Sold to the highest bidder

[Editor’s note: When VentureBeat launched a place last year to let companies list their assets for sale, we introduced it with a column from Brian McConnell, who was first to list his company for sale there. It has been a long and windy process, but Brian has finally sold his company. Here’s his story:]

A few months ago, I decided to publicly list my company, Open Communication Systems for sale. I’d like to share the experience.

OCS builds a suite of group communication tools that make it easy for users to create groups about any topic, and then communicate via web, email, conference calls and other media.

We’re about two years old now, have been in beta for a few months, with a total investment of $225,000 ($125K in angel, about $100K of my own money). We’re a local call in several dozen countries. Not bad for a little bootstrapped company.

I decided to investigate a sale because telecom is still a capital intensive business. I wanted to focus on designing the product, while someone else worked on marketing.

I decided early on I’d rather sell my company and go work for a new boss, or not at all. I didn’t want to raise venture capital. The problem with VC: You’re half-selling your business, and there’s risk they’ll overestimate demand, pressure you to grow it too fast and cause it to implode.

Before I set about putting the company up for sale, I worked out a list of criteria that went something like this:

* Deal value between $5 to 10 million dollars. Conferencing is a good business. People pay for it. I knew that with proper marketing support, we could make numbers to support this price, maybe better depending on the buyer. Earnouts would be a big part of the package.

* Buyer should be doing something related to communication, either online, via phone or some combination.

* Buyer should leave existing team in place, some travel ok, but I hate commuting, and relocating, even to the south bay was a deal killer. Cars make you fat and unhealthy.

* Buyer should be a public company with liquid stock, or offer a cash deal. I sold my first company at age 28, went home with a million dollar check. That was a good experience. I sold my second company to Visto Corp, a bloated VC backed “pre IPO startup” that raised over $250 million. I ended up with 500,000 worthless Visto shares that were rendered valueless in a “pay to play” round. Never sell your company for shares in a VC backed startup, there are just too many ways you can end up playing the role of Rube Suckerman in that story.

* Acquiring company should be a fun place to work that rewards creativity.

* As I am somewhat of an oddball even by San Francisco standards, buyer should have a corporate culture that allows for individualism.

One of the lessons is that the biggest factor in a successful sale is if someone on the buy side gets excited about your company and product.

Several months into this process (we’d talked to many small and large companies), we were contacted by Virtual PBX. They allow you to outsource your business telephone system and replace an expensive PBX and call center equipment with an inexpensive hosted solution. Our groupware and conferencing platform was a perfect fit for them, while they had exactly the business sales and infrastructure we were looking for. They liked our web and VoIP engineering expertise. Fairly quickly we determined that an acquisition and team hire made sense.

Virtual PBX, like Open Communication Systems, is a private company. They more or less created the hosted PBX category, and have bootstrapped their way from a garage operation to a 25 person company with strong revenue growth. They’re ten years old, profitable, and never did a VC round or took on any debt, which is very unusual for a telecom company.

We looked at their business saw a big opportunity going forward: Virtual PBX and its peers could become significant businesses as customers switch from outdated intercom systems to hosted IP services.

Our deal was a simple cash plus revenue share deal, with an expected value of several million dollars with no maximum. Our product, a flat-rate conferencing service that is a local call in over 30 countries, is a product that they can sell effectively. With the deal we negotiated, I can also work 4 of 5 weeks offsite (I live part-time in South America), and will have time to work on my non-profit and open source projects.

We have a long-term budget for development equivalent to a small VC round, which will last several years, and all of the facilities we need to build a killer product.

Our deal is not a blockbuster deal, but we’re a small team and it’s fairly priced for our company’s stage of development. With an estimated value of several million dollars, possibly more, this is a good outcome for a $225,000 investment, and in line with our expectations going into this process. We won’t be buying 400 foot yachts, but we’ll do well.

It wasn’t an easy road. We built all of our products with only $125,000 in angel funding, plus another $100,000 of our own money. We had a couple of “near death experiences”. Several times we thought about punting when money was really tight, but we kept at it and got the product launched.

My advice to entrepreneurs is simple, and that’s to focus on building products that customers are willing to pay for. Next, resist the temptation to believe overly optimistic forecasts. Maybe you’re working on the next Google, but it’s more likely you’re working on the web’s equivalent of your neighborhood stereo store. There’s nothing wrong with that, so long as you’re realistic about demand, and about your personal goals for the business.

You might not retire at 30, but building a sustainable business is a rewarding experience, especially in an industry like ours where a good product can reach people in all corners of the world.