Why I Sold My Startup Instead Of Taking VC Money

Ross Gordon

This past June, after passing up an investment from Chicago's hottest tech VC firms, I sold my one-year old startup, CraftJack, to IAC's HomeAdvisor (fka ServiceMagic). Some people thought I sold too early and passed up the potential for a future exit many times the size. Here's why I did it...

Great exits are few and far between

Almost every entrepreneur, myself included, starts a company thinking it will one day sell for tens of millions of dollars, or even IPO. The harsh reality is that fewer than 15% of VC backed startups get acquired (and much lower if you include non-VC backed startups). In fact, a recent issue of Inc. Magazine had an info graphic showing that fewer than 2% of companies sell for over $2,000,000.

While I think it's essential for every entrepreneur to think that their company is likely to sell for tens of millions of dollars, I also think it's important for entrepreneurs to be aware that statistical reality says otherwise, and to recognize great opportunities when they arise.

The right opportunity with the right company

I initially approached HomeAdvisor to see if they wanted to make a strategic investment in CraftJack. I had just started speaking with some local VCs and angel groups and I figured that approaching some of the larger companies in our industry (home improvement lead generation) would be a good way to get a few more offers on the table. I had reached out to QuinStreet, Web.com, and a few others, who all expressed some level of interest. 

HomeAdvisor's answer came pretty quick - they had no interest in making strategic investments in our company. But they did have another idea: they asked if I had thought about selling. Of course, I had thought about selling, but not this early. Like most entrepreneurs, I planned on selling for tens of millions of dollars after a few years of non-stop growth. So I cordially said that selling right now was not something I had considered, but I would be open to a conversation about it.

Our initial conversation consisted of high-level topics such as the industry, my vision for the company, and some of the technology we built. And after every part of the conversation, they would say something along the line of "interesting, we just had an internal meeting about trying that here."  Or "yeah, we are doing something similar." The more we talked, the more overlap we found between the direction of CraftJack and HomeAdvisor. Suddenly the idea of an acquisition at this stage started to make some seem more likely than either side initially thought.

A week later HomeAdvisor flew my CTO and I out to Denver to meet their executives and to talk more in depth about the details of our company and if we would be a good fit for them. My experience in Denver strongly influenced my final decision to sell. Not only did I get along great with their whole team, but I was impressed by how open they were to my ideas and vision for CraftJack. Typically companies who have long dominated their industry feel they have little to learn from new comers. HomeAdvisor is not like that, they look for every opportunity to learn from others and improve their service for both contractors and homeowners.

The offers on the table

We got our first offer from a local VC firm a few days before I went to Denver. It wasn't the valuation that I was hoping for, but it was still one of the most exciting moments for me as an entrprenuer. Shortly after returning from Denver, I got a call from HomeAdvisor saying they were interested in making an offer. And so the negotiation process began. The final offer on the table gave us a higher valuation than the VC offer, with most of it being guaranteed and the remainder tied to a earn out. While there was some interest among other VC's and lead generation companies, they were going to need more time to make an offer and the two deals on the table likely would not have been around if I waited.

At this point I had two options: the first was an offer for guaranteed money that may not have allowed me to retire, but would change my family's financial security for the rest of my life The second was to take an investment at a lower valuation with hopes of growing the company and selling for much more in the future.

The decision to sell

It was a tough choice to sell after just one year with a lot of growth still on the table. I am a risk taker by nature and passing up on guaranteed money for the chance of making more in the future still appealed to me. But as I consulted with some personal advisors and friends (one of whom is also a local VC), they all pretty much said that you don't pass up an offer this good for a company at my stage, especially considering the odds of failure for most  startups (even VC backed ones). The advice I got helped tip the scale for me. The more I thought about it, the more I realized I had to put my family and employees first. Taking the offer would provide immediate financial security for my family. It would also mean my company would be backed by IAC, who owns HomeAdvisor, providing our employees with stable salaries and great benefits and also allowing us to offer these perks to future employees.

Growing CraftJack in Chicago

Perhaps one of the most impressive things about HomeAdvisor's offer was their desire to invest in growing our company in Chicago (instead of merging us with them and moving us to Denver). They want CraftJack to be it's own brand with its own team and they are investing a sizable amount in the company to help us hire a great Chicago based team (.net developers, see our job posting here! Internet marketing interns also wanted!). This commitment shows their belief in our team and their desire to do what's best for our company and the people who started it. That's a rare thing in today's acquisition landscape.

There's plenty more time

One of the final reasons that influenced me to sell was my age and confidence in my abilities. I am 29 (28 at the time of the sale) and I know I will have more opportunities to start other companies in the future. And with one exit under my belt and a good deal of financial security, I will be in an even better position to succeed the next time around. In the meantime, I am excited to lead CraftJack as a growing part of the Chicago tech community and I think that with IAC and HomeAdvisor's backing, CraftJack will continue to increase it's presence in the Chicago tech scene over the next few years and I'm happy to have the opportunity to be a part of it.

Have questions or comments about this post? Tweet me at @tallross

 

 

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Comments

Aji Abraham

Very interesting article. I had to go through a very similar set of circumstances with our last startup. It is never easy to let go of your baby early. Trick is how do you make sure the new home is a better option for everybody involved. In our case we were merged with a stronger brand.

Hari Vedam

Very good article. The way you approached the problem was clear and rational. Good luck

Scott Smith

Interesting, well-articulated story - you approached this process rationally and thought things through clearly from start to finish. Good luck as part of HomeAdvisor/IAC and with future companies.

Ross Gordon

Thanks, Scott!

David Grossblatt

One of my co-workers forwarded me this posting and I felt compelled to sign up just to say that I have had the pleasure of working with Ross for the last few years. His success is no surprise. He is an extremely talented business person. Congrats Ross!

Ross Gordon

Thanks David! Appreciate the opportunities you and Mike gave me to work with you guys when I first started as an affiliate!

Bruce Ackerman

How long did you work on CraftJack till you approached this selling proposition? Are you able to speak to revenue at that point?

Ross Gordon

CraftJack had launched about a year before we sold, but was formed out of some smaller lead gen sites I had that started 1-2 years prior. I guess you could technically call CraftJack a pivot, but it was more of an evolution to what I had learned in the lead gen space when I started as an affilate, and then later when I started LocalPainterquotes.com to sell direct to service providers (which I started about a year prior to launching/rebranding as CraftJack).

We were over $1MM revenue for the trailing 12 months at that point.

Bruce Ackerman

That's awesome, thanks for the reply. I shot you an email at infoATtribe9interactive.com with just another question since I'm looking at something similiar off my existing product in a different space.

Stephanie Burke

This story is encouraging on many levels - thanks for taking time to share your experience, and congratulations on your outstanding success!

Ross Gordon

Stephanie, thank you very much and I'm glad I could help you in some way!

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