Hey HN, Justin here (the post's original author). Didn't expect this to get posted again. I'm happy to answer any questions here about selling your company.
I recently started a new company, Atrium, aiming to make legal services (such as M&A) for startups and tech companies easier as well.
Hard to say because so many things we did wrong were life/business lessons that we probably had to do wrong for me to be sitting here telling you I'd do them differently.
Are you asking what I would do differently if I started a new company today?
I started a new company (Atrium) and that occupies all my spare mental energy. When I was investing I felt like I had to fill my day up with something, hence snapping all the time.
I do occasionally post Q&As on Instagram stories now: @justinkan
I've read this a few times and having been through up and down periods it's clear that the most important part of this, is the following:
The best time to sell your startup is when you have many options.
It needs to be really emphasized that this is a very rare place for the vast majority of startups. That means this advice isn't generally applicable.
Which brings up the implicit question, why would you decide to sell your startup if you are clearly winning and growing at the pace that you can build a sellers market?
There are a lot of really good reasons you would, but I think all of them come down to: At some point you won't be able to be competitive in the market without the resources of a larger company. Whether that means you'll never be able get to an IPO, or you'll get out competed between now and then.
I've never read a good rundown of WHY they decided to sell, Twitch or otherwise.
So it's really a question of when, not if. Opportunities to sell will come in waves over time so how do you know which one you should take because it's possible to overshoot and then the whole thing goes bust (Digg, Foursquare etc...).
What I'd be interested in is the Founders guide to selling your company when it has relatively few options. That's the more common case, and one that where I think the opportunities there are missed by most founders. I never read stories about that, I've only read "we were on track to a billion in revenue and sold."
Interesting point. I could also write "The Founder's Guide to Selling Your Company When You Have Few Options" based on my experiences. It is a much more horrible process.
Re: why sell? 970 million reasons. Biggest one was that it seemed like good value for what we had.
Another reason: from my perspective (it may be different for other people involved) we were also at an inflection point where there was a steep power law distribution of people who owned content (game studios) and therefore a relatively small number of people had a lot of power over Twitch. Similar to Netflix pre-Netflix originals. That's not a good long term position to be in (hence Netflix originals). I think that's changed now for Twitch.
Sometimes it can just be that you’re tired and want to try something else.
Think of a job, Say after 10-20 years of very hard work. You probably either want a promotion or have changed companies. Just done something different. Sometimes for an owner the only way to do something different is to sell.
Another common reason is to get some skin out of the game. As an analogy do you invest all your stocks into one company? As an owner often all your finances are directly tied to the company’s success. It can be wise to diversify from just your company.
There are a number of reasons but these are just two common ones unrelated to how the company is doing, good or bad.
Great article and insight into a somewhat opaque process.
I sold my company in 2014 and the biggest surprise to me was how long and time consuming the process was. It really impaired my ability to run the company as efficiently as I would have liked during the transition process. And the stress of having to meet with buyers, but not being able to fully communicate the scope of the meetings to the team until the appropriate time was significant.
At the time of its sale to Amazon, I remember wondering how twitch could only be worth 1 billion compared to something like WhatsApp being worth 20 billion. It was purely from an engineering standpoint that I considered what twitch was doing to be vastly more impressive. It's three years later and Amazon hasn't been too overbearing with the changes they've made, but I wonder if JKan believes he got fair value for his company?
Taking $970mm seemed like a good deal given the level of risk. So from an expected value perspective it was a fair trade. Twitch has grown much since then, but you can't have regrets when it comes to trades.
Exactly, it could have gone the other way and the value could’ve crashed. As long as you got a fair price you should never look back at what could’ve been.
Back in the dot com days I had a friend who sold his options early. He made enough to pay off his house cash. The price kept going up and he could’ve been a millionaire. But then as we all know the bottom fell out and his company crashed hard, almost overnight. He was happy he sold out. Had he waited he may have gotten nothing. He may not have cashed out st the peak but he definitely got a good deal for his options. And every time some tells him he should’ve waited to get millions he tried to remind them he probably wouldn’t gotten zero if he waited. Most people still don’t get that, they just focus on what the highest value could’ve been, even if that’s the least likely price he would’ve gotten in reality.
Hey, thanks for answering! It's probably closer to the truth that WhatsApp was just insanely overvalued in comparison as FB has been very aggressive in eliminating anyone that threatens their dominance. I'm a long time twitch/JTV user who's been there almost since the start (close to 10-year anniversary now), so I'll take this opportunity to say thanks.
I've worked in software M&A advisory for 3 years now. This is an awesome guide. Anyone looking for professional advice (go beyond just reading blog posts and internet material) on this type of thing, feel free to reach out. Happy to speak for free initially and point in the right direction.
"Ramen Profitable" ≠ Profitable for most public companies, and even if they did, would be immaterial. I'm sure most of the 30% referenced above are barely profitable.
At Cisco, I operate at a roughly 20% profit margin on a roughly $50,000,000,000 annual business. Most acquisitions are immaterial from a profitability standpoint.
No offense intended, but the vast majority of startups in tech don't go through YC batches or anything like that.
The vast majority are startups you'd never hear anything about. They're started by a small team or one person, they build something on the cheap, try to market it, fail, then try to sell it. Or a non-technical person pays a coder to build a site but then it doesn't take off or the coder bails, so the non-technical person tries to sell it because they put money in so it must have value.
I have personally done that 3 times (even got real customers on one). I can name 5 new startups that I've head about in the last month just in my mid-sized city. I can't imagine how many are already out there slowly dying that I just never heard about.
Justin - you mentioned that investments bankers take 1-2% of the selling price. What percentage do all the rest of the closing costs take up (lawyers, etc)? What are these other closing costs?
Lawyers are one of those costs that can be a lot, or controlled, depending on how much negotiation happens. For billion dollar acquisitions usually you will pay $1-2mm in fees in my experience. For smaller acquisitions I've seen anywhere from 100-500k. Those are very loose ballpark numbers.
Other closing costs -- usually there will be an escrow service for any holdbacks. That usually is only tens of thousands of dollars - not expensive relative to deal size.
- Accountants (if you don't have dedicated resources)
- Your time
I can't stress this enough - the last one ends up being your biggest cost (although not direct). I've seen more than enough company's execs struggle with transaction fatigue because you're trying to sell a company while still running one. This is where good bankers/advisors come in.
Find a couple of your competitors and set up a bidding process, that is probably the best way to get the maximum out of a company like that. Aim for 10 years net or so, and be sure to stipulate that you reserve the right to refuse all offers.
I've written up a HN thread about this subject a long time ago:
From experience this is what you should be able to get if you negotiate hard and have more than one interested party at the table. If you can find only one taker and they are aware of it you will see a much lower value.
Also: for less than 10x net, if is growing steadily just hold on to it for a little while longer, but do continue to talk to interested parties, you will meet your goal sooner or later. Patience is the big secret to successful negotiation.
multiple is highly dependent on the growth rate, and makes no sense to talk about it without knowing how fast the company is growing. $100k/year growing 100% is very different than growing 10%.
Buying small websites is a hard business, because you have to maintain them. If one engineer can maintain 10 sites, it costs $2k/mo to maintain each, so the gross profit has to be well above that to make a business out of it. Maintaining 10 sites, each written independently with their own tooling choices, requires an engineer with a very large cranium.
It can be done if you pair it with an agency model. You keep multiple devs on hand who treat the sites as internal clients. Over time if you keep making acquisitions, you have less and less need to keep the external client pipeline full.
I recently started a new company, Atrium, aiming to make legal services (such as M&A) for startups and tech companies easier as well.