An interesting case popped up recently and a few (Asian) friends and I were debating whether a young entrepreneur was handling a sales process optimally. The entrepreneur had created a very lightweight, but fun and engaging website that had gained rapid and viral adoption in the course of just a few days. Said entrepreneur had gotten some inbound queries as to whether the website was up for sale, and decided to hold an auction for several days and take the best offer. However, midway through the auction period, he received an offer that he thought was very generous and was debating taking that offer instead of waiting for the auction period to end. My friends and I debated whether this was smart and I took some time to reflect on negotiations, negotiating in 3D (thank YOU HBS), and if it were me, how I might run the sales process. Now, I have never built a website or anything remotely technical at all, but regardless - the best way to think through a sales process is to start from the perspective of a purchaser. When entering into a negotiation, whether you are the buyer or the seller, you should always try and understand as much as you can about your opponent and their perspective.
I’m guessing if you’re like most normal people (i.e. not the uber wealthy), you spend some non-trivial amount of time doing your due diligence and planning your purchase, especially if it is a big ticket item like a car or condo/house. Ideally, there should be some semblance of a plan instead of a hurried or rushed decision. A decent plan should encompass understanding several (5) key dimensions that will influence your purchasing decision. Consider this framework:
1. Your Resources: this is both in terms of dollars and time (they do say time is money for a reason). You need to understand how much you are willing to spend and how much time you have to make the purchase. Time is a function of need. If your only laptop was stolen and you are a freelance programmer, you have a GREAT need to get a new laptop ASAP to get back to work. You therefore have a very quick timeframe in which you need to make a laptop purchase to get back to work and meet deadlines, eat, pay the bills, etc.
2. Cost: If you only have $200 to buy that new laptop, you probably will not get very far. You need to know the cost of the product you’re in need of, and reconcile against your financial resources.
3. Scarcity: Understanding how scarce a product is will factor into the decision making process. If you have $2000 to buy a laptop and time is not an issue, you don’t need to buy the first one that you come across that is below your $2000 price point. Knowing that there are many different products within your intended purchase category means you don’t need to buy the first one you come across but instead should do research to compare features of different products and costs.
4. Product information: Check out reviews of other purchasers or of trade publications on the product category. If it’s not a scarce product, others will have purchased and can provide valuable insight into how well (bad) the product is.
5. Sellers: Understand the number of sellers of the product and characteristics of the sellers. If there are multiple distributors of a product, you should have the ability to see if one is selling at lower price than another.
Back to our case and as it relates to the website the entrepreneur created and our framework, from a purchaser’s perspective:
- your resources - dollars to spend, this is UNKNOWN. time is known - the parameters of the auction from a time perspective were established by the seller and made public.
- cost - UNKNOWN.
- scarcity - known, to date - there was only one site on the web with the lightweight, fun, viral engagement platform that this website had. no others.
- product information - known, the website had been up and running and experienced tremendous growth and UVs.
- sellers - known, just one - the entrepreneur.
Now, from the entrepreneur’s (seller’s) perspective, looking at the same deal:
- resources - only a few hours of entrepreneurial coding went into the website (so no material dollars out of pocket), and a timeframe was established for the auction by the entrepreneur, so both are known.
costoffer amounts - known, as several bids had come in to date, but UNKNOWN as the auction had not yet expired.
- scarcity - known, just this 1 website.
- product information - known.
sellerspurchasers - known, several bids had come in and therefore there were several interested purchasers.
For those of you keeping score:
PURCHASER: 1.5 UNKNOWNs.
SELLER: 0.5 UNKNOWNs.
So information asymmetry tips in favor of the entrepreneur in this case, and provides him (the seller) with leverage. The entrepreneur possesses even more leverage because the the auction time had not yet expired, yet he had already received offers above his walkaway price point. In other words, the lower bound of his ZOPA was met and established, and there was only unknown upside. In this specific case, the seller decided to take the latest (greatest) offer, and called off the auction. He in essence, artificially anchored the upside of his ZOPA. While it was certainly a huge and very profitable return given the minimal hours he spent building the website, money was left on the table. We can only wonder whether he could have increased his return by 2, 3, 4, or 5x by waiting until the end of the auction and fielding more offers from multiple interested purchasers.
Not everything is cut and dry as it relates to negotiations, but in the case for entrepreneurs I think there are some key selling takeaways that can be applied, whether it’s fundraising (selling yourself or your product/vision to investors) or exiting (selling your NewCo):
- Do whatever you can to increase your leverage! This can be done in a variety of ways, but I really believe the most important is to surround yourself with a great group of advisors and mentors. This is especially true for young entrepreneurs or 1st time entrepreneurs. As smart as you may be, no one person is an island and there’s a reason why they say there’s no substitute for experience. Seek out people who’ve done this before, and use them as a sounding board as often as you can.
- Be patient! There can be a tendency to rush, both in terms of fundraising (we need to get this X round of financing done by Y date) and exiting (we want to be profitable and sell by Z months from now). Be patient. If you believe you’re working on something of value/promise (and other smart and experienced mentors and advisors do too), be patient and believe in your idea and your team! So many people in the start-up/entrepreneurial space love to focus about speed, execution, getting to market first, etc., but in reality - if you’re really an entrepreneur focused on creating value and changing the world, it’s not a sprint but a marathon.