Founders: Rushing to a sale isn’t smart

By Tien Tzuo on May 16th, 2012

The recent sales of Instagram and Slideshare are sure to get entrepreneurs’ blood going, with press coverage, speculation and attention all flowing to the companies, their buyers and a culture that encourages the quick sale of businesses. This focus is wrong. Entrepreneurs should concentrate on building great products that delight their customers.

An exit strategy offers investors an opportunity to recoup their capital and, hopefully, make a profit on the original stake, usually courtesy of a sale.

Quick exits are not all bad. They’re a healthy sign of a successful entrepreneurial economy. We all celebrated the success of Instragram, YouTube, Slideshare and many others when they made their sales. Big wins encourage investment, and they continue to feed the dreams of investors and entrepreneurs alike.

But those high profile sales often obscure the underlying lesson: you can’t control the exit, you can’t predict the sale. Instead, you can only control how you build a great product and how well you build a great customer base. Instagram had those qualities as did YouTube.

Companies that are built with a quick exit in mind typically don’t work out. Companies built with a great product and great customers in mind always create value.

In an article for Fast Company in 2000, business author Jim Collins contrasted the new flip-fast ethos with companies he had profiled in an earlier book, Built To Last. The difference: companies that were “built to flip” generated short-term gains for stockholders at the time of IPO or sale, but they struggled to show consistent profitability and often hit a wall not long after generating multi-billion-dollar valuations.

In contrast, Collins suggested, companies that are built to last contribute something more worthwhile. They have the aura of greatness and epitomise the “Entrepreneur’s Dream”: they aren’t just vehicles to get rich quick, but instead icons of business with strong roots that are sustainable for decades.

I agree with that advice. Patient investors are out there and entrepreneurs would do well to build for success, not for a quick sale. When I started Zuora, I made sure to pick VCs that shared my philosophy and avoided those that I thought would be rapacious and only interested in making a quick buck.

To an extent, my model was Marc Benioff, the CEO of Salesforce.com. Salesforce was enormously successful, even though it launched in 1999, not long before the dotcom collapse. All through Salesforce’s history, people have predicted that it would be bought by a giant such as Oracle, Google or Microsoft.

Instead, Salesforce is now among the most mature, sophisticated business technology companies to have launched in the last two decades. It has constantly pioneered, innovated and listened very hard to what customers and prospects said. That outlook has other advantages: managers and employees want to stay; customers become brand advocates because they enjoy a consistent, mutually beneficial relationship; partners trust Salesforce to do the right thing.

At Zuora, our plan was always to build a company for the future: not just a “me too” company, but one that aligns with the big trends going on in the world outside technology. We saw a shift to what we call the “subscription economy”, where the relationship with the customer is supreme and maintaining (and monetising) that relationship is how companies succeed.

We wanted to change the world – or at least a little part of it – and we attracted talent and investment on the back of that. We couldn’t have done that if we had been trying to sell to the first bidder or busting a gut to get to an IPO for which we weren’t ready.

So my advice for startups and young companies would be to forget about making a quick exit. If your company is focused, full of good people and well managed, the rest will take care of itself.