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Today’s tech bubble: Sell or IPO your company?

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If you had the chance to sell your tech company for a great price would you – or would you play the long game?

This is a decision successful entrepreneurs end up facing and is a question for some tech entrepreneurs right now as we go through what is arguably another bubble – and there are some very interesting cases to think about – and think what would you have done?

Consider the Huffington Post: A success story to most people – purchased by AOL for $315M in February at a 6.3X multiple of $50M in revenue and very small profits. The last investor, Oak Investment Partners, tripled their money in just over 2 years which is a great result for a late stage investment decision. And yet, as Jeff Bercovici of Forbes writes in his somewhat damning review of the HuffPo/AOL honeymoon, the difference in interests that can appear between investor and entrepreneur in very visible in this case.

Fred Harman, the Oak partner who made the HuffPo investment, told Forbes “Our goal was an IPO rather than building up the company to be acquired by another media company” and that he and the HuffPo CEO Eric Hippeau “were still inclined to roll forward as an independent company out of the belief that The Huffington Post could continue to rapidly scale and be the dominant social news company on the Web”. But for Arianna, AOL meant personal liquidity and a much larger stage and budget to build her dream with.

(full disclosure: my current company FirstRain is funded by Oak. They like to swing for the fences – as do I)

In contrast look at Zillow, which went public last week and, on 2010 revenue of $30.5M, now commands a valuation of greater than $1B. Is this valuation a surefire sign of a tech bubble? On Seeking Alpha screener.co writes that “The vast difference in valuation between a recent tech IPO and similar publicly traded competitors is not limited to Zillow” – Pandora’s valuation is almost as shocking as Zillow’s and outrageous in comparison to their comp RealNetworks. So long term public valuation (and so the team’s return) is at risk here.

In the enterprise social media space, Radian6 decided to sell to Salesforce instead of taking the long road. At a valuation of $326M and 10X revenue Techcrunch thinks SFDC overpaid but 10X trailing revenue is a terrific valuation for an enterprise software company and being integrated into Salesforce takes all the return risk out for the founders – plus SFDC smartly put additional options on as an earnout over 2 years (not unusual when a public company buys a private company and wants to keep the founders around). But also consider that maybe Salesforce creates a larger platform with deeper pockets for the Radian6 team to execute their vision on.

And waiting in the wings we have Groupon. They did not sell to Google last Fall for $6B and, if they can get over the questions about their business model and profitability, hope to IPO for $20B – and are lining up enough banks to make it happen.

All this leads to questions of timing – are today’s valuations fashion driven because tech IPOs are hot now? – and what would you do if it was you? I’ve been there, it’s a gut-wrenching decision.

If you sell:
+ You get secured liquidity and wealth for you and your team (especially if you are bought for cash)
+ You play on a larger stage, often with a larger budget
+ You may get access to many more customers on a larger platform
+ You create long term job security for your core tech team
- You lose final authority on strategy and budget
- Many members of your team (non tech) may lose their jobs
- You lose the essential joy of building your own venture

If you go public:
+ You get significant capital to grow your business with
+ You stay in charge (for now…)
+ Your investors get a great return in 6 months (after the lockup comes off)
+ You may get a significantly higher return over a longer time period
+ You continue to drive the strategy and M&A to execute you and your team’s vision
- Limited liquidity for you or your team for the foreseeable future
- You are running a public company (no picnic!)
- Your return is not secure, you are subject to volatile markets

… and there are many more pros and cons…

One of the best pieces of advice I got was to, in the end, focus on how my management team is successful and makes money from their hard work. Not my ego or my net worth. Not my investor’s return. My team, the ones who built the company with me. If they make money, everyone else will make enough.

Misreading the seismic shift HuffPo represents

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There is a seismic shift going on that is continuing to shake the foundations of journalism. The intellectual view was well captured in an editorial by NYT executive editor Bill Keller – while the commercial reality is impossible to avoid as you can see in this chart from Business Insider on the drop in ad revenue over the last 10 years.

Keller’s piece, which is at once thought provoking and snarky, expresses annoyance at the hyper-inflated public and market valuations of aggregators like The Huffington Post, arguing that AOL’s purchase of HuffPo no more moves it into the content game than a company “announcing plans to improve its cash position by hiring a counterfeiter.”

Clearly he has an issue not only with the HuffPo team making out like bandits – but more so because they are doing so, in his mind, through aggregation. Earlier in the piece, Keller describes the news aggregation business model as “taking words written by other people, packaging them on your own Web site and harvesting revenue that might otherwise be directed to the originators of the material,” a practice he then likens to Somalian piracy. Methinks he also finds Arianna’s ability to capture a thought and repackage it in a warmer, more convincing way, very annoying.

Keller’s irritation is somewhat understandable, after all, he presides over one of the world’s great newsgathering organizations, one maintained at great expense and passion, and he’s watching the public perception of the monetary value of that content sink precipitously. But while aggregation in some form is here to stay, the quality of journalism is a pendulum that will swing back. His bemoaning of the fate of journalism is not unlike to bemoaning of the smut being circulated in England in Victorian times. Yes, there were great writers publishing in periodicals at the time (Dickens for example) but at the same time the Illustrated London News was a bestseller with stories of scandal and mayhem like Jack the Ripper.

I think Keller substantially misinterprets the value and appeal of HuffPo. Not only does HuffPo attract readers with pop culture – it also hosts a tremendous amount of valued, original opinion content authored by high-profile bloggers from politicians to religious leaders, mixed with aggregated news, yes I admit all from a decidedly left-wing perspective. I am often surprised to find out who is reading HuffPo. Not only rabid liberals in the mid West, but also academics and captains of industry. I find out because they tell me their reaction to some of the provocative pieces I have myself written for HuffPo.

More importantly, however, I think Keller misses the overall shift in content dynamics to which The NYT is also subject – the growing ability to analyze new and aggregated content and derive relationships between them making the stream both relevant and unexpected. Something we provide to our  business users.