Brandon Mullins

Xobni Turns Down Acquisition Offer (supposedly): Smart Move

This is slightly old news, but has been bothering me as I read more and more about it in the blogosphere. Here’s my view.

A few months ago, Techcrunch broke the news that Microsoft had placed an acquisition offer of $20 million on the table (in the form of a Letter of Intent) for Xobni, Inc., the email organizer, analytics, and social network tool currently designed as a plug-in for Microsoft Outlook. Xobni turned down the offer (or so the rumors go).

Many bloggers and commenters are heavily debating whether or not this was a sound decision, to essentially walk away from, what seems at first glance, a relatively large amount of money for a relatively short amount of development time. Another argument is that Xobni is simply an extension of Outlook, a mere add-on that Microsoft itself could now design, develop, and deploy with their next version release, essentially “squashing” Xobni’s product, model, and future. In fact, in a Techcrunch poll, 53% of readers voted that Xobni was crazy for walking away from that sum of money, especially since it’s Matt’s and Adam’s first venture.

But not so fast. How can anyone on the outside of this deal accurately assess whether this was a viable decision, with no where near enough inside knowledge to form an opinion? There are a host of reasons why turning down this offer may have occurred:

• not wanting to have Xobni become lost in the Redmond machine of bureaucracy
• Xobni has a much greater vision up their sleeves
• liquidation preference and ROI for everyone involved.
  

Sure, Xobni currently functions solely as as nice value-add to Outlook, but I highly doubt that Outlook is the only email application that Xobni aims to integrate its software into. This is way too short-sighted of a goal for such an intelligent team run by Matt Brezina and Adam Smith (have you read Adam’s blog posts? Incredible). Thus, if Xobni can successfully integrate into Yahoo!, gMail, and Thunderbird, then turning down this current offer may not look quite so terrible of a decision. In fact, it could play out to be a brilliant decision.

Also, look at this from a purely financially viable standpoint: Xobni had raised somewhere in the neighborhood of $5M from prominent VC firms, including Kohsla Ventures, Atomico, First Round Capital. They also raised a round of Angel funding prior, and preceding that, was a part of Paul Graham’s Y Combinator. Each of these funding events took sizable chunks out of the founders’ equity share. If we can safely assume that the institutional investors had included a 1x Liquidity Preference on the $5M investment, and we can safely assume that they invested on a $15M pre-money valuation (completely an estimate), then 25% went to the VCs alone. Of a $20M exit, the VCs would exercise their liquidity preference, taking $5M off of the top. They would then get 25% of the remaining $15M in the common pool, or $3.75M, leaving $11.25M for the remaining angels, founders, etc. Take out Y Combinators’s share, the Angels’ share, and misc. equity share (lawyers, advisors, board), and their really isn’t a whole lot of monetary value left for the original founding team. And if we look at this from a VC’s ROI perspective, an $8.75M payout ($5M from liquidation preference, $3.75M from particpation) on a $5M investment is only a 1.75x return, hardly a successful deal, or at least relative to what was expected when term sheets were signed.

Of course, this scenario could have been the result of the board’s resistance to see the exit opportunity through due to a thirst for much larger returns, even if the founding team was in favor of taking it. If so, it could serve as a lesson learned for entrepreneurs: with VC funding comes a “go big or go home” mentality, one in which acquisition opportunities that would result in satisfactory wealth for the founders are passed by because of the need for large returns by investors.

What Xobni is up to, we can’t be for certain. But given the intelligence of both Matt and Adam, all of their new hires, and the investors behind them, I trust that they have an intelligent strategy backing their decisions, and can reach the $100M+ company they originally set out to be.

Brandon Mullins