How A Million Dollar Acquisition Offer Killed My Ecommerce Startup
“Allen, we want to buy your company.”
They can’t be serious, I just got here and we’ve only been talking for a few hours.
I had dreamt of this day in my wildest startup dreams, but never thought I would get the opportunity this soon.
I had flown to the West Coast from NYC for a potential “partnership” meeting with a large, very well funded e-commerce company interested in selling our products. After an early dinner, they laid the deal on me.
“We want you to move out here, integrate your product offerings into ours and launch a new vertical by the beginning of the year. We’ll give you a 1% stake in our business.”
At the time, their company was valued at over $100 million, making the offer worth . . . over $1 million.
I was 28 years old and only 12 months into my startup.
This deal is our opportunity to scale the business and snag a huge piece of equity in an IPO bound company. This could be worth 10x in 5 years!
(Initiate Dr. Evil laugh.)
I called my girlfriend (now wife) and my parents and told them the news.
For the next month I was riding high and waiting for the deal to close so I could collect my “winnings”. In my mind, the game was over and it was time to celebrate. Mission accomplished.
I couldn’t have been more wrong.
After sixth months of negotiations, dead end meetings, and unanswered emails, the deal was dead in the water and my company was out of cash.
Below are 3 of my lessons learned – the naive mistakes of a rookie entrepreneur:
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- NEVER lose sight of the mission
- If you don’t have leverage, you’re screwed
- Don’t drink your own Kool-Aid
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My hopes are that you learn from my failings and apply these lessons to your own e-commerce business or startup.
Ecommerce Startup Lessons Learned
Never Lose Site of the Mission: Build A Business
In the summer of 2012, I made a large product pivot and re-launched my travel private sales company as Offmap.com – an adventure travel e-commerce company that sold custom trips to destinations like Machu Picchu, Peru, using virtual guides via your iPhone and / or iPad.
Our business was selling independent dream vacations priced at 70% less than the major travel companies by using mobile e-guides instead of human, megaphone-carrying tour guides.
After the relaunch, the customer feedback was overwhelmingly positive and we seemed to have hit product/market fit.
Although we were gaining some traction, it was not fast enough.
I had bootstrapped the company and wasted too much time on our first “private sales” business model. Two months after the relaunch we were continuing to bleed money and were running out of runway.
That’s when I got the email that landed me on the West Coast sitting across the table from the empty dream offer.
“Though the immediate cause of death in a startup tends to be running out of money, the underlying cause is usually lack of focus…Starting a startup is a huge moral weight. Understand this and make a conscious effort not to be ground down by it, just as you’d be careful to bend at the knees when picking up a heavy box.”
– Paul Graham
The siren song of new products, game changing deals, and early acquisitions can lure any entrepreneur off the train tracks.
At Offmap, we were focused on building the perfect product for adventurers, and wanna-be adventurers (travelers). It was my passion and we had a great product.
But, the moment the acquisition offer came along, I began focusing on the potential future of the business post-deal, and neglecting the day-to-day operations.
Starry-eyed and thinking in my future equity, I began to lose track of my business: the original, initial concept I had put so much time into building. The “big guys” sucked me into negotiations, meetings, and many coast-to-coast flights – all of these ultimately did nothing but stall the process of my “big opportunity.”
It’s okay to entertain early offers for partnerships or even acquisition, but never at the expense of your core focus – the actual business.
If You AreN’t The One With Leverage, Then You’re The One Getting Screwed
Trying to negotiate a deal without the right leverage is like trying to lift a car – without the right tool, it will break you.
For a startup, leverage can come in many forms:
Cash in the bank:
Having cash in the bank gives you runway and runway gives you time – making the deal you are negotiating a luxurious, strategic option, NOT a necessity for survival.
The best type of cash in the bank is revenue (ideally predictable and recurring revenue), but can also include funding (ideally 12 -18 months worth).
Without this cash (which quickly becomes apparent to the potential acquirer during discovery), your fate is held directly in their hands. Stalling negotiations while you slowly – or quickly – bleed to death is not a fun way for your startup to die.
Multiple Offers:
Like two super moms battling over the last tickle-me-elmo (remember those things?) on Christmas Eve, so should the demand be for your business. Multiple acquisition offers from 2 or more companies is the best way to quickly bid up your price and puts you in control of the time table.
Access to and Exclusivity of Product, Customer, and/or Market:
This is especially important for ecommerce companies that sell physical products, but applies to all business models alike. An acquirer is interested in your company because you possess something that they do not have or cannot easily get or build. This could be your patented portfolio of medical devices sold to hand surgeons, or your customer email list of 1 million actively engaging mothers between the ages of 30-40.
Whether your leverage comes in the form of access to product, customer, and/or market, you must also be the exclusive option: acquiring your company is the best, and (possibly) only option.
Don’t Drink Your Own Kool-Aid (Well, maybe in moderation…)
There is a fine line between going “all in” with your business and getting lost amongst the smoke and mirrors of startup hype.
It is vital that you believe 110% in your mission and goals for the company. But, always make sure to maintain flexibility with the product.
“Don’t get too attached to your original plan, because it’s probably wrong. Most successful startups end up doing something different than they originally intended.” – Paul Graham
The same holds true for a potential acquisition deal.
Don’t get star struck and lose sight of reality. Is the deal too good to be true? Is your product and business as good as you’re pitching it? As the founder, you must sell the dream to prospects (and in this case potential buyers), but never become disillusioned by your own storytelling.
In my case, I lost sight of reality: I spent more time on calls with my deal attorney than on calls with my customers.
I was believing my own “travel-revolutionized” pitch instead of questioning whether the long sales cycles and high barriers to purchase for our average customer would even allow Offmap to scale or bootstrap to profitability.
We had a great product, but did we even have a viable business model?
Don’t Make the Same Mistake I Did With Your Ecommerce Startup
In reality we did have a great product and the deal would have been a fantastic opportunity, but we died a quick death by distraction and disillusion.
Though I was a bit beat up and highly disappointed from this whole experience, I learned some of the best business lessons of my life.
Much of Blue Stout’s current successes can be attributed to those lessons learned and my new perspective. In sharing these lessons with you, I hope to help you learn how to avoid a few mistakes I’ve made and to provide some insight in not only avoiding them, but how to improve your ecommerce business success as you launch and grow.
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