The first tech start-up I was involved with lasted 11 months from start to finish. I joined the company in the second month and was part of the journey for nine months.
The company was acquired in an all-stock deal after 11 months, at a valuation of mid nine figures. The investors who were part of the first financing earned a return of 65x...in 11 months. The investors who participated in the second financing made 15X their investment...in four months.
I did the math and determined that the team had generated $21 per second in investor wealth over the company’s lifetime. $21 per second.
How did this happen?
We had assembled an excellent team, both on the product side and on the business side. Our engineering talent was amongst the best for highly technical semiconductor chip design. The product concept and solution offering was strong, and several would-be acquirers could see the needs that our product-set was going to address. The technology we were developing and the solution offering would be second to none.
There was also a lot of luck, as our timing was very good. The telecom/datacom market was ramping up with huge infrastructure needs to support the first wave of the internet. The stock market was on a large and lengthy upswing, so publicly-traded companies were making acquisitions with their stock and not spending any of their cash.
To the companies being acquired this was perfectly fine, as once a brief lock-up period expired the employees and investors could sell their shares in the open market. All the employees were granted stock options and if they exercised their options and sold their shares during one of the many opportunities we had to cash-in, every employee made enough money to buy a house or pay off a mortgage, buy a nice car or some other indulgence. The first twenty employees did extremely well and earned life-changing money. We also offered the employees two opportunities to purchase stock alongside the financing rounds, giving them the ability to further invest in the business, and really invest in themselves. Several of us took advantage of this opportunity and it paid off.
We were also very fortunate to be acquired when we were. About six months after the acquisition was completed the stock market went through a significant crash. Share prices went down considerably and public companies halted their growth-by-acquisition strategies. Had we waited another four to six months to accept an offer, an acquisition would not have happened. Now, the company was also in the midst of its third financing round and there was considerable investment interest from top tier venture capital firms. Raising a substantial amount of money to support the company’s product development and marketing plans would not have been a problem. We would have raised enough to support operations and some headcount growth for at least another 18-24 months.
In fact, it was one of the debates the leadership team and Board had - do we accept the offer in hand, or raise money to continue to build the company and seek an even larger exit in the future. Venture capital backed tech start-ups face this dilemma all the time and not always make the right decision. The tech sector graveyard is full of companies who passed on acquisition offers only to run out of money and shut down operations some time later.
Had we passed on the acquisition offers entirely, raised money and continued to operate, the business would likely have failed. The telecom/datacom industry realized that the traffic on the internet wasn’t growing as fast as first anticipated. Yes, public access to the internet was skyrocketing, but the applications and the amount of data flowing through the internet infrastructure was not going to strain that infrastructure anytime soon. Therefore, the need for processing and data management tools the likes of which we were developing would end up being at least a decade away. Hindsight tells us our products were ten years too early. They were great and super valuable, but our market timing was way off.
We were lucky and we were smart. The leadership and Board looked at what business risks lay ahead of us, as a stand alone business. We asked ourselves if it was better to raise significant funds and weather those challenges on our own. Or, was it better to become part of a larger organization and have more resources to deal with those challenges, and the ability to deal with them for longer periods of time. Some would argue that a “nuclear winter” in the tech sector lasted for two years. It would be some time before mobile access to the internet became commonplace and thus even longer before mobile applications or apps consumed considerable bandwidth on the public internet infrastructure.
$21 per second is an insane amount of money. Why did it happen? Did we plan for this to happen?
In a way, we did indeed plan for this. We didn’t specifically orchestrate this massive exit, but we did what any good entrepreneur and leadership team does. We establish some solid objectives that when achieved would generate value; based on those objectives created a strong strategy around markets, products and product introductions, to achieve those objectives; we assembled a world-class team of product developers, which is what a deep technical solution needs; we had the early foundation of a strong business team, but not a large team because our products were still a while off from launching into market...so we didn’t spend cash too early on things we didn’t need in the first 12-18 months. All of this indicated that the business was well-operated as we implemented our strategy. We had the foundation of a great company.
Business leaders need to always remain focused on executing the plans associated with their strategy, to achieve the stated objectives. The exit or liquidity event will take care of itself, if you execute.
But yeah, $21 per second is *crazy*
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Thank you for investing time in reading this post. Questions and comments are always welcome.
Shail Paliwal
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