Over the years I have been lucky to meet many smart people. I consider myself even luckier by the fact that many of them have become my friends.
The interesting thing about smart people, at least in the business world, is that the fact they are rare yields a high premium for their services. In other words, companies are willing to pay a lot to hire them or receive their services.
During the last year, roughly 5 to 10 of my smart friends have approached me all with a similar story, albeit in completely different industries - they started a small business, typically a technology services company, or a bootstrap technology startup. The business started growing and attracting attention, customers and even initial income. Roughly after a year, when the company typically has 2-5 employees, my friends were approached by one of their customers, partners, or just a big company.
Initial relationships with those companies typically turn into a joint project, or some form of a contract, but after some time, a VP typically appears and says: "What would you say about us acquiring your company?"
Typically, at this point, shy smiles appear on my friends' faces, their eyes sparkle, and you can almost see the $ signs change into staring ??? signs, I ensue to explain.
A (technology) business, in its essence, has four sources of value:
- Capital - If the company has lots of cash, its value is at least as the amount of the cash it has.
- Human Capital - The company's employees, especially in technology startups and services companies are what makes the company valuable. Without them, even the most advanced technology cannot function.
- Technology - Good candidates for acquisition should have good/unique/innovative/sophisticated products and technologies. They are not necessarily rocket science material, but they are better/more impressive than what internal engineers at the acquiring company can produce or have time to work on.
- Customers - This is the business part. Except for the cash, if a company has a lot of customers, preferably the paying type, the company's value increases by orders of magnitude.
My entrepreneurial friends are many times dismayed by this process. They do not want to sign up for some job in a big company, while stopping to work on their baby product, and receiving a significant, yet non life changing sign-up bonus.
And this is where my story ends with a moral - if you are an entrepreneur (or even just any business owner), and you hope one day to cash on your investments in your company, make sure not to confuse between the appearance of a business, and a real business. Decide on day one what your goal is, and build your company towards that goal. If you are seeking a quick "talent" acquisition, try to emphasize the talent in your firm and create marvelous products. If you would like to build a business, try to make sure there are customers involved, and a significant number of them.