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Tuesday, February 3, 2015

The incentives for entrepreneurial risk

Cross-posted from the Bio Business blog

I have been teaching innovation management for more than 15 years at three different schools. In most cases, I kick off the course with a discussion of the incentives for innovation, a topic of particular interest to Berkeley economists such as David Teece and the late Suzanne Scotchmer.

Innovation and IncentivesThe fundamental idea is that innovation is risky in many ways: the innovator doesn't know if the technology will work (technological uncertainty), whether the market will value it (market uncertainty) or whether the innovator will be able to hold off imitators and other competitors long enough to make a profit (appropriability and ompetitive uncertainty).

As with any other gamble — whether investing early-stage companies or lottery tickets — the innovation winners have to pay above-normal returns to cover the partial or total losses from the losers. Business is an experiment, and if you don’t compensate for the risk, then entrepreneurs, managers and investors will avoid risk. (We can debate the magnitude or the approach to providing incentives — as Scotchmer and others have done—without denying the inexorable need for such incentives).

Of course, outsiders only see the winners of the lottery or the IPO jackpots. They don’t see the dry wells, the failed companies or the other investments that fail to pan out. So the big success of blockbuster drugs attracts attention (and populist attacks) from those who don’t factor in the cost of failures. In many cases, this is due to economic ignorance — innovation costs or economics more generally — and in some cases this ignorance is willful.

Forbes columnist (and former Pfizer R&D head) John LaMattina attacks such ignorance in his February 3 column “New York Times Op-Eds Misleading Regarding The Biopharmaceutical Industry.” The column is balanced and thoughtful, allowing for the basis of most of the criticisms while decrying the economic ignorance (willful or otherwise) beyond the criticism.

In the category of willful ignorance has to be that of economics Nobel Laureate Joseph Stiglitz, a “frequent” critic of the pharma industry (and, IMHO, capitalism more broadly). Let me briefly except LaMattina’s comments on the Stiglitz op-ed:
1) “In generics friendly India, for example, Gilead Sciences, which makes an effective hepatitis C drug, recently announced that it would sell the drug for a little more than 1% of the $84,000 it charges here.” – Actually, “generics friendly India” really means that India has its own rules when it comes to intellectual property (IP) and often refuses to recognize legitimate IP positions.

2) “Overly restrictive intellectual property rights actually slow new discoveries by making it more difficult for scientists to build on the research of others and by choking off the exchange of ideas that is critical to innovation.” – This is a stunning misrepresentation of the R&D process in the biopharmaceutical industry. For any investment to be made in R&D, be it the 3 person start-up company or a Big Pharma, the promise of a financial return must exist. An absolute requirement for these investments is having sufficient IP to justify that a project, if successful, will provide such a financial return.

3) “As it is, most of the important innovations come out of our universities and research centers, like the NIH, funded by governments and foundations”. – As I have said in the past, these contributions are very important in the search for new medicines. But Stiglitz, like many other critics, is either ignorant of the amount of R&D carried out by the biopharmaceutical industry or chooses to minimize that the industry’s applied research is what converts nascent ideas and discoveries to the breakthrough medicines that are continually generated by the industry.
I would be naturally sympathetic to LaMattina’s criticisms due to my free market bias, which stems both from my first experience as an entrepreneur, what I’ve learned studying technological innovation for the past 20 years, and of course what I’ve also learned teaching students how to run innovation-related businesses.

However, his three criticisms have particular salience now that I’ve co-founded a new (pharmaceutical) startup that is a spinoff of my current employer. It is (as he says) a 3-person startup, bootstrap funded for now, trying to bring a breakthrough therapy to market.

My two co-founders and I are working nights and weekends — alongside our regular jobs — to raise funds, validate the science, and try to get something approved by the FDA. We wouldn’t be working so hard (#2) unless there was some possibility of a big return at the end: hypothetically, if we’re each putting $10,000 worth of effort into it each year, then if we have a 10% chance of success then we’d each want a $100k+/p.a. return (actually more given due known entrepreneurial optimism biases).

Of course, we wouldn’t have started down this path without IP. We have to talk to the government, CROs, CMOs, potential investors, industry execs and others to make our idea feasible. We are a tiny company with no full-time employees and minuscule resources: almost anyone we talk to is better equipped to bring this to market than we do. All we have is an idea, a vision and the (patent pending) IP that we hope will allow us an exclusive to bring this to market (if we can overcome all the uncertainties).

Finally, we have thought long and hard about commercialization. Even if every NIH or other government grant goes our way, we’ll have certain regulatory, manufacturing, distribution and (yes) IP costs that won’t be covered by government grants. These costs are far beyond what we can bear personally, so unless the potential returns are attractive enough, we won’t get the equity investment necessary to bring this therapy to market.

The Stiglitz ignorance (or misrepresentation) is depressing but utterly commonplace, particularly among economic populists. But sometimes these populists can see the light.

In the 1970s, there was no more outspoken populist among national political figures than George McGovern (1922-2012), the South Dakota senator and 1972 Democratic presidential nominee. After retiring from the senate, he opened a hotel in Connecticut and found out firsthand how little politicians know about business risks.

As McGovern wrote in a June 1, 1992 Wall Street Journal op-ed (quoted in a 2011 Forbes article):
In retrospect, I wish I had known more about the hazards and difficulties of such a business, especially during a recession of the kind that hit New England just as I was acquiring the inn’s 43-year leasehold. I also wish that during the years I was in public office, I had had this firsthand experience about the difficulties business people face every day. That knowledge would have made me a better U.S. senator and a more understanding presidential contender.

We intuitively know that to create job opportunities we need entrepreneurs who will risk their capital against an expected payoff. Too often, however, public policy does not consider whether we are choking off those opportunities.
So there is hope for intelligent people who get out of the Ivory Tower (or the Beltway) to try to make a living in the real world. McGovern was a man of modest means — a modern-day Harry Truman — trying to put away money for retirement. Millionaire politicians and academics are unlikely to leave their comfort zones, but there’s still a chance for skeptics to experience this epiphany.

Sunday, June 29, 2014

Drag on startups is drag on the economy

We know that entrepreneurs are essential to economic growth in the U.S., but two economists (one of them Nobel) brought this point home last week:
Behind the Productivity Plunge: Fewer Startups
By Edward C. Prescott and Lee H. Ohanian

In the first quarter of 2014 … [productivity] declined at a 3.5% annual rate. This is the worst productivity statistic since 1990. And productivity since 2005 has declined by more than 8% relative to its long-run trend. This means that business output is nearly $1 trillion less today than what it would be had productivity continued to grow at its average rate of about 2.5% per year.

…In our view, an important factor contributing to declining productivity growth is the large decline in the creation of new businesses. The creation rate of new businesses, as well as new plants built by existing firms, was about 30% lower in 2011 … compared with the annual average rate for the 1980s.

If history is any indication, many of today's economic heavyweights will ultimately decline as new businesses take their place. Research by the Kaufman Foundation shows that only about half of the 1995 Fortune 500 firms remained on the list in 2010.

Startups also have declined in high technology. John Haltiwanger of the University of Maryland reports that there are fewer startups in high technology and information-processing since 2000, as well as fewer high-growth startups—annual employment growth of more than 25%—across all sectors. Even more troubling is that the smaller number of high-growth startups is not growing as quickly as in the past.
The authors (economists from Arizona State and UCLA respectively) attribute this to the regulatory drag on small business, both in terms of raising the cost of doing business and specifically the complexity of tax compliance.

However, another explanation (which I blogged last year) was the risk aversion of would-be entrepreneurs. Is that due to regulation? Due to a belief that the system is rigged? To the challenges of starting a company in an economy that never fully recovered from the Great Recession? Or — more simply — a loss of optimism by entrepreneurs that they can financially recover if their venture is unsuccessful.

I don’t have an answer, but this is just further evidence that making the US economy more startup-friendly is essential the country’s economic and political future.

Saturday, June 7, 2014

Entrepreneurial opportunities from 3D printing

This week has been my week for 3D printing in Europe. I gave a talk on the industry’s history at a workshop in Germany on the business of 3D printing on Tuesday, and listened to a number of other academics talk about their own research. On Thursday, I visited Materialise, a (soon to be public) 3D printing service bureau in Belgium. On Friday, I interviewed one of the founders of Ultimaker, a Dutch startup and a leading maker of consumer 3D printers.

In my talk, I said the flurry of consumer 3D printing startups since 2005 can be attributed to

The first created both a market and a pool of potential entrepreneurs, while the latter two reduced the entry barriers for those entrepreneurs. Together, this brought dozens of new entrants into making 3D printers in the past decade.

From my interviews (including the two this week), it is clear that 3D printing has had a transformative impact on the entrepreneurial careers of engineers and other technical entrepreneurs. When they learn about 3D printing, they drop everything and try to figure out how to make a career out of working in the industry — usually by making a better mousetrap. (Obviously not everyone who learns of 3D printing does this — but the entrepreneurs are the ones who do so.)

This reminds me a lot of my earlier research on mobile apps and open source software, what I witnessed in internet services (Web 1.0) and the PC revolution, and what I read about the airplane and the automobile. An exciting, high-growth technology attracts hundreds of entrepreneurs, many with more technical than business acumen. The lucky ones ride the growth rocket to make multimillion dollar companies, while others crash and burn.

If (as we all expect) there are scale economies, then the excess entry by firms will bring a dramatic shakeout. In another 10 years, there will be 5-10 major personal 3D printer makers — some of which will have been bought by the existing industrial makers (as Stratasys did with Makerbot) or other companies (HP, IBM, GE, etc.)

On the other hand, many of these companies will survive (or profitably exit) by migrating to niches within the product category, or upstream or downstream (or laterally) to other parts of the value network.
For example, the co-host of our workshop, Frank Piller, showed a plastic model mini-me that was scanned, hand-edited, and then printed in color. At €995 per model, it’s not a high-volume growth business, but it is a way to build resources and capabilities to pursue other opportunities.

This is an exciting time for these entrepreneurs, and for those (like me) studying such entrepreneurs. It will be also an exciting time for engineers to join the industry, just as it was 20 years ago for Internet services or 30+ years ago for personal computing.

Friday, May 23, 2014

New models of biotech entrepreneurship

Thursday night, the Oxbridge Biotech Roundtable concluded its 2014 Onestart Americas $150k business plan competition. Several dozen contestants, mentors, and one LA-area biotech entrepreneurship professor travelled to the City Club in downtown San Francisco to hear the 10 finalists offer elevator pitches, and then see the money awarded to one of the teams.

Following the initial (2013) competition in London, the American competition began with December's submission of pre-proposals by 150 teams. 35 of these teams (including one led by current KGI MBS students) travelled to a February bootcamp at Stanford for additional training and mentoring, before the 10 finalists were announced in April. One of the 10 finalists, Excell Biosciences, was cofounded by a KGI alumnus.

As in the two previous Onestart Europe competitions, the contestants were required to be aged 35 or younger. As in Europe, the US competition was co-sponsored by SR One, the corporate investing arm of GlaxoSmithKline.

The 10 US finalists reflected an interesting mix of geographies and industry segments. From the leading U.S. biotech clusters, only three teams were from the Bay Area, one from Boston and none from San Diego. The competition also included two teams from Toronto, one from Vancouver and one each from Los Angeles, Denver and New York.

The mix of products was broadly representative of life science startup companies
  • 3 therapeutics
  • 3 devices
  • 1 diagnostic
  • 1 healthcare IT (consumer app)
  • 2 process innovations, for manufacturing and for drug delivery
Most of the startups were in some phase of bootstrap funding, and the judges commiserated with the particular difficulty that therapeutic companies face in raising the tens (or hundreds) of millions necessary to come to market.

Have judged, organized and mentored business plan competitions for years, I was struck by several aspects of the OBR finalists compare to typical (college-based) business plan competitions.
  • Of course, a lll of the plans were about technology. That’s true for our KGI competition but not for the typical b-school competition.
  • Second was the depth of the entrepreneurs’ understanding of their technology. Again, at many (not all) b-school competitions, the entrepreneurs are smart individuals who BS their way through a partly thought out concept. On Thursday, the winning entry — Resilience Pharmaceuticals— reflected six years of work, including the 2013 MIT PhD dissertation by cofounder Retsina Meyer.
  • The judges remarked on the depth of the teams (and that, like VCs, ultimately they had to bet on the teams as much as the ideas). The audience only saw one team member make a presentation, but some teams had five or more official members listed in the program. At least four teams were headed by polished PhDs. Apparently the winning team has attracted Boston veterans to join their team, beyond the founders.
  • Finally, some firms had won equity investment prior to the finals. The winner has attracted a commitment from Third Rock Ventures, a leading biotech VC.
Representing SR One, partner Matthew Foy said that the $150K prize “is not the point of Onestart — it was just the carrot to get people’s attention”. They seem to have succeeded in doing so. Overall, in its second year (and third competition), the Onestart sponsors seem to have moved closer to their goal of creating actual entrepreneurs and startups.

It will take a few months to see how many of these 10 companies will actually launch and — more importantly — how many can succeed in bringing a product to market. Still, in terms of the structure of the program (and the nature of the competitors), the sponsors seem to have already done better than all but a handful of school-based competitions.

Wednesday, February 26, 2014

If Facebook kills entrepreneurship, what’s next?

The $19b that Facebook paid to buy WhatsApp is shaking up Silicon Valley, as other Internet startups try to figure out how they can get their own inflated multiple.

But for the rest of the world of tech entrepreneurship — such as life sciences — it could further starve the flow of investment capital they need to get off the ground.

Entrepreneurship guru Steve Blank tweeted Monday
steve blank ‏@sgblank Feb 24
Why Facebook is killing Silicon Valley http://steveblank.com/2012/05/21/why-facebook-is-killing-silicon-valley/ … more relevant today
The earlier article talked about his work teaching entrepreneurship for science-based startups:
The irony is that as good as some of these nascent startups are in material science, sensors, robotics, medical devices, life sciences, etc., more and more frequently VCs whose firms would have looked at these deals or invested in these sectors, are now only interested in whether it runs on a smart phone or tablet. And who can blame them.

Facebook and Social Media
Facebook has adroitly capitalized on market forces on a scale never seen in the history of commerce. For the first time, startups can today think about a Total Available Market in the billions of users (smart phones, tablets, PC’s, etc.) and aim for hundreds of millions of customers. Second, social needs previously done face-to-face, (friends, entertainment, communication, dating, gambling, etc.) are now moving to a computing device. And those customers may be using their devices/apps continuously. This intersection of a customer base of billions of people with applications that are used/needed 24/7 never existed before.

The potential revenue and profits from these users (or advertisers who want to reach them) and the speed of scale of the winning companies can be breathtaking. The Facebook IPO has reinforced the new calculus for investors. In the past, if you were a great VC, you could make $100 million on an investment in 5-7 years. Today, social media startups can return 100’s of millions or even billions in less than 3 years. …

If investors have a choice of investing in a blockbuster cancer drug that will pay them nothing for fifteen years or a social media application that can go big in a few years, which do you think they’re going to pick? If you’re a VC firm, you’re phasing out your life science division. As investors funding clean tech watch the Chinese dump cheap solar cells in the U.S. and put U.S. startups out of business, do you think they’re going to continue to fund solar? And as Clean Tech VC’s have painfully learned, trying to scale Clean Tech past demonstration plants to industrial scale takes capital and time past the resources of venture capital. A new car company? It takes at least a decade and needs at least a billion dollars. Compared to IOS/Android apps, all that other stuff is hard and the returns take forever.
Two years ago — ironically a few weeks before Blank’s blog posting — I started writing my own posting along these same lines. What I wrote (but never posted):
Did software ruin entrepreneurship?
On Friday, I sat between two entrepreneurs at an office party for my old job. One of the entrepreneurs is in clean tech (hardware) while the other is in IT (software). One is in his 30s and one is in his 50s.

The hardware guy was talking about his challenges raising funds. One VC told him (I'm paraphrasing): “I gave Instagram $5 million and got back $200 million. Why should I give you money?” [after their $1 billion acquisition by Facebook].
The remainder of my (incipient) argument was that software promises abnormally low cap short returns, and the amount of money needed to fund a software company is getting smaller by the week, as VC Mark Suster wrote back in 2011.

How will this play out? I see at least four possibilities:
  1. During the dot-bomb (dot-con) era we had too much money chasing too few good ideas, and what resulted was what economists call excess entry. Eventually the bubble burst — and it could again.
  2. Another possibility is that these other ideas don’t get funded. There are business models that made sense in the 1890s or 1950s that no longer make sense — such as ones that are labor intensive or based on craft work — and new businesses here don’t get launched.
  3. Blank points to the genius philosopher-king model — where a really rich guy (it’s almost always a guy) puts his money where is mouth is (again, almost always a big mouth). In a previous century it was Howard Hughes or Richard Branson, while today Blank points to Elon Musk.
  4. The final possibility is that politicians play kingmaker, not with their own money but with Other People’s Money, i.e. yours and mine. (They will be egged on by a incantations of “market failure” of a few economists.) While this may make sense for public goods such as public health, we saw how such large scale private intervention worked with firms like Solyndra.
Of course, these are not mutually exclusive. Musk depends on public subsidies to support the business models of Tesla and SolarCity, although — unlike Fisker and Solyndra — he’s at least offering something people want to buy. SpaceX depends on public procurement, but I believe his announced plans that this is just a bootstrap to get the business off the group (so to speak).

Is there a happy ending? Like Blank, I think the Facebook effect is going to get worse before it gets better.

Thursday, November 14, 2013

A bird in the hand...

The morning paper reported that Snapchat CEO Evan Spiegel turned down an (all cash) purchase offer from Facebook for approximately $3 billion.

My Snapchat-addicted teenager was relieved, saying "that means we're probably not going to get ads". (I had to break it to her that ads are inevitable, no matter who owns the company).

There is an interesting comparison to other pre-revenue startups
  • Snapchat, two years old, refused $3 billion offer from Facebook
  • Instagram, two years old, $1 billion purchase in 2012 by Facebook
  • YouTube, 18 months old, $1.65 billion purchase in 2006 by Google
  • Pinterest, valued at $3.8 billion in last month’s VC round
  • WhatsApp turned down $1 billion from Google in April, and one analyst Wednesday estimated its value at $11 billion (based on Twitter’s $24b market cap after last week’s IPO)
Obviously, these are exceptional exit opportunities, but still there are lessons for other firms considering the timing of their exit.

The New York Times suggests that its offer for Snapchat suggests desperation by Facebook:
Facebook’s Snapchat bid shows triple the desperation. The social network paid $1 billion for no-revenue Instagram a little over a year ago. Now, it’s said to be dangling as much as $3 billion to lure a mobile app that sends self-destructing digital images. Facebook’s apparently escalating need to buy off marauders at its moat suggests its defenses may be scalable.

Coming just months before its initial public offering, Facebook had obvious reasons to buy Instagram. Consumers were spending more time on mobile devices, instead of desktop computers. This was listed as a “risk factor” in its prospectus for its initial public offering as the social network still hadn’t figured out how to make money on mobile advertising. More important, it faced the risk that users might migrate to a rival optimized for smartphone usage.

Snapchat has similarly astounding growth. In September, its users were sending 350 million photos a day, up from 200 million in June. …

Still, there’s a disquieting element about a company spending billions for a simple application it could almost certainly have replicated for next to nothing. Facebook’s acknowledgment that teenagers are using its service less on a daily basis may signify the social network is losing its edge among the ranks of new technology adapters. That it is also now willing to shell out $3 billion to snuff out a rival in its infancy brings with it a whiff of desperation.
Writing on Sunday, Blogger Ben Evans asked where Facebook should draw the line:
Is FB going to buy Whatsapp, Snapchat, Line, Kakao and the next ten that emerge as well? Sure, some of those will disappear, but it doesn't look like FB will crush the competitors the way it did on the desktop. On mobile, FB will be just one of many.
From the standpoint of the entrepreneurs, Business Insider reports on those claiming that Instagram sold too early and too cheap:
Now, 18 months later, industry people are starting to believe that [CEO Kevin] Systrom was wrong to accept that deal. They believe that if Instagram had stayed an independent company, it could be worth between $5 billion and $15 billion today.

This morning, activist investor Eric Jackson tweeted: "Systrom has to be feeling like he totally missed this wave. Instagram likely worth $15B today minimum." Jackson told us he came up with that valuation figure by looking at Instagram's total active users, about 150 million, and Twitter's, around 236 million. Assuming that Instagram's user base is more U.S.-weighted, and therefore more valuable, he figures Instagram's market cap as an independent company would be at least half of Twitter's $30 billion.
To me, this is the question of the value of a bird in the hand. Instagram’s continuing success is not guaranteed. Like any stock, the value could go down, not up. (NB: Digg, MySpace, AOL). Since they’re pre-revenue (let alone having positive cash flow), no one has any idea what these companies will be worth.

It seems unlikely that Spiegel (or Systrom) will have another comparable exit opportunity. If (as Wikipedia says) Systrom owned 40% of Instagram, 40% of $5b-1b is $1.6b (pretax) left on the table. For the founders, it’s the difference between never having to work again, and having enough pocket cash to change the world, whether by buying/selling companies or eradicating malaria.

Mark Zuckerberg refused a Yahoo purchase offer and delayed his IPO, and now is #20 on the list of US billionaires with a worth of $19 billion, the richest American under 40 years old. Timing is everything: Zuckerberg is worth far more than the widow of Steve Jobs, who accomplished far more over a longer period (but IPO’d early and sold his Apple founder’s shares in the 1980s).

Key employees with stock options will be similarly conflicted. With another 5x rise in valuation, some may never work again. On the other hand, some have enough money to buy a house (even in Los Angeles) today, and they won’t if the company never concludes a successful exit. The more sophisticated realize they, too, may not have another opportunity: a childhood friend had stock options from seven Silicon Valley companies, and none ever produced a sizable ($100K+) return.

The existence of a Chinese VC valuing Snapchat at $4b is giving Spiegel a concrete reason to turn down the Facebook offer. Still, new capital is not liquidity. Also, as Tech Crunch notes for Pinterest, the ever-increasing valuation may make it impossible late investors to profit from acquisition — making the exit IPO or nothing.

So does turning down a $3 billion exit mean a $10 or $15 billion one? Or a $500 million one? Spiegel isn’t panicking, but instead is leaving all his chip on the roulette wheel for one more spin.

Saturday, October 26, 2013

Buy, don't start a company

In doing research for my first (journal) article on 3D printing, I found an interesting article that suggests young entrepreneurs should consider buying a small growth business rather than start one from scratch.

The story (from the October 28 dead tree edition of Forbes) is about Stanford alumnus Rob Cherun and a course he took that changed his career goals from McKinsey consultant to one-man LBO artist:
Cherun’s inspiration was a little-known but increasingly popular course at Stanford called “Strategy 543: Entrepreneurial Acquisition.” This second-year elective is a fast-paced, two-week primer on how to become a one-person version of KKR or Blackstone Group, carrying out your own tiny takeover and installing yourself as chief executive officer. …

Every year second-year Stanford students like Cherun stampede into S-543 to learn the essentials of raising money, finding an acquisition target and closing the deal. Instructors Peter Kelly and David Dodson–two longtime entrepreneurs and investors themselves–take only 40 students per session, and that doesn’t come close to satisfying demand. Months before this autumn’s class began, every slot was claimed, and another 26 students hovered on the waiting list. Frustrated aspirants will get a second shot in the spring, thanks to a new scheduling expansion.
Columnist George Anders cites a study of “search funds” that concluded that the occasional home run (100:1 return) produces a pretax IRR of 34%, even allowing for a 50% failure rate.

In Cherun’s case, money was the easy part: after four Stanford instructors ponied up, Cherun and a partner raised more than $500k for their search and a promises of equity funding for an actual deal.

The entrepreneurs bought 90% of a Canadian company that monitors construction sites for thefts. The 35-year-old founder remained as a minority partner and got to spend more time with his wife and kids without having to travel across the country. The new owners have doubled revenues to $10m (loonies?) annually.

However, these Stanford students face a sizable opportunity cost. In almost the same issue, Forbes proclaimed Stanford the “best” US business school, based on the difference between pre-MBA salary ($80k) and post-MBA ($221k) salaries that (net of tuition and lost wages) left them on average $100k richer after five years. The generous salaries for the elite graduates of the Stanford class of 2008 were aided by placements at Apple, Google and the top consulting firms (Bain, BCG, McKinsey); these were 5 of the 6 employers most preferred by MBA students (#4 on the list is Amazon).

Three other schools (Chicago, Harvard, Wharton) also had $200k post-graduation salaries. My undergrad school, MIT, ranked 12th -- just ahead of UCLA, Berkeley and Virginia; my grad school, UCI, ranked #62 (up from #69 in the last ranking).

It takes great confidence to walk away from the certain cash to run a small company. (Stanford students are nothing if not confident.) The risk is probably lower if (as in Cherun’s case) the company has a track record and (as recommended by Stanford) can be bought for 6x EBITDA.

Except for the last point, this looks like a win-win, providing a liquidity opportunity for entrepreneurs who can’t take the company to the next level. Still, having a residual equity stake (and a meaningful management role) makes it a lot more attractive for founders who might have trouble letting go of their baby.