Phew, that's a difficult one. Don't take the suggestions you get here as truth, think deeply about this yourself.
If the "gorilla" was Microsoft or another company that needs to price its products high, then I would say go for a lower-cost, alternative vendor strategy. But Automattic is very used to competing with inexpensive / free services, so I think this strategy would fail.
How strong are your emotions about BlogVault? Are you deeply invested in it, are you seeing many brilliant things you can do with this product, are you energized at the thought of what the final product / technology will look like -- or is it "just" another business opportunity for you, a way to a company and some money but not especially dear to your heart?
Pivot. Is there something in the work you've done so far, something in your technology or better yet in your customer's wish lists, that looks like a promising possibility?
Try selling your customer list and other assets to Automattic? You could approach them, and suggest a orderly hand-over of your current assets to them for a price. This could be in everyone's best interest (yours, Automattic's, the customers because they will get ongoing service, etc).
If you have just started, and you have no costumers or no investments to speak off -- just close down, and walk on... Allow customers to get their data out, or write up a guide on how to migrate to Automattic's service, and then keep the site up for 60 days to allow everyone time to migrate...