Thoughts about the quick flip

My firm, Spark Capital, is a venture capital firm and we invest in startup companies for the most part.

Often we invest very early (first institutional round). For example we invested $350k in Tumblr’s first round and $500k in AdMeld’s first round. We invested about $1M in OMGPOP’s first round, we invested $2M in Boxee’s first round, etc.

As an investor and entrepreneur I have been involved with companies that have been acquired fairly quickly. We were investors in thePlatform for about 6 months before they were acquired by Comcast. The terms are still confidential but we made several times our money and it worked out for everyone. WebTV Networks was sold less than 3 years after the company was started.

These quick exits are sometimes called the “quick flip”. I have some thoughts about the quick flip so here they are:

0 – We don’t try to time the market, we don’t expect or plan for the quick flip. We usually have a heart to heart with entrepreneurs to make sure we understand their expectations as they start their companies. As an example, if they tell us that they would sell the company in 6 months for $5M then it’s unlikely we would invest in the company. It’s just not a good strategy for us given our fund size and the risk/reward strategy that we have in place (that risk/reward strategy means we will have some companies fail btw).

1 – Sometimes startups get an offer earlier than planned. If the company is doing well, then it usually comes down to the founders choice. Back in July, I laid out my thinking in my post about Zappos and I believed then that the VCs did not force a sale. A few weeks ago Fred posted this graph that shows when a founder sells or a VC sells. I couldn’t agree more.

I can think of a number of TechStars ‘09 companies that could be very interesting acqusition targets for large companies right now. But I know that the companies actually most interesting are same the ones that are trying to build something big. They may still choose to sell but that’s not the plan.

2 – Sometimes, for a variety of reasons a company may not meet the founders and/or VCs expectations and a quick sale might be the best thing to do for everyone. Essentially, you have to always keep an eye on the market opportunities, ability to execute and risk/reward.

3 – But one thing I really don’t like is when companies have a quick flip built into their business strategy from day zero. To me that signals that a company isn’t focused on building a business that can make it on it’s own.

4 – Point #3 can be confused with something I do like: companies that are capital efficient and have options. If you are capital efficient you can take time building your business model. And with a capital efficient business you have flexible financing options as well as exit options – and that can be very a good thing.

I’m sure much of this is obvious to many of you. I guess the uber point here is that i’m okay with a quick exit but only if it’s unplanned and it’s in everyone’s interest. But that shouldn’t be the goal at the start.

Instead, the goal should be to create something that you want to see in the world and build as much value as you can.

(many thanks to @mokoyfman for reading a draft of this).