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Wharton-bred Entrepreneurs Ponder the Pros and Cons of Leaving.
Farhad
Mohit knew his board was getting restive. Several members represented
venture capital firms that had invested in his company, Shopzilla.com,
and they wanted out. They had nothing against Mohit or Shopzilla. They
just needed their money so they could give a return to their investors.
They'd become so hungry to leave that their sense of the company's interests was diverging from Mohit's. "Their view of long-term compensation for employees became, ‘Why do we need that?'" Mohit recalls.
Mohit had to offer them an exit strategy, that is, a way to turn their investment in his private firm into cash or publicly traded stock. That meant either taking Shopzilla public or selling it to someone else.
This past summer, Mohit chose the latter path, selling Shopzilla, which he conceived with a few others including Henri Asseily — a fellow MBA class of 1996 student — to E.W. Scripps Co., an Ohio newspaper and TV-station chain, for $525 million. The exit, of course, made Mohit — Shopzilla's biggest shareholder — and his partners, wealthy. (Mohit visited Wharton Entrepreneurial Programs in September, serving as an Entrepreneur-in-Residence.)
It also
underscored the importance of one of the paradoxical challenges
of entrepreneurship — devising
an exit strategy. It's something that any entrepreneur who welcomes
investors must consider. In fact recently several Wharton alums have
exited their firms,
including Seth Berger (AND1), Brian LeGette/Ron Wilson (180s) and Josh
Kopelman/Lucinda Duncalfe Holt (TurnTide). But offering that exit often
means making plans to relinquish,
or at least dilute, corporate control, which some entrepreneurs hate
to do.
Not all of them, of course. Rick Thompson, co-founder of Flycast Communications, a Web-advertising firm, had no qualms about planning for the sale of his company. "Exit planning for me is something that starts early," says Thompson, a veteran of several startups. "I like the idea of doing something fresh and new every five years." (More on Thompson in a moment.)
Mohit, in contrast, wanted to stay at Shopzilla, which, until this year was called BizRate.com. Over nine years since earning their MBAs, he and Asseily had turned the site, which is like a cross between Consumer Reports and Google, into the Web's leading shopping search engine. In Mohit's view, it had only begun to realize its potential. "We're at the intersection of a couple of hot areas — search and e-commerce," he says. "And we're not yet the e-commerce powerhouse that the idea can become. People think of us as a price-comparison site, but the right way to think about us is a front-end for shopping. We arrange all the doors to the retailers in a way that makes it easy for you to walk in."
Before the Scripps deal, Mohit had assumed that, if he and Asseily ever sold, the buyer would be a new economy peer like Google, eBay or Yahoo!, not an old economy outfit like Scripps. "When Scripps came along, we thought they were a stalking horse for someone else," he says.
But the more they met with Scripps' executives, the more they liked them. "We were looking for somebody who wanted to bet on our idea not take it and run with it. Other people were like, ‘Of course, Farhad, you and your team want to depart, right?'"
Mohit's experience points to a truth about structuring exits or, for that matter, any kind of deal — culture can matter as much as cash.
Outwardly, the cultures of Shopzilla's and Scripps' managements couldn't have seemed more different. Mohit — casual, frank and funny — wears long hair and a beard that he describes alternately as "Jesus meets [Charles] Manson" or "the Taliban Messiah." He owns a single suit, which he nicknamed "the fund-raiser" in reference to the only times he wears it. Away from work, he pens poetry or travels with friends to Burning Man, the annual counterculture art festival in the Nevada desert.
Scripps' bosses, in contrast, are "old-school businessmen," he says. "But they were the company that was most like us in culture — a bunch of stand-up, by-their-word people. Yes, they're from the Midwest, and I'm from the Middle East. And we don't look like we fit together. But their idea was that, ‘We want to bet on Shopzilla and think it's going to be a big thing.'"
Plus, Scripps' businesses dovetailed better with Shopzilla than Mohit had assumed. Among them are the Home and Garden and Food networks and the Shop At Home network and web site. "They're very good at building lifestyle brands," Mohit points out. "And Shopzilla could become a very powerful online brand."
Just as important, the folks at Scripps accepted a condition that Mohit insisted on: whoever bought Shopzilla had to accelerate the vesting of employee stock options. "Even people who started two weeks prior to the sale got their full four years of vesting immediately," he says. "My reasoning was that this was a big milestone for the company, and everybody should be ecstatic about it."
"An acquiring company doesn't like the idea that everyone can leave [because their options have vested]. But I'm the biggest shareholder, so I was going to lose the most money, and no one was going to convince me otherwise. Scripps agreed. Some of the other companies were like, ‘Are you crazy?'"
Unlike Mohit, you could say that Rick Thompson began to think about selling Flycast Communications before he'd even started it. For one thing, he has a serial entrepreneur's itch to start new ventures. He'd worked for a startup before attending Wharton in the mid-1990s and has helped launch several more since selling Flycast in 1999.
For another, he knew first-hand how ephemeral entrepreneurial riches could be. "I was part of the startup team of a [California] company called Octel, one of the first employees after the founders," he says. "It grew to 1,000-plus employees, and I became very confident in the company and kept all my stock."
Octel hit a tangle of troubles. Its chief executive quit abruptly, and the stock tanked. "My equity was wiped out," Thompson recalls. "Suddenly I went from being wealthy to having to change my life plans. I knew that could happen very quickly."
With Flycast, Thompson figured out early on that carefully planning his exit could benefit his company. "From day one, I was happy to have anyone do my job and always hired people who were smarter than I was," he says. "The net result is you build a company with a lot of stars who can stand on their own. By the time the company was sold, I wasn't necessarily even a key person. Managers who try to obsolete themselves — I think there's some real power in doing that."
Flycast went public in May 1999, raising $74 million, and, four months later, was acquired by Massachusetts-based CMGI for a reported $740 million.
Soon after the deal closed, Thompson and his partner, Larry Braitman, left and began making plans for their next venture. These days, they're working on one called Steamroll. Thompson won't say exactly what it will do, only that it, too, will be in Web-based advertising.
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