Rude VC: Selling Early, and other opinions on the Digg acquisition


Remember Digg ?

Less than six months after radical innovator NetVibes caved in to Dassault Systèmes for 20m€ and almost five years to the exact day after navigation firm Webraska lost its way into the arms of Sanef, the social news sharing site Digg was sold to Betaworks for a reported $500k. This sum represents just a fraction of the company’s last institutional investment round valuation of $160m.
Digg was once one of the most promising social media web sites. Founded in 2004, the service gave consumers a way to assemble their own collections of news and Internet content, rather than relying on the choices made by newspaper editors. In 2008, Digg allegedly declined a trade sale to Google for close to $200m.
Stories like that of Digg — and to a lesser extent, Webraska and NetVibes — are not uncommon but are easily overlooked when we re-create the narrative of hot tech startups riding the latest trend. We all remember the billion-dollar-plus Instagram, Yammer, and Skype transactions, but the lion’s share of venture-backed startups, especially in Europe, do not follow the same path. I would argue that the best-advised ones sell too early.
There’s something to be said for selling too early. From a purely financial perspective, it is of course far better than selling too late. Locking in some financial gains, modest as they may be, can help an entrepreneur and investor alike build confidence for the next trick.
But selling too early is more easily said than done. For starters, how do you know when it’s not too late ? A short putt nevers drops in the hole, as the golfing expression goes.
Part of the problem is psychological. It’s easy to get caught up in the euphoria of astronomical valuation announcements coming out of Silicon Valley: Facebook, Instagram, Zynga, etc. Even here in Europe, we’re not sheltered from the sensationalist headlines thanks to the tech press and blogosphere.
Another factor relates to the nature of the VC model. Venture investors seek an IRR across their portfolio of 25%~30%. Given the disparity of performance in any given portfolio, even in Europe a VC needs to have one or two big winners to balance out all their fair-to-middling investments. In Europe, that means a multiple of 5~10x the investment. While a modest acquisition offer from a strategic acquirer might return 2~3x the VC’s money, a VC might take the acquisition interest as a sign that they have a veritable goldmine on their hands, and thus hold out for more. Because European VC’s often control all key decisions a startup can make, they can successfully force the entrepreneur to hold out with them.
There is also an element at play that is more uniquely European: the tendency to view a given startup venture as a one-time event. The U.S. affliction of repeat entrepreneurship is only just begining to infect us here. Like game theory predicts, when we view the war as not one but a series of several independent battles, our behavior concerning one particular “round” changes.
For me, I draw two primary lessons from the Digg story:

  1. If anyone offers you $200m for anything, take it.
  2. For European startups, if there’s a proposal on the table in which investors make a reasonable multiple on their money and founders earn a comfortable amount, I submit that such an opportunity needs to be carefully considered.