You ignored the Venture Industrial Complex while building your technology business the old-fashioned way, one customer at a time. You lived The Bootstrapper’s Narrative facing the roadblocks and celebrating the rewards along the way. But as you look at the opportunities and challenges that lay ahead, you find yourself wondering what’s next?
Don’t worry, you are in good company. Every successful founder eventually faces this decision sooner or later and there are several realities that will influence how proceed:
- Your business looks vastly different than it did years ago; you might not even know all the employees’ names and you certainly haven’t met all the customers
- Your senior team is capable of handing the day-to-day operations
- You are paying yourself well because the business can finally afford it and you’ve even taken a couple of nice vacations with the family
- You still have a passion for the business and most people still identify you with it, but you feel more removed from it than ever
- You have nearly 100% of your net worth tied-up in the business, and your friends (maybe your financial advisor, too) have been telling you for a while that you need to diversify
So where do you go from here? Well, the good news is because you built a profitable bootstrapped technology company, you have choices. Each one provides a mix of personal, financial and strategic benefits. Let’s take a look.
Stay the course: Plow ahead into the business to take it to the next level with you and your team. This will require some new investments in technology, sales processes and marketing execution. It will also require you to forego taking profits for yourself and put them back into the business with no immediate payoff. There’s a chance that you might come to the conclusion (maybe you already have) that a few of your critical employees who helped get you to this point aren’t well-suited to take the company to the next level; you might have to make the difficult decision to replace them with more experienced people or add a management layer above them. You aren’t sure where to find the talent, how much they’ll cost and if they’ll be any better in the end than your current team. But choosing this path can also be extremely rewarding because nobody knows the business or has the clarity of vision to execute the long-term plan than you. There are plenty of great resources to help you through this phase from mentors and coaches other CEOs who have faced the same challenges. Organizations like the Young Presidents’ Organization (YPO) are great places to look for help. The key is to find someone to help you take an outsider’s look at where you can make low-risk, high-impact improvements to your company. Plus, you still own the business so you get to keep the reward for your effort.
Pass the baton: If you don’t have the risk appetite left to make the huge financial and personal commitments required to stay the course, maybe you can pass the business on to your employees. Can they buy it from you? All at once or staged over time? The practicality of this plan will depend on the size of the company and its potential value. In the technology industry, most successful companies that reach this stage can draw values way out of reach of most employee buyouts, but give it some consideration. There are plenty of ways to structure a transaction like this and if there is a lot of effort, transparency and patience around the table it can be a great way to transition over time to people you already know and trust.
Raise equity: Don’t think venture capital think, “recapitalizing.” You were disciplined and built a profitable business from the outset so you don’t need the money for the business. What you might want, on the other hand, is some liquidity for yourself without giving up majority ownership control of your business. These transactions are generally completed by traditional private equity funds looking to invest potentially large sums for a significant minority stake of your company. In return they receive board representation and other types of provisions giving them some say in how the business is run. In return, you get to reduce your personal risk by taking their money and putting it in your bank account, while still owning your business. Just read the fine print, because while you still own control, the new investor will have a lot of say in the key decisions and you’ll have to eventually get their money out through a future transaction at some point in the next several years.
Sell to a “strategic” buyer: This usually requires hiring an outside advisor or banker to solicit bids from the companies you’ve been competing with all these years. Maybe a buyer has already approached you. If so, still suggest hiring someone to help you negotiate the deal. The good news about strategic buyers is that if you have been a big enough thorn in their side they can likely afford to pay you a premium price compared to a financial buyer. But what happens to your team when you sell to a competitor? Your brand? Your customers? You need to balance these tradeoffs long before heading down this path, because the non-financial issues might outweigh the big payday.
Sell to private equity: Think about this as a combination of the last two choices: you sell to a financial investment firm instead of a competitor but you sell a majority of the company instead of retaining control. While you can remain involved in the business as an equity owner, board member and advisor, you are no longer in control. The advantage of this choice is that you still get to participate in the growth of the company both financially and strategically. You have upside and engagement without the personal expectations to deliver results. The disadvantage of this path is that while you are still involved, you no longer have the final say. For many founders, this can be a tough transition; to ease this process make sure you have complete trust in your financial partner to look after your team and improve the business without destroying the culture you spent so long building. You can only get comfortable taking this leap after spending time with the investors, calling their references (from winning and losing investments, from people they hired and fired) seeing how they treat you and your team during their due diligence process because their behavior certainly isn’t going to get better after they own the company.
Any one of these paths can provide you with a great solution and they are not mutually exclusive. You could take an investment from a strategic partner or you could raise debt from a private equity fund without giving up equity. You could also wait and make your choice a few years down the road. But the path you choose to pursue should be driven by a deep examination of your professional, personal and financial goals long before you start the journey.