Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Wednesday, December 21, 2005

Advice for IT Start-up Companies

Many people seem to have the notion that the way to get rich in the information technology industry is to start a company and then sell it to Yahoo, Microsoft, or Google. That kind of thinking is a clear example of the ex post, ergo propter hoc fallacy. Just because some entrepreneurs have made money by doing this, it does not follow that (a) this was their goal, or (b) setting out to build a company that you can sell is a good strategy. Generally speaking, the biggies won't want to buy your company unless it is successful and could make a lot of money on its own anyway.

Here is Paul Kedroski on this topic:

If you are building a startup solely with the intent of flipping it to one of the majors then you are playing Russian roulette using a gun with five full cylinders, and one cylinder containing a bullet that flits in and out with 50% probability. It is, in other words, a stupid game, one that ex post looks more rational than it would truly be to have done ex ante.

The best way to get purchased by anyone -- GYM included -- is to build a great team, find a large and growing underserved market, build a great product/service for which people will pay more than it costs to provide, grow faster than the market, and stay paranoid that a hundred other companies are gunning for you all the time. If that sounds a lot like the path to building a company, not merely one that is built to flip, it isn't just a coincidence.

Building companies to flip is a dumb exercise, one that more often than not produces neither a company nor flipping.

One possible exception to this strategy emerged in the comments (I recommend you read them all): If part of the plan for obtaining venture capital for a startup must include the possibility for a sell-off to GYM, then by all means it is worth thinking about and planning for that possibility.
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