Posts from March 2011

We are getting to the end of the series on M&A. Two more M&A Issues to talk about and then I am done. The final two are consideration and price. Today I'll talk about consideration and next week I'll talk about price.

Consideration is the way in which you and your shareholders will get paid. The most common way to get paid is cash. The other common way to get paid is in the buyer's stock. You may also get paid by accepting a note (an IOU) from the buyer. And of course, many transactions include more than one form of consideration. A combination of cash and stock is very common.

Cash is the best way to get paid in most cases. You know exactly what you are getting when you get paid in cash. If the purchase price is a signficant amount of money to you and your shareholders, I would almost always prefer cash. If you've created a lot of wealth with your company, why risk that wealth on someone else's company?

Stock is the best way to get paid if you are selling your company relatively cheap but you are a big believer in the upside of the buyer's stock. A good example of this are sales of young companies to fast growing privately held businesses. When Ev Williams sold Blogger to Google, the Blogger shareholders got privately held Google stock which appreciated a lot when it eventually went public. When Summize sold its twitter search service to Twitter, the Summize shareholders got Twitter stock (and some cash) and that Twitter stock has appreciated significantly since. In these kinds of transcations the Blogger and Summize shareholders would not have made much of a return if they had taken cash. By taking stock, they turned their company sales into fantastic transactions.

There are situations where the buyer will require the seller to take stock. It might be because the buyer doesn't have sufficient cash to make the purchase. Or it might be because the buyer wants the seller to be aligned with the buyer and incented to stick around.

If you are accepting stock as consideration, you need to be careful to evaluate the short, medium, and long term potential of the buyer's stock. Back during the first Internet bubble, we sold one of our portfolio companies for stock in another company. We did diligence on the buyer's company and knew that it was weak and in trouble. But so was our portfolio company. Three months later, the buyer went under and we lost our entire investment. We probably would have ended up in the same place if we didn't sell. But I tell this story so that you all understand that taking private stock can be risky. It is not an exit unless the stock is public and liquid and you can sell immediately and turn it into cash.

Selling for public stock is a lot different than selling for private stock. Public stock is a lot closer to cash, particularly if there are no restrictions on the seller's stock. If you get public stock with no restrictions, you can sell immediately and turn it into cash. Or you can hedge your stock with puts and calls and take a lot of the risk out of the position. Or you can put in place a regular selling program. If you are selling your company for public stock, pay a lot of attention to the restrictions the seller wants to put on your stock. And resist them as much as you can.

Taking a note from the seller is not very attractive. A note has very little upside (compared to stock) and it is not immediate cash. With a note you are still taking risk that the purchaser could falter and not be able to pay the note. It is true that a note will not fluctuate with company performance like stock. If the purchaser remains in business and solvent, the note will be paid at face value with interest. We've received notes as consideration in a few situations over the years but it is very rare in the venture capital and startup business. As a matter of practice, I like to avoid them.

In summary, you can get paid in multiple ways in an M&A transaction. Cash is usually best and is also the most common. Stock is attractive if you believe there is a lot of upside in the purchaser's stock or if it is public and immediately liquid. A note is the least attractive form of consideration and also is rare in the venture capital and startup sector.

Seth Godin wrote a post on The Domino Project about tweeting in class. He references my talk at HBS where the professor asked his students to tweet out their class notes. Seth says:

I confess to being fascinated, mystified and horrified by people who tweet notes in real time. I mean, here is one of the giants of his industry, and the best the students can do with their attention is tweet short sentences, out of context, to an unknown audience of busy people who are reading hundreds of other out of context abbreviated notes at the same time? Waste a wasted opportunity.

I understand Seth's horror. But I don't share it. I believe note taking is an important way to remember the important points made in class. The act of writing something down makes it easier to recall. And if you share those notes out on a twitter feed, then you are saving them publicly, like bookmarks in delicious, with others who might want to consume them.

You might have a separate twitter feed for class notes. That way you don't spam all your followers with dozens of notes that might not make sense to them. You could have a twitter feed for every class you are in so the class notes don't get comingled. This has the added benefit of different URLs for each set of class notes.

Twitter is many different things rolled into one. There are so many different useful things you can do with it. I think public class notes is a particularly interesting one.

Steve Blank says in his New Rules For The New Internet Bubble:

hiring talent in Silicon Valley is the toughest it has been since the dot.com bubble

I'm hearing this from everyone I know in Silicon Valley. And you can see the evidence on the web.

Joshua Schachter posted this on his twitter feed yesterday. This is what a new developer gets when they show up at work at Tasty Labs.

Quora posted this on their website yesterday.

I guess the developer setup is a key part of the recruiting war in Silicon Valley. Tasty Labs earns their name with the inclusion of Dr Pepper in the standard dev setup.

But seriously, there is a war for talent, particularly developer talent, going on. Not just in Silicon Valley but also in NYC and many other places around the country.

Companies, small and large, are resorting to all sorts of creative ideas to recruit. Free lunches, free yoga, pushing code day one, cool schwag, options, RSUs, pretty much whatever it takes.

We are watching this anxiously. It is likely to get worse before it gets better. But we are not just sitting around biting our nails. We are working with our portfolio companies to help in lots of ways. And I think it is making a difference. If you want to work in the USV portfolio, here is the USV portfolio jobs page. And if you want to drink Dr Pepper and write code with Joshua Schachter, here is how to do that.

At Union Square Ventures, we pride ourselves on our transparency and openness. Wednesday's Airbnb post and Paul Graham's followup posting of our email thread on that opportunity is a good example of where being open benefits everyone involved, from Airbnb, to Y Combinator, to Union Square Ventures, and mostly to entrepreneurs out there who have always been curious what really goes on.

But there are plenty of times when we are not open. If an entrepreneur comes in and pitches us on an investment, we don't blog about it. We have all sorts of things going on in our portfolio right now that we'd love to talk about but obviously we can't and won't. And when we make an investment that the people involved decide should be kept quiet, we are fully capable of doing that.

Today, I wrote a short blog post on USV.com about our portfolio company Kickstarter. We've been an investor in Kickstarter since the fall of 2009 but are only talking about it now that everyone involved is comfortable with making the investment public.

We prefer to be open and transparent, but that is not always the appropriate or desired posture. And when we are expected to be discreet, we are fully able to do that.

Last night I attended a meeting/dinner of many leaders in the NYC tech sector with the folks in city hall who work on economic development. We listened to a bunch of reports. One of the most telling was from Larry Lenihan of Firstmark who is managing an early stage venture fund focused on NYC tech companies. Larry explained that many of the best opportunities that come to them don't get funding because of the lack of a technical co-founder.

NYC has a wealth of business people with domain experience in many important sectors. But they seem to be having a hard time of pairing up with technical talent to form great startup teams.

Enter Pair Up. Pair Up NYC is an effort from InSITE, a group of grad students at NYU and Columbia who help startups. They've noticed the same issue and are doing something about it. Pair Up is a matching program between people who want to do startups.

I've tweeted out the link to Pair Up a few times, but I am writing this post to let everyone know that the deadline to apply for the first Pair Up program is tomorrow, March 18th. If you are looking for a cofounder and want some help, here's where you can apply.

obama_oj
Originally uploaded by charmaine_cooper.

When you walk into our conference room at Union Square Ventures, you see the box of cereal on the right on our conference room credenza next to a wifi router and a jar of Jolly Ranchers. It is there because we are big Obama fans? Nope. The cereal box is a reminder to back great entrepreneurs whenever they walk into our office regardless of what they pitch us on (as long as its in our investment universe).

Let me explain. Cliff Elam made a suggestion for a blog post in the "bloggers block" comment thread. He said:

Tell us about something you saw that was intensely interesting but was not something you'd invest in. And why.

So here's the story of how we missed Airbnb, one of the best startups to come our way in the past few years.

The Airbnb founders came out of the winter 2009 Y Combinator class. They came to see us during their time at YC. They told us about a great stunt they pulled at the Democratic Convention in Denver (in which Obama was nominated). They bought a bulk supply of generic cheerios and made up these cereal boxes to generate seed capital for their startup. Here's how one of the founders Joe Gebbia describes it:

We made 500 of each (Obama O's and Cap'n McCains). They were a numbered edition on the top of each box, and sold for $40 each. The Obama O's sold out, netting the funds we needed to keep Airbnb alive. The Cap'n McCains… they didn't sell quite as well, and we ended up eating them to save money on food.

I asked them if they'd leave a box of the cereal for us and it has been sitting in our conference room ever since. Whenever someone tells me that they can't figure out how to raise the first $25,000 they need to get their company started I stand up, walk over to the cereal box, and tell this story. It is a story of pure unadulterated hustle. And I love it.

At that time, Airbnb was a marketplace for air mattresses on the floors of people's apartments. Thus the name. They had ideas for taking on other listings but they had not yet made much progress on them.

We couldn't wrap our heads around air mattresses on the living room floors as the next hotel room and did not chase the deal. Others saw the amazing team that we saw, funded them, and the rest is history. Airbnb is well on its way to building the "eBay of spaces." I'm pretty sure it will be a billion dollar business in time.

We made the classic mistake that all investors make. We focused too much on what they were doing at the time and not enough on what they could do, would do, and did do. I am proud that our portfolio is full of companies where we saw the vision before other investors did and backed a great team. But we don't always get it right. We missed Airbnb even though we loved the team. Big mistake. The cereal box will remain in our conference room as a warning not to make that mistake again.

Some huge percentage of startup companies in this country are founded by immigrants. Not surprising. It has always been that way in America. But in the wake of 9/11, we've shut our borders and become intolerant of people from other cultures. Over time that will result in the sclerosis of our economy and the decline of america as the locus of capitalism and the american dream.

Last year, right after our firm and one other VC firm invested $3mm into one of our portfolio companies, the founder was forced to leave the country because his visa ran out. The jobs that $3mm were intended to fund didn't get created. The innovation the company was working on was delayed. Is that good policy? No it is not.

The startup visa movement was born out of frustration over stories like this and thousands of other similar ones. The premise of the startup visa is simple. If an entrepreneur can get funding to start a business in this country, he or she should be able to get a visa. Creating companies and jobs is a patriotic act and should be rewarded by legal status. The logic behind these ideas is irrefutable. But over the past year, the startup visa movement has run into a series of roadblocks. Politcs and goverment has a way of turning good ideas to mush.

Like a good entrepeneur would do, the movement has persevered. It has adapted, taken feedback, rethought certain ideas, and come back stronger. Yesterday, a redrafted startup visa bill was introduced in the Senate by Senators Lugar, Kerry, and Udall. And one of the harshest critics of the initial startup visa bill, Vivek Wadhwa, has concluded that this new version of the bill is "is even better than I had hoped for."

If you'd like to help promote this idea, you can use the votizen service to send a message to your elected officials. The more they hear from us on this issue, the better off we will be. And if you want to keep up to date on the startup visa movement, you can follow it on tumblr and on twitter.

This is an important issue for america, its economy, its vitality, and its entrepreneurial culture. Please help get the word out and make the startup visa a reality.

Yet another post in the M&A Issues series. This one is about timing, ie how long it should take from the first serious conversation about a sale transaction until the closing.

I've seen acquisitions done in a week. I've seen acquisitions take over a year from the first serious conversation to close. And one thing I know for sure, if a buyer wants to take their time and feels like they can get away with it, they will.

Not every buyer wants to take their time. Many buyers want the transaction closed as soon as possible. In that case, the seller has alignment with the buyer and the transaction closes quickly.

Sellers usually want a quick close. They should. Selling your business is distracting and fraught with risk. One you decide you are going to sell, you should move with as much speed as you can while being diligent, thorough, and reasonable.

Six weeks from serious conversation to close is fast. If the company is "clean" and the buyer is incented to do a quick close and there are no governmental approves, it can be done.

Anything over three months is too long. The sale process starts to hang over the company and impacts the team, the business, and can lead to lasting problems. Team members get antsy. Resumes hit the street. Customers hear rumors and start thinking about plan B. The senior team loses focus. The company suffers.

If there are reasons why a close is going to take a long time (governmental approvals, buyer approvals, diligence, etc) an approach you can take is to sign a defintive agreement which obligates both sides to close and provides remedies if the close does not happen (including breakup fees). This is often the way deals are done with public companies that require shareholder approval.

Another key issue related to timing is the news leaking out. The longer the process goes on, the more likely the news will leak out. The reality is most deals leak and it rarely gets in the way of a deal getting done. Buyers hate it when the news leaks out because it can bring additional buyers into the process and make it more competitive. But most sellers should prefer a quiet process too. The less chatter about the sale, the better in my opinion.

I'm a fan of quick M&A processes, within reason. It takes time to do the required diligence and legal work. Doing a deal in a day is generally not a good idea. Doing it in six weeks is desirable and should be the goal. Anything longer than three months is likely to be problematic and will require a ton of management effort to manage the fallout. If you are a seller, you should specifiy the time to closing in the LOI and do everything in your power to make the buyer meet that deadline. And if you are buyer, you should respect the seller's desire for a quick close and work hard to make it happen on your end.

I blog a song every day on my tumblog. At the bottom of the page on my tumblog is a banner which you can click and play every song in reverse chronological order. And I've gone one step further and created a website called fredwilson.fm where you can have that experience immediately once the page loads.

But this approach requires the publisher (me) to provide that stream for you. What if you find a page full of music that you want to play and there is no banner at the bottom? Enter ex.fm.

ex.fm (short for extension.fm) is a chrome extension that allows you to play all the music you find on a web page in reverse chronological order. Once you add it to chrome, you simply click on the ex.fm logo on the upper right of the chrome browser and you are listening.

ex.fm offers a lot more. The founder, Dan Kantor, was one of the team members on delicious and naturally you can bookmark (they call it note) a song and add it to your collection on ex.fm. And, of course, you can play a person's noted songs. Here's my friend Bijan's noted songs. Bijan is an investor in ex.fm. I am not, yet. So this is not a "pimp my portfolio" post. It's just a "pimp the things I love" post.

I find ex.fm works best on tumblogs. So visit a great tumblog, like this one, or this one, or this one and run ex.fm against it and sit back and enjoy.