Knowing when to hold 'em

Barry Diller actually said something Tuesday at Web 2.0 that was pretty good. In response to a question from an entrepreneur, apparently about whether he should sell his successful web enterprise, Barry said: "Don't sell. The way you build equity is to hold on."

Which got me to thinking about lots of web companies that have had "successful exits" and wondering if maybe they shouldn't have been so hasty.

What if Flickr hadn't sold?

What if hadn't sold?

What if MySpace hadn't sold?

What if Blogger hadn't sold?

Apologies, again, for using Alexa graphs to demonstrate a point. But it's safe to say that all these properties have grown dramatically since their sale. If you imagine these are stock charts, you would probably conclude that the sellers would have been wise (/lucky) to hold on a little longer.

Now, that's rather simplistic, isn't it? You have to ask yourself several things before coming to such a conclusion. You have to ask, first:

How much was the acquiring company responsible for the growth following acquisition?
This is easy to conclude in the MySpace case: hardly at all. Does Fox even have the capability to bring measurable traffic to MySpace? Perhaps in the form of massive TV commercials, but that hasn't happened.

But in the other cases, obviously Yahoo! and Google have the ability to introduce these fledgling products to many millions of people. That's definitely part of the promised benefit of these deals. But does it happen?

On the Yahoo! homepage, there's a link to Yahoo's product that competes with Flickr. And on their entire site, only a few obscure mentions of Flickr are found.

Same with

Perhaps they've done other things I'm not aware of, like free ad campaigns or emails or marketing dollars (but marketing dollars doesn't really count as using their distribution). I'm going to go out on a limb and say that very little of these services' growth was due to Yahoo's massive distribution power.

How about in the case of Blogger? Blogger is linked on Google's "even more" page and, in the Google Toolbar, if you go to Options / More, you can turn on a BlogThis! button. Other than that, again, a few obscure mentions. They once ran a homepage promotion for Blogger on non-US Google sites, which had a nice impact for a few days. And the toolbar button brought in quite a few users for a brief while in 2003, when it was on by default, before they hid it. The "even more" page does not have a significant impact.

No, Blogger has grown, for the most part, without tapping into Google's huge reach.

But the second question you have to ask is:

Have the acquirers stopped imminent doom from happening?
This isn't as obvious of a benefit of getting acquired as distribution, but it can happen. For example, if rumors are to be believed, YouTube may have melted under the pressure of lawsuits had the awesome power of Google's attorneys not come in to save the day.

For the services mentioned above, although you never know what's going on behind the scenes, but it's hard to imagine such a scenario. I'm assuming, in all cases, that these companies would have acquired reasonable funding had they not sold. (Flickr and Blogger had offers on the table, and Delicious had just raised some.) That being the case, most problems are solvable.

One of the promised benefits of going to a Yahoo! or Google is scalability. Maybe they'll save you from doing a Friendster (which probably would have been better off selling). I don't know about Flickr, but I know is moving, or has recently moved, to some Yahoo! infrastructure that is purportedly quite nice. (If they have moved, it wasn't very long ago.)

As for Blogger, this was definitely something we needed and looked forward to. There was no way our codebase in early 2003 would support the load of today. However, until the most recent version, which is in beta now, Blogger has run on 90% homegrown code. Not code that we came there with, but code that was written specifically for Blogger (and the same database). There just wasn't any magical Google scaling device we could port to.

Of course, we ran on Google hardware and network, took advantage of Google libraries here and there, and had great Google-recruited engineers working on it. Also, as I'm sure with all of these services (save MySpace), we had parent-company ops and security folks who may have averted a disaster or two. But these aren't the core things that tend to illicit or prevent growth.

So, this is pure speculation, but it's hard to say that any of these sites would have been taken down, or seriously hindered, were it not for getting acquired.

As long as you're asking these questions, you should probably ask:

Would they have grown even more had they not been acquired?
Who knows. But it's not beyond the realm of possibility that these sites have been hindered after acquisition by a lack of flexibility or by having fewer resources to do what they needed to do than they would have otherwise, because they had to compete for them internally instead of buying them on the open market.

Just a thought.

Am I saying these companies shouldn't have sold?
No. There are still many other things to consider. For example, if you traded one stock for another stock that grew even faster, that would still be a good deal from a financial perspective. Also, from a financial perspective, it's possible that your further funding may have diluted you more than your growth made up for.

Or, not the case for any of those mentioned above, but if you just got offered a ridiculous price, despite not having a lot of substance to your business, you might regret not taking it.

Or if you just don't want to hack it out on your own—which I know is the case for some tiny startups that have gotten acquired by Google before really getting going—that's a legitimate reason. (In the vast majority of cases, the opposite is true, and founders beat their heads against brick walls in the big company for a couple years until escaping.) Or if you're just not interested in your thing anymore and want to move on, it can be great to find a stable home for it (not that acquirers don't often kill entrepreneur's babies on a whim).

All I'm saying is that you often hear about companies that should have sold when they had the opportunity, but you rarely hear about companies that shouldn't have.

And that Barry Diller has a point: Sometimes you should hold on.

Addendum! Kevin Fox writes in with several excellent points, not all of which I had thought about, but all of which I agree with. From Kevin:
An additional aspect that's important to consider is to what degree predicted performance is built in to the offer price. Even if Alexa traffic charts were accurate measures of traffic over time, they alone tell us nothing about the estimated future traffic at various points along the way. Thinking about Web 2.0 timing is much more like buying and selling tech stocks than it is trading commodities.

Take any significant Web 2.0 acquisition and try to estimate what the annual growth would have to be for the price paid to be a fair price. How much will Myspace have to grow to pay back Fox for its half-billion dollar bill? While P/E and PEG ratios are part of the standard vocabulary when valuing stocks, their equivalent (most 2.0 acquisitions are still in the red, rendering these numbers undefined) is just as important as their current web footprint.

Finally, hindsight usually favors waiting since people forget about the companies that didn't sell when their growth estimates were higher than their actual outcome. Just like mutual fund companies that start dozens of funds a year and only keep the ones that perform well, the persistence of memory (or lack thereof) is a confounding factor. There will always be success stories, and there will always be failures. I would guess (and you would have more experience than I in this) the ability to hedge your bet and cash out weighs heavily on the minds of founders of promising companies with negative cashflow.

Of course, another factor is often a founder's desire to be an eternal entrepreneur. There comes a point when you want to do something new, whether it's changing to a different project at your new parent company or leaving to start the adventure all over again.

This is an attitude I admire. ;-)

Right on. So, in conclusion: You never know.