It would have been a bargain to buy us at an early stage, but companies doing acquisitions are not looking for bargains. A company big enough to acquire startups will be big enough to be fairly conservative, and within the company the people in charge of acquisitions will be among the more conservative, because they are likely to be business school types who joined the company late. They would rather overpay for a safe choice. So it is easier to sell an established startup, even at a large premium, than an early-stage one.
I think it's a good idea to get bought, if you can. Running a business is different from growing one. It is just as well to let a big company take over once you reach cruising altitude. It's also financially wiser, because selling allows you to diversify. What would you think of a financial advisor who put all his client's assets into one volatile stock?
How do you get bought? Mostly by doing the same things you'd do if you didn't intend to sell the company. Being profitable, for example. But getting bought is also an art in its own right, and one that we spent a lot of time trying to master.
Potential buyers will always delay if they can. The hard part about getting bought is getting them to act. For most people, the most powerful motivator is not the hope of gain, but the fear of loss. For potential acquirers, the most powerful motivator is the prospect that one of their competitors will buy you. This, as we found, causes CEOs to take red-eyes. The second biggest is the worry that, if they don't buy you now, you'll continue to grow rapidly and will cost more to acquire later, or even become a competitor.
In both cases, what it all comes down to is users. You'd think that a company about to buy you would do a lot of research and decide for themselves how valuable your technology was. Not at all. What they go by is the number of users you have.
In effect, acquirers assume the customers know who has the best technology. And this is not as stupid as it sounds. Users are the only real proof that you've created wealth. Wealth is what people want, and if people aren't using your software, maybe it's not just because you're bad at marketing. Maybe it's because you haven't made what they want.
Venture capitalists have a list of danger signs to watch out for. Near the top is the company run by techno-weenies who are obsessed with solving interesting technical problems, instead of making users happy. In a startup, you're not just trying to solve problems. You're trying to solve problems that users care about.
So I think you should make users the test, just as acquirers do. Treat a startup as an optimization problem in which performance is measured by number of users. As anyone who has tried to optimize software knows, the key is measurement. When you try to guess where your program is slow, and what would make it faster, you almost always guess wrong.
Number of users may not be the perfect test, but it will be very close. It's what acquirers care about. It's what revenues depend on. It's what makes competitors unhappy. It's what impresses reporters, and potential new users. Certainly it's a better test than your a priori notions of what problems are important to solve, no matter how technically adept you are.
Among other things, treating a startup as an optimization problem will help you avoid another pitfall that VCs worry about, and rightly�taking a long time to develop a product. Now we can recognize this as something hackers already know to avoid: premature optimization. Get a version 1.0 out there as soon as you can. Until you have some users to measure, you're optimizing based on guesses.
The ball you need to keep your eye on here is the underlying principle that wealth is what people want. If you plan to get rich by creating wealth, you have to know what people want. So few businesses really pay attention to making customers happy. How often do you walk into a store, or call a company on the phone, with a feeling of dread in the back of your mind? When you hear "your call is important to us, please stay on the line," do you think, oh good, now everything will be all right?
A restaurant can afford to serve the occasional burnt dinner. But in technology, you cook one thing and that's what everyone eats. So any difference between what people want and what you deliver is multiplied. You please or annoy customers wholesale. The closer you can get to what they want, the more wealth you generate.
Making wealth is not the only way to get rich. For most of human history it has not even been the most common. Until a few centuries ago, the main sources of wealth were mines, slaves and serfs, land, and cattle, and the only ways to acquire these rapidly were by inheritance, marriage, conquest, or confiscation. Naturally wealth had a bad reputation.
Two things changed. The first was the rule of law. For most of the world's history, if you did somehow accumulate a fortune, the ruler or his henchmen would find a way to steal it. But in medieval Europe something new happened. A new class of merchants and manufacturers began to collect in towns. Together they were able to withstand the local feudal lord. So for the first time in our history, the bullies stopped stealing the nerds' lunch money. This was naturally a great incentive, and possibly indeed the main cause of the second big change, industrialization.
A great deal has been written about the causes of the Industrial Revolution. But surely a necessary, if not sufficient, condition was that people who made fortunes be able to enjoy them in peace. One piece of evidence is what happened to countries that tried to return to the old model, like the Soviet Union, and to a lesser extent Britain under the labor governments of the 1960s and early 1970s. Take away the incentive of wealth, and technical innovation grinds to a halt.
Remember what a startup is, economically: a way of saying, I want to work faster. Instead of accumulating money slowly by being paid a regular wage for fifty years, I want to get it over with as soon as possible. So governments that forbid you to accumulate wealth are in effect decreeing that you work slowly. They're willing to let you earn $3 million over fifty years, but they're not willing to let you work so hard that you can do it in two. They are like the corporate boss that you can't go to and say, I want to work ten times as hard, so please pay me ten times a much. Except this is not a boss you can escape by starting your own company.
The problem with working slowly is not just that technical innovation happens slowly. It's that it tends not to happen at all. It's only when you're deliberately looking for hard problems, as a way to use speed to the greatest advantage, that you take on this kind of project. Developing new technology is a pain in the ass. It is, as Edison said, one percent inspiration and ninety-nine percent perspiration. Without the incentive of wealth, no one wants to do it. Engineers will work on sexy projects like fighter planes and moon rockets for ordinary salaries, but more mundane technologies like light bulbs or semiconductors have to be developed by entrepreneurs.
Startups are not just something that happened in Silicon Valley in the last couple decades. Since it became possible to get rich by creating wealth, everyone who has done it has used essentially the same recipe: measurement and leverage, where measurement comes from working with a small group, and leverage from developing new techniques. The recipe was the same in Florence in 1200 as it is in Santa Clara today.
Understanding this may help to answer an important question: why Europe grew so powerful. Was it something about the geography of Europe? Was it that Europeans are somehow racially superior? Was it their religion? The answer (or at least the proximate cause) may be that the Europeans rode on the crest of a powerful new idea: allowing those who made a lot of money to keep it.