Strategic Approach: Building value not excess

Is it taboo to build a company with the intention of selling it early? Many traditional venture capitalists would argue that you don’t create value if you build to flip. Just the term “build-to-flip” brings back visions of the bubble, when companies were being acquired or even going public before they had proven their value.

No one wants to repeat the mistakes that led to the crash. Investors are taking a much more prudent approach toward funding, even for innovative startups. And the “me-too” companies are not getting funded as quickly as they did in the past.

In today’s environment, companies are not attractive to acquirers unless they are able to first build —and prove — their value. So what does it take to build value? When can it be proven? The answer is different for every company and industry.

In software, value can be demonstrated quickly ; in some cases, less than two years. Hardware often requires more time and capital to arrive at the value point, making it difficult to create an early acquisition situation.

Building Value

It has been our personal experience that value is created when the product has been developed, customer feedback has been incorporated, product improvements have been made, and the initial paying customers arrive.

At this point, technology risk has been eliminated. Market risk has been reduced, because it has been proven that a large market of paying customers exists.

This is one of the key inflection points in a company’s lifecycle. This is the moment when company founders and investors need to ask themselves: scale or sell? Or, put another way, expansion or (early) acquisition?

• Option #1: Expansion. Particularly in the case of software, the amount of capital required to market, sell, and support a product is significantly greater than that required to develop a product. This is the point at which many founders solicit venture capital, with the goal of growing the company, then going public or being acquired later.

• Option #2: Early Acquisition. In this case, the founders attract and are acquired by a company that already has the necessary marketing, sales, and support infrastructure in place, and sees the acquired product and development team as an important strategic addition to its current product line.

Company founders and their finance partners have traditionally chosen Option #1. The investors often replace the founder, typically the main product developer and product evangelist, with a more operations-oriented CEO.

While this route is certainly viable, and we are as open to Option #1 as we are Option #2, we also believe that today’s environment and many of today’s entrepreneurs and companies are better-suited to Option #2. It’s a win-win situation all around. The founder can focus on what he/she does best — product development and improvement. The acquiring company improves its talent base and its technological reputation. Its customers get access to the new product, along with a professional and well-managed development and support infrastructure.

Preparing a company for a successful early acquisition does not happen by accident. It takes planning and proper execution. That’s where our Reverse-Liquidity Planning™ process comes into play.

Posted by Clarence Wooten & Lori Whitted on June 06, 2005
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