There are big fish and small fish. There are pretty fish and ugly fish. Small pretty fish have different fates than big ugly fish. Some fish live comfortably off a Palau beach but others just get the skewer. If you're doing your own self-funded software company, you've got one of three strategies: become the big fish, avoid the big fish or get eaten by the big fish.
Each strategy propels the company towards a certain outcome ... and away from others. For the three strategies, the three likely outcomes are: go public, pass the company on to your kids or sell out.
You may be young and eager now. But, like a fish, you won't live forever. Someday, you won't be running the company. Ask yourself: How do you want the company to end? Then look at your company and ask: In what ways can the company end? An angelfish will never grow into a whale, no matter how much she eats. Some outcomes aren't possible with some companies. Decide what is acceptable to you first, then build a company where that is possible.
For example, if going public sounds good to you, be ready to discard small safe ideas for big ideas. Be ready to court venture capital. Be ready to bring people and money on board early and pay the price for them. That is, if you want your company to become a whale, plan to feed it. But know this also: whales are few and far between for self-funded companies. The SAS Institute is the largest self-funded software company that is still privately held. It is the exception, not the rule.
Most self-funded companies, though, even the most respected ones, seem stuck, unsure what they want out of the company at the end. They will openly confess that they are not whales nor do they want to be. But, are they delicate angelfish, hoping that they'll live for 30 years until their budding offspring can take over? Or are they fodder for a shark?
If they haven't thought and don't know, they are probably starfish, working and reworking the same patch of coral, adding a little territory each year, taking it day by day, not knowing or caring much about what is beyond in the rest of the sea. Their ultimate outcome is probably grim: an anchor smashing them on the head one day or being a snack for some small predator, then forgotten.
Going the starfish route, seeing where the day takes you, is attractive to software engineers. To us, business planning is as nasty as swimming through an oil slick. We say that we just want to build "good software" and we are tempted by the notion that, by concentrating on producing good software, the business part will naturally work itself out. But doing business planning by choosing where we want our companies to go can be a very significant edge.
When we look at it, avoiding the big fish is both hazardous and unattractive. How many times can a smaller fish dart into the safety of the coral when a shark happens by? Be a little too slow, once, and you're sushi. Consider that few companies survive from the 1970s. When you retire in 2030 or 2040, will your company have survived all those years? Even if it does, that fish will have lots of cuts and scars. Like it came out of a knife fight with Rambo.
When you want to pass the company on, will your little tadpole even want it? You may love writing software and jousting with the software sharks. Will he? Maybe not; he might prefer cash.
Cashing out, probably by feeding your self-funded company to a bigger fish, is the third fate. Build to flip? Shocking! But, no, this is not the old dot-com notion of a build to flip company. It is about choosing products, doing design and generally running your company such that it can both be profitable and be attractive to a much larger company.
But what do big fish like to eat? Technology? Profits? Sales?
Here's a table based on my own analysis:
| Company Sale Price | Acquired Company's Technology or Products | |
| $10M | Respectable products with no strategic value. | |
| Interesting technologies with no sales. | ||
| $50M | Market-leading niche products. | |
| Strategic products appealing to mid-size players. | ||
| Also-ran strategic products appealing to large players. | ||
| $150M | Too-early-to-tell strategic products appealing to large players. | |
| $500+M | Market-leading strategic products appealing to large players. |
Now, admittedly, this analysis has about as much in common with formal statistical methods as a hammerhead shark has with a golf ball. I basically made it up. But, if your own observations jibe with mine, you can conclude a few things.
Technology isn't worth much. Companies pay for markets, not impressive technology. The fanciest technology or the best written code without a market is like a yellow goldfish, interesting but still only worth 59 cents.
Companies with no strategic value are only worth their sales. Usually, sales is only a few million dollars per year. If the larger company acquires the smaller company for only its sales, it usually only pays 2x or 3x.
Move out of the niche. If you already have a niche product, invest in more aggressive non-niche products. Even market-leading niche products peak out quickly. When your company becomes a bigger fish, stop chasing the minnows.
Large players can afford to pay a lot more. Even if your company is worth $100M and is a perfect strategic fit with a mid-size company, the mid-size company can't pay because you'd end up owning them. No CEO wants to buy a company but give up control of his own. Only multi-billion dollar companies can pay hundreds of millions and still be safely in charge.
Popularity and strategy drive prices. If you want be eaten, only do things that make you yummier.
Now, as a software engineer, you may be wrinkling your nose. Phew, what stinks? Oh, it's all this talk about being popular and making millions. Yuck. You just want to make "good software". You created a company to "do things right" and have fun. A programmer's paradise. Only enough sales to stay independent and buy some new hardware. Filet mignon, instead of tunafish, every once in a while. Erik's Delicafé instead of Subway. Sure, millions are nice but selling out stinks.
Do you have to try to make millions?
Yes, you do.
Success in software is measured in code quality; success in business is measured in dollars. Making more money faster means that you could start one or two more companies in your lifetime. Developer-friendly companies. Which means more software that is well-written. And more software that is interesting. With more money, you could do more. You could even sponser open source projects. Don't be a Ben and Jerry's shop just because you are afraid to dream too big. If you've got a shot at being Amazon, go for it.
Next, consider your employees. You are the big fish in a small fishbowl. If you have 10 employees and you sell the company for $10M, you'll likely get $8M. What about those guys? You like those guys, right? They trusted you, helped you, supported you and stood by you. But, if you aim low, those guys won't get squat. Let Employee #10 get more than bus fare. Make him millions, too.
Finally, what about the rest of us? Which is more inspiring: a few successful self-funded niche companies or a school of self-funded players who sell out for $100M+? It's a pity that so many techies build these little starfish companies. Do us all a favor and build a shark. Don't just be a technical example; be a business example, too.
Go fish.
E-mail Dan Howard about this article
