It's common sense: If someone offers you $100 million, you accept and become fabulously rich.
In Silicon Valley, common sense is replaced by an irrational desire to create an extraordinary company like Google or Facebook. For 99.99 percent of entrepreneurs, that mentality is profoundly stupid and the pursuit of a billion-dollar company has cost many founders life-changing fortunes.
Here are four examples of companies that turned down $100 million offers, and it may have been a mistake.
VIDDY: Last year, a video app called Viddy walked away from a $100 million offer, then lost all of its traction. Viddy has since laid off half its staff and its CEO has been fired.
Viddy's competitor, SocialCam, however, was smarter. It raised significantly less money than Viddy at a far lower valuation (Viddy raised $36 million at a ~ $300 million valuation). It was acquired for $60 million just months after its launch.
The mistake Viddy made was trying to become a $1 billion company like Instagram. It's admirable but ultimately it ended in failure.
FOURSQUARE: Foursquare also had the option to sell for more than $100 million and passed.
In 2010, one year after its launch, both Yahoo and Facebook offered to buy Foursquare for $100-120 million. At the time, Foursquare had only raised $5 million and had a handful of employees. The money would have changed the founders' lives, and it would have been a home run for investors.
But Crowley had already sold one company to Google, Dodgeball, and he regretted it. Google promptly shut down the location app, and Crowley didn't want to see his dream shut down again. He turned down the offers and has gone on to raise $71.4 million. Foursquare is currently fending off "haters" and trying to prove its business model.
QWIKI: Google offered to buy TechCrunch Disrupt winner Qwiki for more than $100 million, but CEO Doug Imbruce turned it down. Now it's on its third pivot.
PATH: Path also turned down a $100 million offer from Google three months after launch. Now it's getting heat for spamming users to maintain growth. Morin is worth millions from his time at Facebook, but his employees aren't.
Why founders turn down big money
Part of the reason founders turn down jaw-dropping sums is their desire to build world-changing companies. Sometimes they feel the acquirer isn't a good fit, or they aren't ready to give up control.
"Of course it's a tough decision because you're trying to figure out what's the best thing to do for your company," Foursquare's Dennis Crowley said of acquisition offers. "Your company is your baby at that point…You have to make a call and weigh the pros and cons."
Another part of the equation is the investors who have a lot of money at stake.
Benchmark investor Bill Gurley told the audience at TechCrunch Disrupt that an "anti-IPO," pro-acquisition mentality plagues the tech industry and "prohibits companies from hitting the long ball." He used Indeed as an example. Indeed is a Connecticut-based company that was acquired for an estimated $1 billion after only raising $5 million, a win by almost any other standard.
"[Indeed] had a great business model, a huge consumer brand…and they sold it,” he scoffed.
Gurley isn't the only investor urging founders to take their startups further. Last year, New York startup Single Platform faced similar pressure to avoid an acquisition. It had raised $4.45 million and was in the difficult, local-business space. Like many early stage startups, it battled near-death experiences and struggled to generate significant revenue. An investor told us then that its founder, Wiley Cerilli, was mulling over a $50 million buyout. The investor turned up his nose at the idea of a sale.
"You'd NEVER hear a Silicon Valley startup talk about selling for $50 million," this person said.
The odds are against startups
Most startups fail. The odds of a venture-backed startup failing are 75%.
Yet founders, against the laws of probability, cling to the anecdotes in which founders hold out for epic, jackpot offers. Sometimes it's smart to hang on.
GROUPON: Groupon was offered $6 billion by Google, turned it down and went public. But its founder Andrew Mason is now gone, and the company might wish it had taken that exit.
PINTEREST: Pinterest hasn't succeeded yet, but it's growth hasn't slowed and its on its way to be an image-based shopping engine. While no billion-dollar acquisition offers have been made public (Google was rumored to be interested for a few hundred million dollars), investors think Pinterest is worth multiple billions.
FACEBOOK: Mark Zuckerberg was offered $1 billion by Yahoo in 2006 and turned it down. He's now worth ~ $13.3 billion and 1,000 of his employees are millionaires.
The smartest founders know how to ride the wave
The decision to sell a company is harder than it sounds. There's fear that investors and the tech community will think a founder is taking an easy way out.
But the smartest entrepreneurs don't let that get to them. They know when it's time to sell.
SINGLEPLATFORM: A few months after the $50 million acquisition discussion, another company offered to buy SinglePlatform for $100 million in cash, stock and employee incentives. Cerilli was in the middle of a fundraise, and he spoke with his investors about what to do. This time, he received support. An investor told him, "Wiley, I'm excited to work with you, but you should take the offer. I'll work with you on your next company."
OMGPOP: Another entrepreneur who knew when to walk away is Dan Porter. Porter was the CEO of OMGPOP which was acquired by Zynga for ~ $200 million. Porter decided to sell his company after confiding in 10 friends and asking for their opinions. He assumed all of them would think he was "giving up" if he sold his company. To his surprise, all of them told him to sell.
Neither Porter nor Cerilli will forget the day they told employees about their acquisitions. Cerilli called up his co-worker, Kenny Herman, after the Constant Contact sale and told him he was now a millionaire. Herman, then 27, had just landed in the airport from his honeymoon.
Porter sat down with each OMGPOP employee and told them how much they had individually made. A bottle of champagne was chopped open, and an entire day of work was dedicated to paying off employee debts, such as student loans and mortgages. Porter's decision also made OMGPOP's founder, Charles Foreman, a millionaire. Before the sale Foreman had left to found a new company; he only had a few thousand dollars in his bank account.
When you're an entrepreneur with a lot of initial traction, it's easy to forget the odds are stacked against you.
While it's hard to sell a company and wonder what you could have built if you hadn't, it's painful to know you and your employees could have been rich, and you blew it.