Ed Sim had a great post recently probing the range of risk appetites entrepreneurs may have, and how they ought to think about the trade off between building a business over time vs trying to flip it quickly for a smaller profit. I love the "Beyond Startup Cycle" above, which he modelled on Gartner's over-hyped Hype Cycle chart. [I hope you don't mind me republishing it here, Ed.]
Ed's thinking was triggered by the increasing number of announcements of startups being acquired at very early stages in their development, often before having raised an VC. Google has been particularly good at picking up teams/technologies for presumably low prices: in 2007 alone Google bought Jaiku, Zingku, Panoramio, Marratech, Tonic Systems, and others.
The key point Ed makes is that businesses have inflection points. At these moments it's critical for both the entrepreneur and his investors to evaluate the risk trade-offs in the context of the viable exit alternatives. I've noticed that I always tend to think of my portfolio companies as works-in-progress -- there is always more to improve, another year of growth to achieve, another release of the technology to await. But this is the perfectionists' dilemma, which can lead to missing the market opportunity or embarking on a path too risky for the incremental value likely to be created.
As an entrepreneur, take a step back each year and think about how acquirers or the public markets would value your business today (both on the basis of its operational performance and the current marekt cycle). Weigh that against the additional value you think you will create in the next year and how likely it is that you may stumble in the effort. You may still decide to ignore the 'rational' outcome, but at least you'll know where your passion lies and what kind of a risk-taker you are.