Of course your VCs don't want you talking to Corp Dev types. Their interests in this matter are not aligned with yours. They want you focused on turning your startup into one of those Big Companies yourself, because that is the outcome that would maximize their return on their investment.
The flip side of that is that the odds of you actually pulling that off are pretty slim, historically speaking; and if you try it and fail you walk away from the table with nothing. Whereas if you get acquired, you walk away with money in your pocket. Maybe not as much as theoretically would have been there if you had persisted, but real money in your pocket beats theoretical money any day.
So the logical role model for a founder looking out for her own self-interest is Kenny Rogers: "You got to know when to hold them, know when to fold them; know when to walk away, and know when to run." (https://www.youtube.com/watch?v=Jj4nJ1YEAp4)
To your VCs, a modest exit is not really that much better than a complete loss; all that really matters is how many home runs they can put on the board. If you happen to swing and miss, that's no great tragedy for them. But it could be a tragedy for you, since you'll only get a few times at bat in your life, and if you whiff them all you could be worse off at the end of your career than you were at the beginning.
>Do not enter acquisition talks unless you are ready to sell your company. Negotiating an acquisition is the most distracting thing you can do in a startup: going through M&A is an order of magnitude more distracting than raising money. All of your ability to run the day-to-day operations of your company will grind to a halt. You should only enter an acquisition process if 1) you are certain you want to sell the company and 2) you are likely to get a price you will accept. Don’t talk to potential acquirers “just to see what price you can get.”
Suppose I am a cofounder of WhatsApp. We just booked 10M[0] in revenue and are seeing a lot of success. I'm pretty proud of myself and see big things for WhatsApp.
Though really, my ultimate goal is to compete with Elon Musk putting humans on Mars. I figure I need a few Billion to do that. But that's just a dream.
Facebook "corp dev" comes knocking. I read the news and see they bought Instagram for 1B, which isn't going to get me to Mars, and I'm not sure what they are offering, so I take PGs advice and tell them no thanks. However, if I take that meeting, I end up with several Billion dollars...
Very true. I think this can be generalized to a scenario when an investor reaches out to you and you tell them to circle back in a few months as the company is busy in building out the product.
The same happened in Google's case when they asked Ron Conway to come a few months later to invest. And so he did. For sure Google had a good team, product, etc., but this sure enticed Ron to invest in one way or another.
It's all about expected values and your subjective preferences over those. All of this is determined under circumstances of uncertainty.
You can make a reasonable estimate of the current value of your company, and a reasonable estimate of how likely you are to be offered that value.
You can also make a reasonable estimate of the future value of your company at time X, and a reasonable estimate of how likely you are to be offered that amount at time X.
There are large margins for error in these calculations. You can determine, though, the net present value * probability of the current and future options. The goal of this exercise should be to determine not the exact values (because your error margins are too big to have large confidence in the resulting numbers), but to determine which option you like more.
It's ultimately a subjective decision, but if you are not confident that you will get enough money to definitely want to sell now, then wait.
The original article and the one I linked both put the advice in more absolute terms, but it is obvious that the decision to sell or wait is a difficult one. The goal of both articles is not to answer the question, but to help you understand first that it is not a casual decision, and provide details which may help you decide whether you want that process now.
That scenario seems extremely unlikely though. If you talk to FB with the mindset of "just to see what price you can get", I doubt they would have gotten anywhere near the 19B price tag. That was an extremely well negotiation process that leads to the price: they must have at least some idea what's going on.
In this particular case, I can almost guarantee that the reason the deal ended up this huge is that the founders absolutely, positively didn't want to sell, and especially not to facebook. And facebook had to literally make them an offer they could not refuse (in the sense of the amount of money for every employee... not as in the Corleone sense).
You can glean some idea of why that was from this public information https://blog.whatsapp.com/245/Why-we-dont-sell-ads. This is in direct voice of Jan Koum, the founder and CEO of whatsapp. That gives you some idea of his personality and it's an entirely accurate one. I'll be willing to bet large amounts of money that the Zuckerberg himself had to engage in a full court press before getting a response at all.
It's usually a mistake to talk to corp dev unless (a) you want to sell your company right now and (b) you're sufficiently likely to get an offer at an acceptable price. In practice that means startups should only talk to corp dev when they're either doing really well or really badly
It's that "it depends" that initiates the chain of events that PG is cautioning against. Judiciously reining in curiosity when history has demonstrated it to be a fruitless endeavor and a distraction is the message of this essay.
Well if you do what to at least have the discussion, one tactic might be to throw an optimistic-but-reasonable valuation at them.
"Yeah, that'll be $50 million..."
Then when they push back or ask for more info, just more or less repeat that and say you're too busy managing your growth to spend more time on it unless they're willing to move forward with an offer on paper. Just turn the whole thing around. If they go away, you're done (which will probably happen 99.9% of the time). If not, maybe you'll actually get it.
You could even pull the exploding term sheet trick backwards on them. "We wouldn't be interested in less than (insert biggish number here), and we'll need a response in two weeks." (Obviously word it more politely.)
Maybe it's more like wandering onto the used car lot in the hopes that they'll surprise you with a deal you can't pass up. Maybe they will, but the process of getting there is not one you will enjoy.
Does it still depend if finding out what the offer is will derail you for 3 months and almost certainly result in an unsatisfactory answer (or worse)?
I think that's his point: In theory you might like to know the answer, but in practice unless you are in a very strong or very weak position (and know it), you shouldn't let yourself be distracted this way, as it is incredibly unlikely to be worth the time.
There are of course circumstances where people absolutely do not want to sell their company, but for the rest of us... it depends.