Source: Bloomberg

Accel Cautions Startups to Play Nice With Traditional Companies

Those established non-tech businesses may someday buy your startup, the venture firm's partners say

Accel Partners, the venture-capital firm behind startups like Dropbox, Slack and Facebook, summoned its portfolio companies to a meeting at a San Francisco museum and gave them a little advice.

First, tamp down the disdain for established, non-technology companies that startups traditionally try to disrupt, because based on recent experience, a company like that might end up your acquirer. Second, the days of going public based largely on dazzling growth are over — startups need to make sure their earnings are passing muster, too.

While most startup founders dream of initial public offerings, an acquisition by a larger company is a far more likely outcome.

Accel partners Rich Wong and Vasant Natarajan walked portfolio companies through the increasing chance that established companies well outside the tech sector might end up buying their businesses. As evidence, they cited some large acquisitions of Accel-backed companies, including Under Armour’s $475 million acquisition last year of health and fitness app MyFitnessPal, and Wal-Mart Store’s $3.3 billion acquisition of online e-commerce site Jet.

From 2011 to 2014, technology companies were the largest buyers of venture-backed startups, according to data from research firm Pitchbook. The peak was 2014 when tech companies spent $47 billion buying venture-backed companies, compared with $21.8 billion spent by non-tech companies.

Last year, tech companies cut their spending on venture-backed startups to $18.3 billion, while non-tech companies spent $17.6 billion on venture-backed acquisitions. This year through Sept. 30, non-tech companies paid $25.3 billion for venture-backed businesses, compared with just $10.7 billion by tech companies.

For those rare companies planning IPOs, Accel introduced the Rule of 50, which Wong said "may sound a little old-fashioned." For a successful IPO, partners said, aim for earnings as a percentage of revenue added to the percentage of annual revenue growth to be a number at least equal to 50. In other words, make sure revenue and profit are both growing at a decent pace — or if not profit, that cash is spent in a controlled, disciplined way.

"It's not a fixed rule, but a barometer," Wong said later.

He and other partners highlighted companies like Atlassian, Workday and ServiceNow, which met that Rule of 50, Accel research showed. Those companies traded at 10 times revenue or more.

By contrast, companies where the formula resulted in a number closer to 30, including HubSpot and New Relic, traded at six to eight times revenue. And companies like Box and MindBody clocked in closer to 15, resulting in a trading range of four to six times revenue.

The meeting was the week before the U.S. presidential election. But no matter the future, Wong said he told portfolio companies that technology “is the best part of the economy to be in.”

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