Can you teach entrepreneurship? Part 8: When to sell?
Sell when your company has achieved its mission.
Sell when you have run out of ideas.
Sell when the buyer offers a price that you feel reflects the company's full potential.
Theories on when to sell vary from the philosophical to the economic. These three mental models, gleaned from the work or writings of Elon Musk, Peter Thiel and Ben Horowitz, seem to cover the full spectrum. In this blog I will provide a summary of each.
Elon Musk's mission based sale
Perhaps my impression of Musk is a function of the journalistic narrative of a recent biography, which casts Musk as a man on a mission to bring electric cars, renewable energy and the colonisation of mars to reality. However, even beyond this biography, I do think there is strong evidence of Musk being driven by mission. Firstly, Musk holds nearly all of his wealth in the handful of companies that he founded. From an economic perspective, this lack of diversification is highly sub-optimal - his eggs are in just a few baskets. Secondly, when you read Musk's own words, such as his 2013 e-mail to SpaceX employees, it becomes clear that he sees companies as a vehicle for achieving a mission, not the other way around. His mission for SpaceX is to bring humans to mars. This mission is more important than near term financial success and he refuses to allow SpaceX to go public because he believes that public markets won't respect and prioritise this mission as he wants.
Clearly I don't know what Musk is thinking, but, if I were to guess, I would say that he would advise to sell your company only if you have achieved your mission, or, if you have lost control to the extent that your mission can no longer be fulfilled as you want it to be.
Peter Thiel's pragmatic sale
As written in Zero to One, when a company is sold, Thiel feels the price is always to high. Conversely, when an acquisition offer is turned down, Thiel feels the price is too low. Thiel's logic is that companies are sold when their leaders run out of ideas. When this happens, the company is therefore overpriced. When an acquisition offer is turned down, then the company's leaders still have great ideas they want to implement and, therefore, the price offered must be too low.
I haven't seen the data on this but, no doubt, Thiel very well may have. Regardless, I think the point is philosophically a good one. The corollary, I feel, for when one should sell is therefore simple. Sell when you have run out of ideas.
Ben Horowitz's pragmatic sale
In The Hard Thing about Hard Things, Horowitz provides a mental model for determining when to sell that is based on economic principles. As I understand, Horowitz feels that, as an insider, you are often the only one to understand the full economic potential of your business. For example, the market might currently recognise your potential profitability from current sales - say of product A - but may have little insight on the potential for profit from a future product - say product B. For Horowitz, the right time to sell is therefore when the market recognises the potential for profit from all of your products. If you don't get until this point, you will be selling the company too cheaply.
In conclusion, as I have presented the mental models above, I make it seem like you have the choice as to when you can sell. Indeed, as the three entrepreneurs above also attest, the decision of when to sell is often strongly influenced or even fully controlled by others, whether investors, colleagues or someone else. Nonetheless, for everyone involved, I think it is well worth reflecting on the rational for why and when the time would be right to sell.