The start-up dilemma: Sell up or remain solo?

It is a dilemma for every start-up. The business is set up with a vision, a small but talented team and it will make a difference in the marketplace.

The founder, who has a dream, is then approached by a big company offering bucket-loads of money, in some cases even shares. What do you do?

An “acqui-hire” is when a company buys a start-up to obtain the start-up’s team. It’s easier than owning or developing its products or technology.

It’s now becoming a trend. Acqui-hires in recent times include Facebook’s acquisition of Instagram and Twitter’s acquisition of blogging platform Posterous.

It’s a tough choice. There is the prospect of money and rewards for all that hard work and creativity.

On the other hand, you are losing control.

The company’s founder is losing their baby. And when a company has been taken over, certain roles may no longer be tenable.

In general, the executives at the company doing the buying – the ones with the money – keep their roles and those at the company being bought are at a disadvantage.

Work out what you value

Some start-ups reject these offers. One of them is Halfbrick Studios, a video game developer based in Queensland, which has developed the Fruit Ninja and Jetpack Joyride franchises.

Halfbrick has been approached many times by overseas and local companies. It’s not interested in becoming part of a bigger company. It has knocked back every offer because it does not want to lose that creative drive.

Halfbrick executive producer Ben Vale says the company would be suspicious of any predator that told them they could keep their entrepreneurial drive. The money, he says, is less important than the creativity.

“I don’t think there would be anyone wanting to acquire without having some control over the creativity,” Vale says.

“We are trying to keep that creative control to make sure our products are as good as they can be.”

So what would a predator have to offer to get them over the line?

“They would have to have something we don’t have already,’’ he says.

“We are quite comfortable where we are and, up to this point, we have been doing it on our own and that’s worked out really well for us. It would have to be something crazy to get us acquired by someone else.”

“There are always a lot of offers coming in, but it doesn’t seem like there is anything extra we are going to get out of it.”

“Monetary goals aside, it’s not going to give us any more freedom over what we create and there aren’t any markets we can’t get into already.”

The problem, he says, is that a larger business is working to a different agenda.

“Usually it’s about working out if their goals align with our goals, where our goals maybe aren’t as aligned,’’ he says.

“We’re all about making good quality games and a bigger business would be trying to make the most out of profit and be taking those deals that wouldn’t give us the best quality product.”

He says keeping autonomy is everything. Without that, the business is not enriching and it’s not worth doing.

“It’s about making sure we have the independence to work on the right things and choose what we think is a good idea and make it the way we want to make it. It’s hard to let go of that creative control to someone else.”

Know what you’re getting into

But some have accepted offers. By doing that, they grew their company beyond what they had ever expected.

The key for them is that they were allowed to keep their business and entrepreneurial activity in place. But that meant assessing the offer carefully, and knowing exactly who they were joining.

One example is Paycycle, a Melbourne company that builds online payroll software. Just over 12 months ago, Paycycle was approached by Xero, a New Zealand listed company that builds online accounting software.

For Paycycle co-founder Stuart McLeod, the deal, concluded in August last year, was a nice little earner worth $1.5 million, comprising $500,000 in cash and $1 million in stock.

The stock at the time of settlement was worth $2.13 – it’s now trading at around $5.

McLeod says it was a big decision. To make it work, he negotiated something that would ensure he would still be running the Paycycle end of the business.

“It always is hard to let go of your baby. But what it came down to for us was could we create more value either by ourselves or as part of a bigger unit?’’ McLeod says.

“Xero was already publicly listed at that stage so we thought we would enjoy an important role in a bigger organisation that is already creating a lot of value itself.”

How did they negotiate terms and conditions to keep their entrepreneurial independence? To begin with, the power dynamics were different.

Xero needed an online payroll system so that it could compete with MYOB and QuickBooks. Also, McLeod and his team of six had been working with Xero as partners.

They had already formed a relationship and they were working well together.

McLeod says you have to know who you’re dealing with. Still, he was working with them already as a partner, which made the decision easier.

“We knew very well what we were getting into. We budgeted and scoped to achieve that so we were very happy with the outcome,’’ he says.

“In our case, because we positioned ourselves as partners, we genuinely wanted to be closely aligned with Xero, not only for the revenue aspect, but also because we enjoyed working with them and, as soon as you do that, anything can happen.”

His advice for start-ups is to focus on building the business and making sure they have the same values as the acquirer.

“If you genuinely believe that the path you’re on holds the best value, then keep going.

“We thought we could create more value as part of Xero than we could ourselves and, if you don’t believe, you shouldn’t be a shareholder.”