The Art of Selling a Lemon Orchard
During the Zappos acquisition last week, I saw someone tweet something to the effect of “Congrats on your acquisition!” to the CEO. It struck me as a bit odd, and I didn’t know why at the moment. So I’ve been thinking about it. Why do we congratulate people on an acquisition?
Consider, for instance, growing a lemon orchard from seedlings. The value of that orchard is the net present value (NPV) of future cash flows from the fruit that you’ll sell at the market (not to mention the future earnings diversifying into lemonade sales, etc.). Imagine you sell the fruit day in and day out with a nice steady cash flow. Someone (a large lemon conglomerate) comes along and offers to buy your orchard for the exact NPV of all the future cash flows. Let’s say they bought it for $1B dollars (it’s quite a large orchard).
Would it make sense if someone congratulated you on the sale? If you answer yes, I challenge you to consider that all things being equal - at the time of sale, selling and staying the course are equivalent in terms of value. I’m overgeneralizing, but my point still stands: it’s strange that we focus on the transaction alone.
I’m not taking issue with selling. I’m taking issue with the fact that so much of the valley’s day to day conversation revolves around completing *transactions* instead of creating value. Instead of hearing “M&A volume is way down” I wish I heard about value creation being down: Google’s revenue stagnating, facebook’s future in question because of staff turnover, entrepreneurs aren’t innovating in x y or z space, etc.
The true thermometer to the health of the valley is not one of M&A where money changes hands from few to few. Often, in a transaction like that, users don’t see much of an improvement in service anyway. The true thermometer of the valley is when someone creates something that increases productivity, or enriches people’s lives such that many are willing to pay for that service.
Why not congratulate Zappos as they grow? As they innovate in customer service? When they send you that pair of shoes overnight instead of the slow option? It turns out, most startups aren’t like lemon orchards - they don’t produce fruit. They’re hoping someone else will figure out how to make the trees yield. That’s why I find it strange that Zappos sold - lemons and all - it was one of the few who actually had a chance of making money sustainably in the long run.
Photo: Flickr / Lori Greig