There’s essentially three options for a tech venture outgrowing its startup days: Get big, get bought or go broke. Sensing hard times ahead, a growing number of entrepreneurs are casting around for suitors and a shot at door #2.
“There are a lot of companies out there right now trying to put themselves on the market,” says Milo founder Jack Abraham, who sold his shopping services site to eBay last year for a reported $75 million. “I get introductions to a lot of founders recently asking for ‘advice’ on the process.”
EBay took down another closely watched startup last week: Hunch, a predictive analytics recommendations engine. Hunch said its entire staff will join eBay (EBAY, Fortune 500) and remain based in New York City.
Industry observers say it’s a smart buy for eBay, which is always looking for better technology for nudging site visitors toward other products they might wish to purchase. But it’s also a good ending for Hunch, which launched in late 2008 and changed directions several times in the years since.
By year two or three, entrepreneurs often start feeling the pressure to get acquired: It’s time to get profitable or get an exit plan. The frothy tech environment is adding fuel to the fire. Thousands of tech companies have taken cash from investors this year alone — and they can’t all survive.
There’s growing mindset among tech founders: “If we’re not going to be number one of this space, we should sell while times are good,” says one entrepreneur, whose own company is struggling to break out in a crowded niche.
Paul Lee, a partner in venture capital firm Lightbank, says that “wacky” valuations are accelerating the trend.
“We’re seeing pre-revenue, pre-product companies get $10 million valuations,” he said. “It’s an incentive to sell if companies aren’t doing well. You need to achieve a lot in order to justify that valuation.”
One of the latest examples of a startup shopping for a deal is location sharing app Gowalla.
Launched in 2009, the Austin-based company went head-to-head with direct rival Foursquare — and lost. Badly trailing Foursquare in user adoption, Gowalla recently shifted directions, recasting itself as a travel guide. It is now in talks with a number of companies — ranging from Groupon to Google (GOOG, Fortune 500) — about selling itself, according to multiple sources familiar with the discussions.
Gowalla did not respond to CNNMoney’s request for comment.
Like a game of musical chairs, timing is everything in takeover talks. . . (READ MORE)
By Laurie Segall
Published at CNNMoney