Mark Zuckerberg is reportedly worth billions with Facebook. Sergey Brin and Larry Page have a net worth of $18.5 billion from Google. Yahoo founder Jerry Yang’s net worth is $1.9 billion. In 2004, Google and Yahoo! were reportedly valued at $52 million each.
Even better is that these guys all have similar stories: A handful of nerds geeky idea in their dorm room and turn what innocently started as a fun project into a seriously bankable multi-million dollar enterprise.
But how do you know you’ve got the industry changing business and not just a hobby?
Brian Norgard, a former Brown University student who started his own business called Newroo from his senior year dorm room, has a few tips for making the transition from idea to sold company. Norgard’s Newroo was a content aggregation technology service that ultimately was acquired by FOX Interactive Media in 2006. Now Norgard works for the FOX Advertising Network and specifically on the MyAds product, an advertising tool within MySpace.
So how do you get the seven- and eight-figure transaction done?
1. Find someone who can materially benefit from owning your company. Sounds obvious, right? It’s surprising how many people think that just because someone has money that they are automatically a buyer, says Norgard. Buyers aren’t stupid; they are generally some of the more productive people out there.
“They need to see the hole in the market for your business to be worth it,” Norgard says. “Facebook is absolutely worth billions. Sure, some of it is phantom valuations, but it was an untouched communication and has proven to have global reach.”
2. Within those companies, determine if your company satisfies a product need, a technical need, or a human capital need.
“The human capital need is a big one says Norgard. “Don’t underestimate how important the people already working for the company are because you want people who can operate the market strategically.”
3. Understand both sides of the acquisitions cycle. Buyers are inquisitive and poke around to see what is out there. In the current market, though, most buyers purchase based on a personal relationship with someone at the target company.
Those relationships can be built by preemptively doing business development with the company, by using standard networking practices where you keep people up to date on the business. And, it can be done by doing consulting for a company where your firm can be shown in its best and most useful light, says Norgard.
In reality, it typically is someone inside that the acquirer thinks the world of and where one of the three needs are satisfied.
“From what I have seen and experienced, there is always someone inside a company behind an acquisition of a smaller company,” says Norgard. “It’s never just people sitting around talking ‘How about this, or that?’ That’s just what they show in the movies. In real life all of this is very time consuming, costly and distracting."
4. Understand your small business product rationally. A company looking to buy is going to want to know: Are the customers happy? Do you have value with intellectual property? Is there a distinct sales process?
“Remember, at the end of the day, you need some unique identifier to show that your company is really worth something,“ says Norgard. “Otherwise it really is a school project made in your dorm room.”