Tag Archives: Exits

“Where I’ve Been” and the Need for an Exit Strategy

17 Aug

Where I’ve BeenThe management consultant in me wants to tell you that in developing any new business, particularly a web 2.0 software application, social network, or web-enabled service, it is critical that an entrepreneur think about the “exit.” The questions are “Will I sell this? To whom? Why would they buy it?” It is the answer to these questions which should shape your strategy and business. Nevertheless, not ALL big success stories follow this logical path, and another just emerged yesterday.

It was announced yesterday that “Where I’ve Been,” a Facebook application developed by Craig Ulliott of Philadelphia, was acquired by TripAdvisor for $3 million. The application currently boasts around 2.3 million users, and has been in existence since June of this year.

Yes. JUNE.

What is phenomenal about this story is how quickly this all came to pass, and yet how little of it appears to have been down to planning and the development of a prudent exit strategy up front. Just about two months ago, Ulliott complained “I have 250,000 users, now what?”.

Well my application has become incredibly popular, and I’m very excited about it, don’t get me wrong!

But I’m a freelance developer, not a company, and its put a powerful 4GB $450 a month dedicated server on 3 backbones at maximum load and is pushing 2000GB a month in traffic. It doesn’t make me any money and I’m getting hundreds of comments and emails daily about it.

How can i support it and maintain it? What do i do with it now? its growing at a few users a second, so should i get another server each month?

It is amazing that a young guy can create a piece of software which fits a need he sees, and sell it to cash in big time. Just two months ago, Ulliott had no idea what to do with this idea. Today, he is $3 million richer. It’s a compelling “carpe diem” type story about just doing something you love.

Facebook App developers beware, however, the current landgrab will not last forever, and your chances of making it big are much better if you have a plan.  If you can tailor your software to better match the needs of a potential suitor, while still catering to the needs of your users, do it.

One final thought on this news is how it hooks into the SeedHive concept.  When I originally read about Ulliott’s post two months ago, I thought “this is exactly why SeedHive needs to exist.” It is exactly the kind of question that SeedHive users would enjoy batting around for an hour or two. It would also be the kind of place where people would ask up front what your exit strategy is, and if one doesn’t exist, encourage you to develop one.  Because we ALL can’t be this lucky.

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Why the VMWare IPO Doesn't Dispel the Possibility of Crisis, But May Signal a Shift

15 Aug

VMWareThe successful IPO yesterday of VMWare does little to concerns I have flagged in two of my recent posts about how the credit crisis and shifting economic conditions may be making the US a less attractive and successful center for entrepreneurship (“Buckle Up: Why Entrepreneurs Should Be Scared of the Shifting US Economy” and “Will a Debt Crunch Drive Smart Minds from VC, Entrepreneurship?”). The basic reason is that an IPO is an equity event, with investors buying up ownership of the firm, rather than a debt-leveraged buyout or credit-based investment that will be paid back.  It neither proves that talent is continuing to flow to the startup world, or that weak economic conditions are not affecting the chances of successfully launching a business.

I am writing today in response to a short message I received from Tony, a friend and reader of this blog, asking whether VMWare’s IPO changed my opinion about current conditions for entrepreneurship. VMWare’s first day of trading witnessed the stock spending most of its first day well above the opening price of $29 a share, closing in the mid $50s (See Alarm:Clock – “VMWare IPO Crushes It“).

While the VMWare IPO says little, if anything, about the credit crisis, it may indicate that the market for “exits” for entrepreneurs may be shifting back in the direction of equity markets. In recent years, private equity buyouts have become a credible exit option for startups, with large investment firms using significant debt leverage to purchase an entrepreneurial business. This is in addition to the more traditional exit for startups, through acquisition by another firm in its industry, which would typically involve a significant amount of debt to finance the purchase. If credit is tight, and the cost of borrowing remains too high, these options could well become more expensive, raising the bar that startups must meet before they have a chance to be acquired.

Therefore, an IPO may very well become the most attractive way for entrepreneurs to sell their businesses and “cash out” on their work.  It is not dependent on the credit market, and relies instead upon the perceived value of the company.

Declaring IPO as the clear path forward on the basis of a single exciting tech IPO would, of course, be premature. More evidence in the form of other successful IPOs, weaker acquisition and buyout numbers would help support the conclusion. In the meantime, however, it remains an interesting trend to be on the lookout for.

So what about the gloom and doom facing entrepreneurs that I described in my previous posts? It seems a successful IPO (of a company that was doing well and preparing for this event well before the credit crisis began last month) will do little to convince smart candidates that moving to an operational position in a startup is the right move to make in todays market. Nor does it mean that a weaker dollar and slowing US economy are any less of a threat to startups and their VC backers.