only a handful of months. Very impressive. Using multiples always seems a bit odd for me in super high growth early stage companies. If a product really takes off the early small numbers can really skew things in comparison to later big ones. It's like seeing a 10,000 percent growth rate in the first month on a tiny base.

mattzito 12y ago
Multiples are a convenient way of benchmarking deal performance, and it tends to work out very well for typical deals. Successful series B startup with a consistent growth rate? ~10x trailing 12 months revenue. High-growth series A startup? ~15x. Mature post-series C startup with large customer and revenue base? ~8x. Obviously, the excitement in the market, the competitive landscape, bidding wars, etc. can all screw with those points, but time and time again you see those general ranges for acquisitions.
- WillieBKevin 12y ago
  Good points. Keep in mind the OP is talking about a 14x multiple of annual run rate, rather than trailing 12. He's calculating annual run rate as 12x his most recent month. Considering it's a quickly growing company, if he were calculating his multiple as a multiple of trailing 12, it would be higher than 14.

codingdave 12y ago

I thought Groove was Ray Ozzie's old company that he formed before Microsoft acquired it. I had no idea there was a new startup re-using the name. EDIT: The original title said "Why Groove walked away...".

ainiriand 12y ago

Congratulations for the good job GrooveHQ.

mattzito 12y ago

The upside potential is exactly why they offered 14x revenue - they had to sweeten the pot and make sure that they incentivize you to move now as opposed to later. They are willing to pay a little more now in exchange for insuring that they don't miss out, or miss a huge inflection point. However, bear in mind that as time goes on, and there's more data about monthly run rate, that multiple will likely go down. First, as time goes on, it will become increasingly less likely that you will "pop", or have a huge hockey stick of growth. Part of the multiple is designed to get you out of the game before you hit that inflection point. Second, many companies fall down once they try to scale their business. It requires a different set of skills, often different employees, and makes it a lot more likely that you'll miss on execution. Once you have a few quarters in a row of ~2% growth instead of 5%, your valuation will drop dramatically. Third, the market moves around you. Even if you're continuing to grow, what your competitors do can influence your valuation, to your betterment or detriment. I'm not saying that the author made the wrong decision, only that it's always easier to say, "Well, if we keep growing, and wait another year, we can get acquired for 2X more!". Heck, a year from now, that acquirer themselves might not exist anymore. I think that if you expect you'll want to exit the business at some point in the next few years, if you are fortunate enough to get a more than fair offer where all of your employees and investors would see it as a win financially, you need a really compelling argument not to take it.

wmeredith 12y ago
TL;DR: A bird in the hand is better than two in the bush.
- electic 12y ago
  Agreed, the more data you have the harder and harder it is to command a 14x multiple. I have now made that mistake 2 times in my previous startups.
- ThrustVectoring 12y ago
  That, and you have to actually go into the bush to get them. If you can successfully start businesses, a year of founder work is itself worth a significant amount of money.

mkaziz 12y ago

Did the headline change from a normal one to a clickbait?

josefresco 12y ago

Can't wait for the follow up, a year from now about how things went after this acquisition attempt and post. I'm not insinuating that they'll fail, just that the follow up is more important than this declaration.

chdir 12y ago

> We had a handful of meetings between with their business development team and executive teams, and their engineering team did a thorough technology review of Groove. I'm curious, why would you let them do a thorough technology review of your startup in the first place? (Edit: Because it can be dangerous)

mattzito 12y ago
Depends on what their definition of "thorough" is - it's very standard to have architectural and design discussions pre-term sheet. However, you defer any deep dive into code or structure or "secret sauce" until a term sheet is signed and you're in the due diligence process (and typically you'll have a neutral third party due any direct code reviews).
atmosx 12y ago
Because they wanted an exit? Or because the other party asked nicely!!!
melvinmt 12y ago
I suspect it was allowed to foster a potential partnership.
- chdir 12y ago
  The blog says: It’s not a company that would be a natural product partner for us.
creeble 12y ago
I'm curious about this as well. It would be good to know how groove sorted out whether the company was just kicking tires, or looking at potential competition, thinking about a partnereship, or considering an acquisition. At some key point, it must have dawned on groove (or maybe not) that they were going to receive an offer. I think the context of that happening would be educational.
- chdir 12y ago

mbillie1 12y ago

With respect to the 5 questions at the end, it seems arguably that the author's own evidence demonstrates the incorrectness of the decision for everyone except current customers. Interesting path to take, and nice to read the thought process. How did the rest of the Groove team react?

mikekij 12y ago

Swinging for the fences is great, but so is getting on base. Twelve months ago I accepted 7-figure acquisition offer for my company. Members of our team thought the offer was too low. It was a struggle for me to get everyone on board for the deal. In the past twelve months, the market conditions and competitive landscape have changed dramatically. Had we not accepted the acquisition offer, we'd be out of business, and we would have lost all of our investors' money. This would have had little to do with our execution, and much to do with exogenous factors out of our control. Just one data point though.

otoburb 12y ago
>Members of our team thought the offer was too low. It was a struggle for me to get everyone on board for the deal. Do those same members (who hopefully cashed out) agree with the blessing of 20-20 hindsight, or do they still believe the acquisition offer was too low?
- mikekij 12y ago
  They have each told me that they now think we absolutely did the right thing. Being the one that pushed the deal through, this makes me feel much better. I'm so glad I wasn't wrong!

uptown 12y ago

I'm guessing Salesforce. Anyone know the bidder?

AznHisoka 12y ago
doubt it, since he says its not very related to his industry. I'm guessing someone like SAP.

debacle 12y ago

I wonder how many first-time founders would have made the same decision. My guess is very few.

not_that_noob 12y ago

It takes a lot of guts to do this. Only time will tell if this was a genius move or... I am rooting for genius. Good on you for swinging for the fences. Also, smart to talk about this publicly. Of course, it's good reading. But also many people like buying from those who care about the product they build than from a faceless bigcorp. You can't buy that sort of credibility.

timjahn 12y ago

The real answer is a third of the way through the post: "First-time founders care most about their exit. Every time after that, you focus on legacy." The author already had a successful exit, so they have their money. Now they want to make a difference.

ssharp 12y ago
I saw that he had an exit, but he also said his $6 million payout if he had sold Groove would have been "life-changing". That suggests his other exit netted him a bit less. As far as making a difference, I think calculating that is pretty complicated. Elon Musk had two big exits before he did more fulfilling work with SpaceX and Tesla. Some people want to make that level of massive impact. If that's the case, it probably makes sense to sell, take the money and tick off another exit on your resume, and start your next journey. But if someone is happy with making a smaller difference (I know I certainly would be!), then this might be your big chance to, so selling would not be personally fulfilling at all, even if it is financially fulfilling. There's no guarantee you're ever going to make $6 million from your company, but there is also no guarantee you're ever going to start a company that allows you to have the kind of impact you're having.
jkarneges 12y ago
The fact that the author already had an exit really stood out to me. Many early startup founders struggle just to pay rent. While I hate the idea of selling early, there is the practical matter that a small exit allows for a lifetime of future startups. If Alex didn't already have money, I think the best answer would have been to sell. You only get one life.

ar7hur 12y ago

I appreciate you sharing your experience, this is something we founders are not enough prepared to go through. Two comments IMHO: - Would you have said yes and looked into the details of their offer, you would have realized that the $12M are not upfront. Through retention packages and revesting, most of the price is typically paid over 3 or 4 years. So the offer was probably less attractive than it initially looks. - $12M is never a good outcome for investors (at least big angels and VCs). They make their returns only on big exits.

jf22 12y ago
>They make their returns only on big exits. Don't they make returns anytime their money invested is less than the money gained from the sale?
- mhartl 12y ago
  In a narrow sense, yes, but virtually all investor returns typically come from a few big winners. For example, although many Y Combinator startups have achieved great success, most of YC's returns come from just three companies: Airbnb, Stripe, and Dropbox. If all an investor's winning startups exited at the ~$10m level, their returns would be anemic at best, and would quite possibly be negative after factoring in losses from failed companies. I think that's what the grandparent comment was getting at.
  - psykovsky 12y ago
    And let's be honest, AirBnB will go the way of Uber, regulated out of existance. I honestly don't know why it didn't happened yet, for both.
    - no_future 12y ago
      They're both multibillion dollar backed companies, so more likely the opposite will be true: any regulation against them will be lobbied out of existence.

enjo 12y ago

Reminds me of a story I heard about Photobucket. The founder there apparently had a $1M cash offer early on to sell out. At that point his credit cards were maxed and was really struggling to keep the thing afloat. He chose to pass and went on to sell the company for $300M to Newscorp. Of which he owned a significant portion.

pcrh 12y ago
>Of which he owned a significant portion. He sold Photobucket to a company that he partly owned? That sounds more like a merger..?
- crazypyro 12y ago
  Significant portion of his start-up, Photobucket. He didn't own Newscorp...
hkmurakami 12y ago
I remember that Tony Hsieh had a similar experience with Linkexchange.

DubiousPusher 12y ago

I don't understand why so many here are questioning this move. You can shoot down his logic about the future upside but clearly it wasn't about the money anyway. Call me crazy but I find it encouraging that this guys is measuring the success of his business not just by how much it makes but also by whether it produces a good product that people actually want to use.

markgavalda 12y ago
I couldn't agree more, DubiousPusher.

yuhong 12y ago

"Products that founders swore they built to be “simple” got bloated, overdeveloped and lost sight of their vision." I wonder why.

egregiouscoder 12y ago

Congratulations to you! I think it's good to iterate that you said you love what you're doing. That's what matters most. When I was a kid and someone offered to by my paper made ninja stars, for $5 (it was a lot of money as a kid and still is) I couldn't sell it because I loved it! even though the materials probably added up to couple of cents.

KRUKUSA 12y ago
Haha ninja stars!

GreenPlastic 12y ago

Curious what your team thought was a good exit and what your definition of win handsomely is. For me, I'm at a startup where I gave up 75k-100k in salary for the first 2 years. Owning 1.5% of the company, <20M exits only make sense the first 6-8 months. At 2 years, I would have done much better elsewhere.