> But if the startup gods aren’t smiling, and you can’t either figure out the cause and/or figure out how to correct it, it’s time to start working on a Plan B for the business. Plan B often includes kicking off a strategic process that ends up in the sale of the company before it becomes as obvious to others as it is to you that you’ve got a dying shark on your hands.
It isn't, that's simple. In any deal there are two main obligations for seller and buyer. For the seller to inform the buyer about any material things they are aware of affecting the item being sold ('duty to inform') and for the buyer to look at the item being sold long and hard to see if there is anything they can find that will affect their judgment ('duty to research').
So from an ethics and an honesty perspective you're 100% right, and from a legal perspective you are also right but that's where it gets hairy. Because the 'duty to inform' is not specified in enough detail to make that duty an explicit thing without wiggle room these cases (where a seller should have been aware of a defect but did not disclose it) usually end up in front of a judge and it is definitely not an open-and-shut thing that every such case is ruled in favor of the party filing the complaint. It's one thing to state that a seller should have been aware of something but quite another to prove that they actually were aware of something.
I've seen a deal or two where the seller was 'glad to be rid of 'x'' where you'd expect them to be perfectly aware of the situation and where the buyer did their DD and were totally happy with what they bought. So sometimes it is simply a matter of perspective and the supposed defects are simply not as relevant to the buyer as they were to the seller. But as a seller I'd rather err on the side of caution and inform the buyer even if that sometimes would mean a deal would not go through.
You can bet that after this remark any exits from a16z will be looked at just a little bit more carefully, if that is even at all possible. Most deals at this level go through a very thorough process making it fairly rare that a thing such as 'growth is stopping or about to stop' would slip through the cracks and I'm kind of surprised that a16z is of the opinion that a seller would be able to get away with this kind of trick without either risking the buyer figuring it out in time. That would have to be a fairly in-experienced buyer.
Don't claim that is has hockey stick growth still. Done. All of a sudden you're not committing fraud anymore. Expecting infinite exponential growth is absurd on many layers.
Most businesses live in the margins. This doesn't mean the business should be disbanded.
This is how most people try to make money in any public financial market though. Sell at the top. Private companies are a bit different, but it's always buyer beware and do due diligence for a reason.
If the buyer is going to just shut down the product (and perhaps effectively mitigate their own competition, even temporarily), then there's a bit less potential for fraud to hurt the buyer.
It's not necessarily about misrepresenting your business to potential acquirers. In many cases, an acquirer may be interesting in a company's IP portfolio or product. Such an acquisition might resemble a liquidation but it's better than nothing.
If a business is not growing, but you're paying all the bills and still making money, why is that such a terrifying situation?
There are two reasons I can see for this fear. First, investors who are afraid to lose a lot of money that they put into the company. Second, leaders who are afraid to have to lay off a whole bunch of people because that's very painful. Are there other reasons that I'm missing?
Seems if you're bootstrapped and hire slowly, it's easier to keep balance in this situation.
If you look at the statements for a VC fund, you'll see at most 2-3 winners that provide huge returns, and another 42 zombies (returned between 0x and 3x), which have little impact on the fund overall.
That's 42 tedious board seats, and 3 enjoyable board seats.
Ask a VC, they'll say the problem is that limited investors tend to call portfolio CEOs at random, and ask for a reference. That's pretty much the only reason that they need to pay attention to the zombie companies. And that's why a company that shuts down is better than a zombie that just keeps living without growth. One less board seat to deal with. One less set of arguing founders. One less VP they need to help recruit.
Great points - also, since you have one less company, the VCs now have relationships with a bunch of potential new employees for their other companies.
While I agree 100% in the general desirability of bootstrapping and building a profitable business over taking investors money to build a growth machine, you do need to worry if you have taken investors money and have stalled. The investors will get rid of you as the CEO if you are not doing what they want you to do. If your company is not growing at the rate they expect they will find someone else who will be willing to do what they expect.
But their demands may be unreasonable, unrealistic, and perhaps even self-destructively stupid.
A number of companies have been killed because the original founders were fired and replaced by a more compliant team - who unfortunately had absolutely no clue how to run that particular business.
I'm not a fan of constant growth demands. Companies can fake growth in any number of ways, especially after winning a round. Ultimately it's down to persistent paying customers - not transient customers, and not "users" - and sales/margins. Anything else is PR for potential investors.
My conservative view is that it's fine to run a stable, profitable business without spectacular growth. You may get killed by the competition, but you're just as likely to be killed by the politics and finance of over-extending a business without a real case for it.
If all you demand is growth then that is what you will get - either real growth or something that looks like growth. Fake growth is none too helpful to anyone.
Because, unless you're something like a utility that just keeps on chugging at a steady state, most large businesses don't just "steady state" - they either grow or die, largely because some other competitor will grow faster and eat their lunch. Think of Yahoo - when they stopped growing it was largely because companies like Google and Facebook did a better job of attracting users.
To me your Yahoo example seems to prove the opposite of your point - growth stalled and yet it didn't die. It not only employs thousands of people but also earns billions in profit.
Make no mistake, while Yahoo hasn't died YET, that is exactly where it's trajectory points unless it is able to significantly grow revenues in its core business.
But I think it's a good example of a company that makes a lot of sales and profits but because it's not growing like some of its peers is considered a zombie or lame duck. It's the 3rd largest in traffic after all!
Confusion arises because who gets to say that's the metric that counts? What are your criteria for a business to be considered alive and healthy? Why are those your criteria?
Growth is not inherently positive, it depends on context. For example, if I tell you my cancer has grown 500% this year, it wouldn't be good news. And before you say this is a stretched analogy, it's not necessarily positive in tech either - if you're growing while bleeding money, all you're doing is bleeding more money. So how do you reach your conclusions?
Confusion arises for a lot of reasons, but cancer definitely isn't a useful analogy to discuss a blog post that starts "Most high-growth businesses..."
It's definitely the metric that counts for the kinds of businesses Andreessen Horowitz cares about.
Microsoft and Yahoo are particularly confusing examples, because they are both very large companies who enjoyed a lot of first mover advantage, but were started almost 20 years apart. And then ended up as very direct competition, before settling down as symbiotic partners. If you really want to use an example from biology, you should look at gut bacteria.
Pretty much sums it up, if you are not growing some business it means your dying, because every business that isn't a state mandated monopoly dies eventually. Older more established companies will have parts growing while other parts are fading, that reinvention cycle is critical to staying relevant. If you're a one product company and your growth slows, and you aren't growing the next thing, it means you're now heading toward non-existence.
I completely agree, but this might seem counter-intuitive to this forum, given the fundamental advice to new entrepreneurs: hyper-focus.
Once a company reaches a certain maturity, it "knows" that it needs to diversify to some extent. But it's hard to generalize about diversification strategies because it's tough to agree on the right metric for company maturity. Too many of the historical examples we could use for discussion directly relate to changes in what the state has considered a monopoly over time.
But is that really true? Companies like Basecamp seem to do fine with flat to modest growth. Yahoo is a good example, too. It remains a top 5 or 10 property with large revenues and modest profits. And yet it's pretty much considered a zombie.
> So, when growth slows or stops, feel free to freak out.
Or you could just save yourself the mental angst and build a profitable, sustainable business that doesn't require perpetual growth to keep the wheels from falling off.
"Sustainable" is a very trendy word these days, but the harsh reality is that in most cases it's not up to you. If your business is profitable it will usually attract competitors, and if they are growing and you are not, you will eventually be crowded out. Wal-mart vs. Mom-n-Pop's General Store, in the extreme case.
Most millionaires in this country are self-employed/small business owners, not VC-backed tech startup founders or early [insert unicorn name] employees.
Silicon Valley has convinced many people (you included apparently) that it's virtually impossible to build a business with meaningful and sustainable profits simply because there are competitors or other forces that limit growth and market size. This is simply not true.
Hint: you don't need to own every mobile home park in America to be a millionaire several times over.
It only matters if you have any morality since selling a company to investors for $10 billion when you know the wheels are about to fall off is not exactly the right thing to do.
This is capitalism. As people like to say, you're "obliged" to get the best deal for your current shareholders.
As long as you don't lie or omit required information, you're not required to point out that a particular growth metric is slowing down, and can point to a different one.
(and as one of the other comments has pointed out, quite often the acquirer will shut down the acquired)
I would hope as a CEO you would know of something major like the wheels falling off immediately after you exit. If the event was truly unknowable before you exited then you are morally fine, but to knowing exit when you know there are serious issues is not fine.
As long as everything is fully disclosed, an investor may purchase without recourse.
For example, M. Cuban achieved a $1 billion valuation of a company on $3.1 million in revenue and $2.7 million in net losses. This was transformed into a $5.7 billion exit months later. Yahoo's market cap was then chopped down by about 80% over the next few years.
There is still a moral duty of care towards non-sophisticated investors. You can make an argument that an investor that buys a company knowing all the risks and who is able to rationally evaluate the risk is responsible for their actions, but many investors are not able to determine the risks involved.
"Freak out", "Drop everything else", "Involve all the /key/ people", "Search maniacally for underlying causes" (scapegoat), "Assume the situation is self-inflicted", "search ... systematic[ally]", "Divide and conquer", "Consider a Plan B"
To my ears, all those phrases sound like "lay people off".
Getting rid of people would (or should) be the last thing on their minds.
Reducing cost does not mean increasing growth. If anything, it further damages any chance to recover.
Now firing someone clearly and directly responsible for the reduced growth on the other hand...
That sounds not entirely ethical / honest..