If You Raise Investor Capital, You'll have to Sell Your Company.

If you've read this newsletter for any time or you've attended one of my seminars, you've heard me say: 'when you raise capital from equity investors, you're agreeing to sell your company in 4 to 7 years.'  This is commonly referred to as an exit event.

It seems that many early stage entrepreneurs don't believe this.  Quite a few say they're planning to buyout investors with revenue from the business.

Of course a cash-flow funded buyout isn't possible because each dollar of revenue that would contribute to the buyout actually increases the value of the business - thereby requiring more cash to fund the buyout.  Ultimately, the only option is the sale of the company to a larger enterprise.

I think many business owners resist a sale because they think it means they won't be part of the company post sale.  In fact, a buyer usually wants management in place after the sale to reduce the risk of the purchase.

An article from this month's Inc. magazine, "Why I sold Zappos" shows how a successful entrepreneur, Tony Hsieh, faced this situation last year with Zappos.

Zappos (with sales of $1B in 2008) is a company committed, above all else, to creating a culture of happiness.  Hsieh believes this culture permits Zappos to offer better service and, thereby, create higher profitability.

In 2009 Hsieh faced possible termination as the CEO if he didn't effect the sale of Zappos.  A majority of the board of directors (investors) wanted to sell, but Hsieh saw the company as his "calling" and didn't want it to end up being bought by any organization.

Ultimately, the company was sold to Amazon, Hsieh stayed on as CEO and has continued to develop the company culture.  His investors were (happily) bought out (with Amazon stock) and he was able to continue to build the business and its culture of happiness.

The article is a good read for any entrepreneur who wants to build an investor funded business.

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On the personal side we just got back from taking my oldest daughter to Florida State University for orientation. 

I don't know about you, but when my parents brought me to college (1981), they, like all other parents at the time, unloaded my stuff in the dorm room and went home.  There were no programs or information sessions for them to attend.

Well, apparently that's all changed.  During the one and a half day orientation we learned about the psychological issues freshman deal with, the resources on campus for dealing with all manner of things from roommates, to bugs in the dorm, to campus safety, and heard from a motivational speaker on scripts (rewriting your life) and being in charge of your life and decisions.  It was all very interesting and well done.

Ed