Years ago a seasoned investor made a comment about M&A deals that has stuck with me, he said:
"Nobody ever sells a company, what happens is that someone buys a company."
What he meant is that sellers markets are illusions and even the hottest company is dependent upon someone emerging who not only has the willingness to buy, but also the ability combined with markets trends that support a desired valuation. There are outlier deals that emerge from time to time that test this assumption, like Epiphany acquiring Octane for $3b in 2000, but for the most part acquisitions are rather one-sided in that a buyer is driving terms and conditions based on the acquiree’s ability to be a threat or opportunity to the acquirer.
Orlando is becoming one of the most difficult cities in America to sell a home for fair-market value, WESH 2 News reported.
Note the interesting use of the term "fair market value", which is used to suggest that homes in Orlando are not selling for what they are worth. The simple fact is that "fair market value" is what a competitive marketplace of acquirers (home buyers in this case) will pay for something, as opposed to how this article is written, which suggests that fair market value is what the sellers believe their homes are worth.
This should be a moment for pause for the web 2.0 market because the parallels to real estate are frightening. There are hundreds of companies that are going to step into the venture capital valley of death where their investors, current and potential, ask them "okay, so what is the business here and how is it going to get big without disproportionate investment of capital?".
Many companies won’t emerge from the VoD and will be searching for acquirers, who for the most part are a pretty bright bunch of people who appreciate startup company valuations but also know well the general marketplace trends that drive the emotional side of valuations.
I’m not predicting a firesale environment like we saw in 2002 by any means, but what I am suggesting is that entrepreneurs would do well to recalibrate their expectations of what their companies are worth. The post money from your last round really doesn’t matter, what someone is willing to pay does.