The excitement and buzz of Silicon Valley is definitely what makes it the technology capital of the world, but the peer pressure in the area tends to make many entrepreneurs lose sight of reality. In the Silicon Valley, almost every entrepreneur’s checklist includes: get venture capital, grow beyond wildest dreams, and do an IPO or sell to Google. With less than 1% of startups getting funded and less than 10% of those companies having a great exit or going IPO, you have a 1 in 1000 shot of meeting the goals on such a checklist.
Of the other 999, most of them generate very little if any revenues and just fizzle away. Some become viable technology businesses with none or little outside funding and achieve significant growth until they get somewhere between $5 and $20 million in sales. While such companies are growing, most think that their growth path will continue for quite a bit longer than it actually does. Generally, once they get to that plateau, they get stuck and have a difficult time growing due to one of several reasons:
- Their technology or offering starts becoming obsolete due to a new technology, service or website
- Their well-funded competitors start to take their customers due to more expensive marketing campaigns, lower cost, or a better service
- A company like Google starts to offer the product for free
Once you get to this point, it is very difficult to reverse the damage. At this point, many technology companies feel that if they just add value to the customer, they can usually offset the above negative factors. Sometimes, they can continue to grow, but usually either the competitor is one step away or the increase in value doesn’t warrant the increase in cost to the customer. So what is the best way to beat the plateau? When your company is at a long-term plateau, the answer is to sell the company or take on a majority partner that can help you grow through synergy, capital and management. If you don’t do one of these, you are definitely not getting the best return on your investment and there is a good chance you could lose your entire investment in a few more years.
In fact, the best time to sell a technology company is when you are growing. Our rule of thumb is that while the company’s revenues are growing greater than 20%, it is best to keep growing the company. When it starts teetering around 20% or dropping below 20%, it is best to sell the company. The reason is that selling a company exhibiting growing forecasts is much easier than selling a company exhibiting flat or nominally increasing forecasts. Buyers are typically looking at the forecasts of your company to determine its value, so it is much better being in a position to offer strong, growing forecasts that a buyer can believe.
Thus, the take-away here is that if you are self -funded or a bootstrapped technology company that saw or is seeing good growth, most likely, it will come to an end. Therefore, you have to make a decision whether you will continue trying to grow the company or whether you will capture the value you have already created for the company by selling when your company is in a strong position. If you attempt to continue to grow, there is a good chance, you will plateau and probably decline. Think objectively and choose the right path.