Most people assume that price is what matters most in a financial transaction. When you are raising money, you want to get the money at the highest price (least dilution). When you are selling, you want to get the highest price for your company. But that is not always the case.
Price matters, but my experience says that it often does not matter the most. In many of the venture deals we have done in the past few years, our transaction valuation was not the highest price offered to the entrepreneur. But the entrepreneur chose us as their partners anyway.
In the majority of the sale transactions that have happened in our portfolio, there were higher bidders for the company than the chosen acquirer.
You can get away with this behavior if you have a closely held business. If you have a public company, then you cannot. The Board has a fiduciary responsibility to get the best deal for the shareholders. And if you are a public company, that effectively means the highest price. That is one of many reasons I don’t like being on public boards and operating as a public company.
Let’s say you are one of two or three investors in a closely held startup company. Let’s say that between the investors and the founders, the group owns ~90% of the company. And let’s say that there are two purchasers. One is willing to pay $250 million in a clean transaction and the Board thinks they will be good owners of the business, will do everything possible to keep the team intact and the service vibrant. The other is willing to pay $300 million in a complex transaction, has a reputation for blowing up teams, and has been known to mess up the services they acquire. That would be a no-brainer. The board should take the lower offer in a heartbeat, assuming they really want to sell the business.
When you are doing an important financial transaction that brings a new influential owner into the company, price matters but is not the most important issue. The most important issue is the chemistry between the existing owners and the new investor/owner and the reputation of the new investor/owner. You want to use the market to surface the right valuation band and you should do the transaction in that band. But once you have done that, you should optimize for chemistry and fit. And let price fall somewhere in the “market band.”
If you cannot find an investor/owner who is a good fit in the “market band” then you should kill the process and not do a transaction unless you need to transaction to stay in business. If you are doing a transaction to stay in business, you have screwed up and put yourself in a bad position. And you should be prepared to be in a worse position soon. But that’s the subject of another post.
So price matters but don’t optimize for it. Not in a financing transaction. And not in a sale transaction. If you do, you will often regret it.
Fred Wilson has been a venture capitalist since 1996, and currently serves as managing partner of Union Square Ventures. He blogs regularly at AVC.