Exit Valuations Are Usually Under 30 Million

BY Basil Peters

The really interesting story about tech exits these days is not the small number of really big company acquisitions, it’s the big number of smaller acquisitions. For the typical entrepreneur and angel investor, these smaller transactions are an excellent way to make several million dollar capital gains.

I’ve written before on why this is a great time to plan an early exit. The tech M&A market is hot. Big companies know they are better at company acquisition than developing new ideas in house. And big companies have lots of cash.

The financial media, and most bloggers, write about the really big startup exits like Club Penguin, YouTube, Skype and MySpace.  Those are certainly exciting company acquisitions and great startup stories.

But for the other 99.99% of entrepreneurs and investors, the really exciting news is the large number of tech company acquisitions for under $30 million. Our perception is skewed by the media because few of these smaller acquisitions get feature stories and most don’t even get a detailed press release.

Strong Trend But Little Hard Data

It is easy to observe the strong trend toward earlier exits at valuations under $30 million. Big companies and M&A advisors are talking about it and writing about it. Google even makes it part of their messaging to startups. But when I tried to find a good source of quantitative data, I wasn’t successful. Even when I’ve paid for M&A acquisition databases it was easy to see that most of the under $30 million transactions weren’t included.

The data isn’t available for smaller exits isn’t available because it wasn’t ever released. In the majority of transactions, neither the  buyers or the sellers really want the information about valuation or terms in the public domain.  Every acquisition agreement has non-disclosure wording.

For the larger transactions, it’s much more likely that either the buyer or seller is public. If one of the companies is public, and the transaction is material, according to generally accepted accounting principles, then the information has to be disclosed in the financial statements. In these cases, a writer or blogger, will almost always write about it and Google will index it. So we usually have great detail about large transactions, but often absolutely none about the majority of the smaller ones.

The best reference I did find was an article by Om Malik titled “The New Road to Riches” which was in Business 2.0 a few of years ago.  He reports that the Mergerstat database, which includes about 5,000 tech company acquisitions per year, showed an average selling price of $12 million.

Examples of Early Exits Selling for Under $30 Million

I spent some time on Google searching for recent tech company acquisitions and quickly pasted this list together. Most of these are pretty big successes that millions of us use every day.  They are also great companies acquired for $30 million or less.

  • Google bought Adscape for $23 million (now Adsense)
  • Google bought Blogger for $20 million (rumored)
  • Google bought Picasa for $5 million
  • Yahoo bought Oddpost for $20 million (rumored)
  • Ask Jeeves bought LiveJournal for $25 million
  • Yahoo bought Flickr for $30 million (rumored)
  • AOL bought Weblogs Inc for $25 million (rumored)
  • Yahoo bought del.icio.us for $30 – 35 million (rumored)
  • Google bought Writely for $10 million
  • Google bought MeasureMap for less than $5 million
  • Yahoo bought WebJay for around $1 million (rumored)
  • Yahoo bought Jumpcut for $15 million (rumored)

Why is This Happening Now?

One of my friends in a Fortune 500 company explained it to me this way (paraphrased): We know we aren’t good at new ideas or startups. We basically suck at building business from zero to $20 million in value. But we think of ourselves as really good at growing values from $20 million to $200 million or more. It’s a different skill set than starting things.

If we see a company acquisition priced at $100 million, then our view is that it’s already out of our sweet spot for adding value.

But at $20 million, it’s really easy for me to get it approved. If I could find enough good ones, I’d do a $10, 20 or 30 million acquisition every month.

The Opportunity for Entrepreneurs and Angel Investors

It’s pretty clear that the optimum strategy for over 99% of startups today is to design the company, and its corporate DNA, so all the stakeholders are aligned around the idea of a company acquisition in the under $30 million range.

The good news is that these exits can often be completed in just a few years from startup. They also have a much higher probability of success than swinging for the fences and hoping for a big NASDAQ IPO.

This exit strategy is nicely summarized in “The New Homerun” by Tom Stein in Mergers & Acquisitions magazine, May 2008. He said: “Startups must be content with hitting singles or doubles, that is, a buyout of $50 million.”