To Flip or Build, that is The Question
Silicon Alley Insider, has a thought-provoking essay today by NYC-based VC Ed Sim, on whether entrepreneurs should a) sell a startup on the hype of buzz, or b) double-down and build it to last. It’s not a new question, but it is an increasingly important one at the stage of the market we’re in: cresting the top of a bubble…I mean ‘cycle.’
Plenty of talking heads have produced treatises on this question over time, but Sim’s addition is worth reviewing:
As I started thinking deeper about this question, I was reminded of the old Gartner Hype Cycle [for] the maturity, adoption and business application of specific technologies. Gartner says there are 5 phases in a Hype Cycle: 1) Technology Trigger = “product launch” 2) Peak of Inflated Expectations = “height of buzz” 3) Trough of Disillusionment = “this is harder than I thought” 4) Slope of Enlightenment = “the broad market is finally ready” 5) Plateau of Productivity = “better have my next product ready.” [Sim's translations = "in quotes"]
Then Sim superimposes a “startup lifecycle” on the same Gartner map to, “represen[t] the choices an entrepreneur has to make in the continuing saga of build or flip.” He calls it the BeyondVC Startup Cycle:
Sim concludes that selling at the peak of a Hype Cycle, such as we are in now, is the easier — and, therefore, possibly better — path:
1) [The] easier, less risky choice to make is [selling] at the Peak of Inflated Expectations/height of buzz…where an entrepreneur can maximize short-term value as acquirers will buy more on vision … than on business fundamentals.
2) If you decide to build for the long haul and go for the home run, it will take you a fair amount of effort and time to create the same value that acquirers will pay today; they will expect more [from] mature companies.
3) Companies that sell [at the Hype Cycle peak] may forego going big. [But] if they do not…they will have to live up to their hype in the future. As companies mature the valuation of a startup turns from pure strategic value to one where it is based more on actual revenue multiples and market comps.
We still think there is value in ‘The Build,’ but Sim sure has a point in a market like this. For more resources see his original piece here and Gartner’s work on “Understanding Hype Cycles.”
Here’s a related Business 2.0 article from 2004: http://money.cnn.com/magazines/business2/business2_archive/2004/10/01/8186689/index.htm
Carleen, Thanks for the add! Unfortunately it’s not my work – the piece was written by NYC VC Ed Sim. Sorry if that wasn’t clear in my piece. You can read Ed’s original here: http://www.beyondvc.com/2007/10/should-i-flip-o.html and my edit here: http://www.alleyinsider.com/2007/10/should-you-sell.html
My Bad, Peter. Apologies to Ed. Is fixed. Carleen
Carleen-thanks for the link. BTW, I don’t advocate flipping, I am just providing a framework to think about the decision. As part of that framework, entrepreneurs need to understand that as the company matures, the valuation metrics go from pure strategic technology value to more concrete milestones like customers, revenue, etc. In the end, every entrepreneur should make their own decision based on their appetite for risk and their passion to build great products for customers. If entrepreneurs focus on building their business, then good things will happen. As a VC, I like to invest in people that want to build great products in big markets and not to just flip a business. If during our work together opportunities to sell present itself, then we need to look at it with the lens above.
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[...] FoundRead: To Flip or Build, that is The Question. Its an age old question, which is being asked again. My preference is build it, of course. [...]