Comment by vaksel | Hacker News Reader

Comment by vaksel | Hacker News Reader

I think you do need to sell your company. The ideal of living of residuals shouldn't apply to the internet businesses. They are just way too unpredictable, look at companies from 1998...how many are still around? Only a few of the few are still around, and that's only because they have become synonyms with their niches. Google? Search, eBay? Auctions, Amazon? Online Stores etc. But for each one there are a hundred dead companies that had a good 5 years, and then died.

Small companies/large companies, most of them eventually fail to be competitive. Internet has almost 0 barriers to entry, there is absolutely nothing stopping another startup from coming in and taking you out, doesn't matter if you have a bigger piggy bank.

Better to sell while you are still on top, and then if you really want to, you can use some of that capital to build something else that you can be happy about. And lets face it, if its 6 years later, chances are you have plenty of new ideas you want to try out.

If I have a 5 year old company that makes $250,000/yr for me, and Google offers to buy it for 10-20 mil, I'd take the deal, because it means I'll now have guaranteed money to live the lifestyle I want for the rest of my life, and I'll be able to use a portion of that to do my next startup that I'll be just as excited, as I was about my original idea

I don't think many people would debate what to do if you had the opportunity to sell at a huge markup (i.e. 40-80x your yearly take) that would leave you set for life. That's kind of a no-brainer.

The real question, to me, is whether you should build with the intention of trying to flip or if you should build with the intention of making it a stable business. That direction will make a huge difference in a lot of your decisions about whether to take on funding, whether to focus on early revenue or just on user numbers, etc. And there's no easy answer to that one; it really depends on what you want out of the experience, what your expected likelihood of being able to flip is, if you take satisfaction out of building over the long term or if you'll get bored in a few years anyway, etc.

I think there's a legitimate question of how possible it is to build a stable software/internet business for the long term

It's easy to start such a business; but it's also easy for your new competitor, and for open source. But apart from barriers to entry, there's that routine cataclysm of a computer technology revolution every decade or so. That one is hard to survive. This volatility is the main reason Warren Buffett doesn't invest in computer technology companies.

I think the long-term is a decade or so.

For what it's worth, MiTek Australia, a subsidiary of Berkshire Hathaway, recently acquired a software company: http://www.buildsoft.com.au/Content_Common/pg-Announcements-...

Thanks for that. I think there's some kind of a distinction between a technology company, and technology company that is directly tied to a non-technology business, so that it also is a non-technology company.

Buildsoft (the acquired company) develop software for the building industry. At some point, this is the same business as developing physical tools for the building industry. Once there's a known task and a standardized way to solve it, we can develop our tool for doing that. There's less uncertainty.

I think the distinction is to do with uncertainty, generality and abstractness. A "technology" company is doing something new and unknown, that is applicable to many different industries - but hasn't settled down yet. Once the application becomes concrete, and specific to a particular industry, and the way of solving it is pretty well established, I guess it becomes just a regular business like any other.

Moore's "Crossing the Chasm" talks about customizing a product to a specific industry, as a way to get a measure of security - you won't get wiped out (until the next revolution in computers).

I was thinking that Warren might not have anything to do with this acquisition, but he's very attentive to capital redeployment, so I would guess he did personally approve this purchase.

You don't have to live off residuals. You can live off the money you put away while running your business. That's one of the things that DHH points out in his post.

I have a friend who ran an online business for 4 years while doing a medical degree and put away about half a million pounds (~$1m) while doing so (that's on top of the money that he actually spent). That's enough money to be quite comfortable for a long time.

Well residual = salary you pay yourself, and yes you can put away a large chunk, but you'll never catch up to a guy who just walked away and sold his company for 10 mil. Well not in single life time.

i.e. lets say your friend gives himself $250,000/yr and he grows that by 15% every year and then gets another 10% as a return on his investment, and then lets compare to a guy who just got his check from Google and put it in the same investments to get 10%.

So I threw this into excel:

Row 1: $250,000x1.15 <--this is his company growing at 15%, so he can afford to give himself, a bigger payout(15% more per year)

Row 2: $1,000,000x1.1 <--this is his 1 million he currently has saved, gaining the 10% from investments

Row 3: Sum of 1+2 <---both numbers combined

Row 4: $10,000,000x1.1 <--the guy who took the 10 million, and invested it

After 20 years: Guy who is still running his business 24/7, growing it at a magnificent 15%: $10.8mm Guy who is doing absolutely nothing, or started another company: $67.2mm

Now I'll grant you that the guy who is still running his business, also has his own company that is probably worth more than the 57 million difference. But to get that, he has so far worked non-stop for 20 years.

After 40 years: 112.2mm vs 452.6mm

After 60 years 1.4bb vs 3.0bb

After 80 years 19.986bb 20.484bb

So as you can see, it'll take him 81 years, before the guy who wants to keep his company gets the same amount of cash, as the guy who became millionaire at the age 30.

Thats the whole point, you sell your company as soon as you are offered a large enough chunk of money, so that you can start investing it. The whole "the rich get richer", is possible because money makes money. And that 10% is pretty average, usually possible even if you are risk averse.

And even if the person is COMPLETELY risk averse, and put that money into different ING Savings type companies, which give you like 4.7%, it'll still be 39 years before the residual guy catches up.

10% is NOT average. the 90's distorted people's perceptions of good returns. 6-7% is more average, and that's with risk.

yeah thats why added the Orange Savings account into the mix, 4.7%, no risk, 100% access to money

Those rates are variable, EmigrantDirect had 5.15% going at the beginning of 2008 and now they're down to 2.75%. He's right, 7% is about as average as it can get.

Fail: it's many times harder to build a business and sell it for $10m than it is to build a profitable small business. 1 in 1000 of the ppl who go for your option will make it - 1 in 10 of the ones who go for mine will make it. And some of my 1 in 10 will probably get the $10m option too.

but you'll never catch up to a guy who just walked away and sold his company for 10 mil

Bad Stats. Small sample size. Along with the return, you need to look at the probability of getting said return.

Look at your expected value. 10M with a 1:10,000 shot is different than 1M with a 1:100 shot.

So instead of comparing individual successes, you probably need to look at the EV of the group and then compare it like that.

And if you think you can get better odds than my completely made up ones, then let me know when you need a cofounder ;)

"Well residual = salary you pay yourself, and yes you can put away a large chunk, but you'll never catch up to a guy who just walked away and sold his company for 10 mil. Well not in single life time."

Tell that to Marcus Frind (PlentyOfFish) or James Hong (HotOrNot).

Some math: PlentyOfFish was kicking off about $200-300k in cash per month. That's yearly income of about $3M, so in 3 years, he's banked the $10M that your hypothetical acquisition target has made, and he still has his company.

HotOrNot was reportedly also throwing off multiple millions per year, enough that James didn't have to work even before he sold the company.

The main source of wealth for owners of small LLC or S-corp Internet businesses isn't their salaries, its their dividend checks - which can easily range into the millions. Many popular businesses kick off a lot of cash, and small private Internet businesses usually distribute nearly all of that to the shareholders.

well the hypothetical acquisition # would obviously be higher if a site is make 3mm/yr.

But, as DHH pointed out in his talk at start-up school, beyond a certain amount it doesn't really make that much difference.

The difference between having $1m and $10m is much smaller than the difference between having $0 and $1m. And the difference between $10m and $100m is smaller yet! If you can pay yourself $3m a year, acquisition is pretty irrelevant - you're rich anyway.

Your math is wrong as you assume the person who keeps the company uses all of his income and the person who sells uses none of his. Your also assuming really odd rates of return and a stupid high valuation but:

Let's say he is living off of 150k/year after the first year: Y1: Keep = 100k savings, Sold = 10.85M savings. Y2: Keep = (2501.15 + 100 1.1 - 150)k = 235k, Sold = 10.85m * 1.1 - .15m = 11.785m Y10: Keep = 4.8m savings and the company, Sold = 23.5m Y20: Keep = 39.6m savings and the company, Sold = 58.6m Y30: Keep = 219m savings and the company, Sold = 149m.

Note: If someone offers you 40x earnings it's probably a good time to sell.

Reply on news.ycombinator.com