Honey, I Shrunk the Startups, Part II

A few comments about Dave McClure’s Sunday post encouraging entrepreneurs under 30 to sell at the earliest opportunity, from someone who was a founder under 30. I won’t go into the full rant, since I already wrote that last year, but can’t help but comment on a few of Dave’s claims. (Dave already knows I adore his writing style — Dave, I was just telling my twin brother this morning that I wished I had your voice — even if we disagree here.)

1. “Once you have a deal under your belt — whether it’s a $3M deal, a $30M deal, or a $300M deal, you are bankable.  People will bet on you again.” Ideas, not capital, are scarce. Selling a good company so that one you haven’t even thought of yet will be bankable — that is madness. Aaron Patzer — and anyone else in his position — was bankable well before he sold his company.

2. “And for the young entrepreneur — particularly those under 30 who’ve never done it before — the single best thing you can do to ensure your future success is TO GET A DEAL DONE.” Saying it is especially good for young entrepreneurs to sell their company is especially wrong. Entrepreneurs “who’ve never done it before” don’t need a farm system, or training wheels, or a practice run. Almost every great company (Amazon, Apple, Dell, Ebay, Google, Microsoft, Oracle, Yahoo!, PayPal, Facebook) was started by someone 30 or under. Your best idea usually comes before you’re 30.  Your ability to take risks is highest before you’re 30. In my experience, second-timers have a higher success rate because they are pragmatic and savvy about building a company for an exit, but the magnitude of success is highest among first-timers. If first-timers don’t create public companies, nobody will.

3. “Playing well sometimes means you take a single or a double instead of getting thrown out trying to steal home.” This talk of “swinging for the fences” and “striking out” or “getting thrown out at home” seems like a scare tactic. The difference between software and baseball is that you can swing for the fences and miss, and then just go back to second base. With the exception of Pointcast in 1997, which startup has gotten to the point where a lucrative acquisition is possible, decided to try building the business further, only to discover that there is no longer an exit at all? The company I co-founded, Plumtree Software, turned down seven acquisition offers before going public and accepting our eighth offer. What once made it hard for young people to hold out was their need for cash, but now most successful companies give the founders an opportunity to sell part of their stake early.

4. “Why is it that no one seems to think switching jobs every 3-5 years is a bad thing, but somehow think that selling your business to someone who really wants it and will grow it isn’t terrific?” Selling your business and switching jobs are totally different; anyone who has started a company knows that; you know that.  The idea that every entrepreneur is a serial entrepreneur, who can think of a new startup as easily as getting a gallon of milk from the store or finding a job at Kinkos, is a fiction we use to persuade ourselves that we’ll easily get another shot at greatness. It isn’t that simple. Ask Max Levchin, who seems to have gone through a Great Night of the Soul before founding a maker of Facebook applications, Slide. Just ask Aaron Patzer in five years. I don’t know Aaron and certainly wouldn’t want to bet against him, but if he makes as much money or has as much fun building his next startup as he did this one, he will have beaten some major odds. If I had been his adviser, I’d have helped him do whatever he wants — just as you did — but I also would have told him to keep having fun if he still believed in Mint. I think entrepreneurs need to hear that, too (for the record, I love Redfin as much as Plumtree, and Redfin may get bigger than Plumtree too, but this was a lucky break).

5. “More transactions of any kind or size help improve overall startup ecosystem health.” It is an interesting argument that small-scale transactions create liquidity and transparency, but surely public companies do that best. More to the point, Google, Microsoft and Amazon can’t buy every startup, particularly since many of their recent acquisitions haven’t been accretive. Without new venture-backed companies maturing into public companies, the total amount of capital available to fund innovation will decrease.

And the rest I agree with. It is outrageous baloney that anyone pressured Aaron Patzer to sell Mint. And there are plenty of startups that should sell when they can, for reasons both rational and admirable. But telling young entrepreneurs that they’re not ready to be a Jedi yet, just because they’re young — that just isn’t the Dave I know and love…

Update: a comment notes that the original Jason Fried essay never said that Aaron Patzer was pressured or forced into selling Mint. Jason just said that there’s an environment that made it easier for Aaron Patzer to sell, a point to which I am at least sympathetic. Jason, I just read your essay more carefully, and see that this comment is correct.  If you read what we’ve written earlier on the topic, you’ll see that we agree even more than I had originally realized.

Discussion

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  • jd

    NO ONE SAID “PRESSURED” OR “FORCED”!!!

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  • http://500hats.typepad.com dave mcclure

    glenn, always ready to hear your thoughtful response to my insanity. you bring up a lot of good points, as usual.

    don’t know if i was saying in all cases that entrepreneurs should sell out early, just that i’d probably have a bias for “earlier” vs later for the younger set.

    still, i might be wrong about that too.

    thanks for the feedback & hope to catchup next trip to seattle :)

  • http://blog.redfin.com/ Glenn Kelman

    @dave mcclure: would love to see you. And yes, I really do adore your blog.

    @JD, did you mean to type “JF”, for Jason Fried? Did the typo occur because you have had to spend so much time correcting mis-readings of your essay? I just read the original essay and was surprised to see that you only said that Mint’s sale was encouraged, not forced or pressured. I shouldn’t have been so sloppy. It seems like we agree on this point, which I wrote about last year:
    “Could Amazon’s Jeff Bezos show up on Sand Hill Road today to pitch a company that would lose money on software, on warehouses and distribution centers – for years? He might get his idea funded; he’d more likely get talked out of it. It’s so easy to nudge enterpreneurs — and people in general — toward smaller things.”

    I have corrected my characterization of the Fried essay in the post.

  • http://chrisyeh.blogspot.com Chris Yeh

    Glenn,

    An excellent and measured response, but I have to take exception with points (1) and (3).

    In point 1, you say, “Ideas, not capital, are scarce.” I heartily disagree. Both ideas and capital are plentiful. What is scarce is execution. An entrepreneur who has steered his or her company to a successful exit has proven their execution chops, and that does make them significantly more bankable.

    In point 3, you say, “With the exception of Pointcast in 1997, which startup has gotten to the point where a lucrative acquisition is possible, decided to try building the business further, only to discover that there is no longer an exit at all?” The history of the Valley is littered with these examples. Friendster, for example, turned down $30 million in pre-IPO Google stock, and it’s far from clear that there will ever be an exit. iLike was once a high-flyer, but recently sold for less than the money it had raised. While PointCast is the exemplar here, there are plenty of others. One personal friend (who shall remain nameless to protect his reputation) turned down $300 million cash for his startup during the boom, and shuttered the doors 18 months later.

    Entrepreneurs shouldn’t feel pressured to sell. But nor should they have an exaggerated sense of their own importance. Sometimes selling is the right decision.

    For more on my initial take on the Mint deal, here’s my post:

    http://chrisyeh.blogspot.com/2009/09/21-million-reasons-for-mint-to-sell.html

  • http://amplafi.com Pat Moore

    Hi from an ex-Plumtreer. I agree. First-time entrepreneur and I really don’t want investors because I want to have fun as long as I want. Last thing I want is to be on a investor-driven death march.

    Why would I want to end this fun?

  • http://500hats.typepad.com Dave mcclure

    hey Glenn: re: the clarification on jason’s original post — while Jason may never have explicitly said Mint’s investors forced a sale, it’s certainly suggested in the first paragraph that investor motivations were involved. it would be some serious backpedaling on his part to somehow deny that he was saying that.

    regardless, I believe you’re stretching the last point of my post a little further than intended. I’m not saying every young entrepreneur should sell out at the drop of a hat, rather that selling itself isn’t a bad thing as jason seems to say, and that first-time entrepreneurs might have a bias towards selling sooner than later.

    even more importantly, the current trend in the market is becoming more conducive to small rather than large exits due to the sheer # of potential buyers. it’s certainly not the case that only Google, Microsoft, and Yahoo are potential buyers these days. of course you shouldn’t start a company with the expectation you’ll get bought, but it’s not a cardinal sin to accept a buyout either.

    in any case alwys appreciate the feedback & you make several excellent points. hope to catchup sometime soon :)

  • http://blog.redfin.com/blog/author/glenn%20kelman Glenn Kelman

    Hey Dave, didn’t mean to stretch your post and it sounds like we all agree that selling a company isn’t always good or always bad. When a company’s got a real shot at making it big, it’s up to the CEO, who probably knows better than anyone what to do. I think Jason wishes he’d written that post without the first paragraph about VCs’ influence on entrepreneurs which, at the very least, is somewhat muted. I do think the climate has changed and that affects us all. And I also wish I’d taken more time to read Jason’s essay before commenting on it. I’d read your post but not his…

  • http://blog.redfin.com/blog/author/glenn%20kelman Glenn Kelman

    PS, I think “cancer” is a strong word and you have a right to be pretty mad about that.

  • http://500hats.typepad.com dave mcclure

    actually, several of my friends are cancerous VCs…(cough)

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  • Paul Friedman

    For me (as someone who has been part of 3 startups that were sold), it’s all about balancing the rational with the emotional.

    On the rational side, a measured decision should look at the economic risk/reward tradeoffs when deciding to sell a company. Included in this are both factors around the company (P/R ratios, etc.) as well as personal factors (risk tolerance, wealth needs, etc.)

    On the emotional side, I think you’ve captured it perfectly, with the exception of considering the employees. When the founders/executives make major decisions for the company, they need to keep in mind that this decision affects everyone, not just themselves. Truly, one of the sacred duties of a founder/executive is to put the well-being of their employees above their own self. When a ‘significant liquidity event’ comes along, if the founder/executive passes on it, they are doing so for others as well.

    —Paul

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