Lots of talk these days about new forms of angel/seed capital. But less talk about the most vexing issue facing the venture ecosystem over the past decade – that being the shrinking amount of liquidity on the way out.
If you look at how much money has been raised by venture firms, including the seed and super seed categories, versus how much money has been returned in the past ten years, the ratio is not good. At some point the investors who fund the venture capital asset class will not be able to keep funding it.
The asset class needs to focus on liquidity. M&A continues to be the one bright spot and although I have not seen the data, I suspect M&A activity around venture backed companies in the past ten years has not shrunk and may have actually increased (if you take out the bubble years of 98-2000).
But IPOs of venture backed companies have almost been nonexistent over the past ten years. And that had been an important source of liquidity in the venture capital ecosystem. There is some hope that the IPOs of Skype and Demand Media will spark a renewed interest in tech IPOs. I am very excited about Skype. But friends on wall street tell me that the Skype IPO has issues, like a very weak stock market, the huge overhang of the eBay position, and a continued skepticism around tech IPOs. We will see. I am hoping my friends on wall street are wrong.
I have written about the emerging third way which is secondary sales of founder, angel, and VC stakes to late stage VC firms, growth equity firms, private equity firms, and even hedge funds. This has been a bright spot of late and the trend continues to be positive.
Yesterday our portfolio company Etsy announced that it had concluded a largely secondary transaction with Index Ventures. The interesting thing about this transaction is that it was not founder liquidity driven. The founders did not sell in the transaction. It was not VC liquidity driven. Some of the existing VC firms actually bought in the transaction. It was angel liquidity driven.
Etsy did two angel rounds early in its existence. Our firm participated in the second round. But both rounds were largely composed of individuals, including a bar owner and a restaurant owner who provided the first outside capital. In the video below, founder/CEO Rob Kalin tells the story of installing a new handmade wood bar for the bar owner and in return securing his first outside capital for Etsy. The entire video is very good. If you have a few minutes, check it out.
But the main point of this post is we are seeing that angels can get liquidity via these secondary transactions. They don't need to wait for the sale of the company or possibly the IPO. That is a very good thing, for the angel/seed sector, and for the overall venture capital market.
I hope these secondary purchases work out well for the funds that are making them. Because if they do, we will see even more of them. And that may be a way out of the liqudity issues plaguing the venture capital business these days.
fred – how much of this problem do you think has to do with the rapid growth of the startup “birthrate?”
not muchthe liquidity problem was around long before that
Hi Fred – pretend I’m a little slow (no stretch). Do I interpret this correctly that the early angels, or at least some of them, got their money out, plus some return on investment by selling their “shares” as part of this last/latest round? Thank you sir.
yes, exactlyyou are not slow. you understood it perfectly
Thanks Fred – that’s great info. It seems that @sacca has seen many exits recently in the $20-50 range. Are you seeing this as a major theme for [email protected]
i have not seen the same thing as Chris hasi’d love to see hard data on this issue before jumping to any conclusions
Thanks Fred. I said many but that might be aggressive. I believe that I have seen 3 announcements this year.
Encouraging news, Fred. To date, tho, this practice has been somewhat unusual. Glad to see some angel investors getting liquidity–to spread into newer companies…!
exactlythe thing that VCs need to understand is that money doesn’t grow on treesif they want more money for another fund, they have to give it back to their investors
wait.money doesn’t grow on trees?god damn it!
Fred, this is good for angels. Yet, it’s still not necessarily good for typical VC’s and their LP’s. There’s a lot of money which still needs to be returned to LP’s before new VC funds start springing up. If angels are able to cash out earlier in the future via secondary deals, in my opinion you’re only going to see the growth of angel and superangel funds. VC’s can’t generate the necessary returns they need on previous funds via such secondary transactions (whereas angels probably can). The multiples just aren’t there. The decline in classical VC will continue unabated, don’t you think?
Paul, while an investor with a venture capital fund will never see the absolute multiple that an angel in a ‘deal’ would there are two differences:-1. As an investor, I am motivated to make more money on money I have and not just a greater %age on smaller chunks of my money. As such, there is value in investing significant portions with funds who can deploy larger amounts and generate a decent multiple on them. So for instance I would rather make 50mn a year as opposed to 3 times my money on a 100k investment.2. Money also tends to follow the last in first out rule and so having the ability to participate in follow-on rounds or else to continue to finance over multiple rounds is a major advantage.I think the multiples are around and strategics will always pay irrational amounts for businesses. It just requires a continuous focus on exits. The entrepreneur’s time is best focussed on building the business. The VC’s probably best in this area.
Roshand, as a VC myself, I am referring to the returns afforded by these secondary transactions. An angel, with a couple hundred thousand at most in a deal, makes a nice return if he takes a couple million off the table. A typical VC will have a couple million in. If they do 2 or 3x on the deal, it doesn’t move the needle enough in terms of the returns they need to follow a portfolio strategy with funds of a couple hundred million. Hence, VC’s can’t depend on exits via secondary transactions in their portfolio companies. This won’t save them from the decline which is happening right now in traditional VC.
If you do a lot of these and are essentially actively trading- will it move the needle? Granted I have yet to hear of a fund that’s point is to actively trade in a market. However, would it work?
Shana, true, if you do a lot of these. Sure, Union Square may have pulled off one or two. Yet, there aren’t enough such transactions in the market “for it to work” yet on a greater scale. One can’t look at Fred’s fund (an Outlier) and presume the rest of the market can copy.
Not asking about outliers. I’m just wondering if there is room in the market for a “vc-hendge fund” which actively trades on Second Market rather than sits there and tries to make it through the long haul- and if that long term is the new way to make money at this? Would it move the needle for a fund?
Hi Paul, My feeling is that the decision to exit via a secondary is a call the VC takes based on where he is in the lifecycle of the fund as well as his reading on how soon the company may IPO / get sold to a strategic. Compared to no exit my guess is this is a better option in some situations and more such transactions will benefit the ecosystem as VCs will find they have a potential exit route in certain situations. Of course, the big returns that will move the needle have to come from the traditional routes – IPO, M&A.
that is not true Pauli don’t want to get into specifics, but we have sold secondary shares in oneof our portfolio companies and generated 10x on our entire investment cashon cash and still own 80% of our original position
Agreed on avoiding the specifics. Yet, I’m still not sure there are enough such secondary transactions throwing off the necessary multiples to support the number of VC’s out in the market now. Unless IPO’s come back or for some reason secondary transactions start taking place on a far greater scale like right away, we’ll see a lot of funds disappear. They won’t have the time to start pitching to their LP’s exits via the secondary channel.
i agree that there are too many VCs and too much money being invested in the asset classi don’t think the VCs should be drawing down more than $15bn a year
As you’ll likely remember, Fred, $15b/year is roughly the number that came out of my Kauffman paper on the subject last year. We’ll be doing a follow-up shortly.
that’s where i got the number
the 3rd way just provides the VC’s another ‘out’ when the LP’s are breathing down their necks about the asset class not doing what it says on the tin.it doesn’t fix the more endemic problem – it just punts it up the food chain.We talk about the ‘liquidity problem’ like it is an abstract academic concept and secondary at best to the raison-de-etre of the asset class. “VC is a great asset class, there’s just a teeny weeny problem when it comes to this minor thing called liquidity, but don’t worry yourself about that right now – just sign here”If we referred to it in simple and plain language such as ‘MAKING MONEY’ it would take some of the shine off things – perhaps thats why we don’t.n’est pas? – Kudos to Rob on not cashing in some chips
I don’t know Rob, but unless he has a trust fund (and I doubt it) then not taking chips off the table is nuts. How many people do you know who got creamed after 9/11? How many guys do you know who got creamed at the end of the last two bubbles.If your startup goes big, you’ll have a chance to do more stuff later on better terms. If your startup goes badly (and most still will) then you’ll have something besides pretty paper to show for it.-XC
didn’t say he did the right thing – just gave him props for doing so.Leaving all your chips on the table is a huge sign of confidence and perhaps one also of leadership – you gotta respect that
leaving all your chips on any one bet is always bad strategyjust ask any VC — they agree all about mitigation of risk thru portfolio theory
Didn’t say it was a good strategy. Said it shows a huge commitment.
XC – Rob took some “chips off the table” in the previous round
isn’t the IPO the same thing – “punts it up the food chain”?i see the secondary market just like the IPO market but it is not “widowsand orphans”it is sophisticated investors making the purchases
from what you’ve explained – the 3rd way is larger VC’s (and perhaps hedge funds) buying from smaller VC’s/angels – if thats the case from the LP’s position, at least on an aggregate level, money’s just changing hands within the asset class.For there to be real liquidity within the VC asset class as a whole, from the LP’s perspective if not from the VC’s perspective – doesn’t cash need to come into it from outside the class completely?
the same LPs who invest in VC also invest heavily in hedge funds and public stocksat some level, the financial markets, particularly the institutional side, is trading between one pocket and the other
would love to be the guy selling them the trousers
widows and orphans? buying IPOs?IPOs are almost entirely sold in huge chunks to highly compensated, highly sophisticated fund managers, whose performance is actively measured and judged every day when markets close… no? sure retail investors buy funds. but they also sell funds. so IPO buyers have to have some confidence new issues will perform
“widows and orphans? buying IPOs?IPOs are almost entirely sold in huge chunks to highly compensated, highly sophisticated fund managers…”…Who are managing money on behalf of widows and orphans, and who aren’t always as sophisticated as you might think. Here’s Mark Cuban on the dog & pony show he and his partners did for fund managers prior to Broadcast.com’s IPO:Prior to the road show, we put together an amazing presentation. We hired consultants to help us. We practiced and practiced. We argued about what we should and shouldn’t say. We had Morgan Stanley and others ask us every possible question they could think of so we wouldn’t look stupid when we sat in front of these savvy investors.Savvy investors? I was shocked. Of the 63 companies and 400-plus participants we visited, I would be exaggerating if I said we got 10 good questions about our business and how it worked. The vast majority of people in the meetings had no clue who we were or what we did. They just knew that there were a lot of people talking about the company and they should be there.The lack of knowledge at the meetings got to be such a joke between Todd and I that we used to purposely mess up to see if anyone noticed. Or we would have pet lines that we would make up to crack each other up. Did we ruin our chance for the IPO? Was our product so complicated that no one got it and as a result no one bought the stock? Hell no. They might not have had a clue, but that didn’t stop them from buying the stock. We batted 1.000. Every single investor we talked to placed the maximum order allowable for the stock.On July 18, 1998, Broadcast.com went public as BCST, priced at 18 dollars a share. It closed at $62.75, a gain of almost 250 percent, which at the time was the largest one day rise of a new offering in the history of the stock market. The same mutual fund managers who were completely clueless about our company placed multimillion orders for our stock.
I am glad there is some good news for angel and seed investors on this front. Hope it is a trend line and not a data point. With respect to M&A, my understanding is that the raw number of deals may be OK, but that are happening at less than dollars invested is very high. I am sure the NVCA, or somebody, tracks this. Anyway, not a much prettier picture than the nonexistant IPO market. Let’s hope Skype does very well.
As I’ve mentioned before, the IPO market never really closes. The problem is that relative to other investment opportunities, a typical tech IPO can look expensive – especially in times of market pessimism when investors seek security in solid cash flows and hard assets; two things not normally associated with tech, or a least web, IPO’s.It’s still not totally clear how effective Skype’s plans to monetize its enormous user base will be. In the good times the market would give management the benefit of the doubt – but not at the moment.I’m sure if a solid cash generator (such as Google) were to be IPO’d today, they’d shift it no problem.It’s all about the cash flows (and, as always, price).
What is making it look so expensive, and will that change?
“NON-super angel” perspective, for those interested:Personally, I’ve got my own “wheelhouse” (though the sample size is small):Invest in “seed” stage companies where I know what I’m doing. Inject a “small” amount of capital (for a VC, not for me!)….but mostly focus on injecting expertise, passion and a commitment to the success of the startup. “Sweat equity” is my specialty.Since it’s just my money, and my time/energy…..I can be very flexible on “exits”. I love selling into a B-round…that’s a nice score. But I also like building a portfolio of companies that are focused on making money and kicking out cash to shareholders. No exit is necessary. It’s difficult to really “lose”, because I win a lot and I’m betting on myself as much as anything.The fact that it’s not OPM being deployed, measured, and wound-down in set timeframes gives me flexibility to work with passionate people that I admire and that give me energy in return. I think this gives me the ultimate advantage over funds: Interests that are aligned completely with the founder…..instead of a primary fiduciary duty to partners.Without the pre-IPO liquidity that Fred is talking about, this wouldn’t make a lot of sense. Without the possibility of liquidity, every time I’m deciding to invest $10k or $25k of my money into a business, that’s $25k that I might not be able to use on my kids’ college (if they go) or on 100 bottles of pappy. I’d be limited to x total investments until one of them returned enough capital to make another.The liquidity expansion gives the angel a (sometimes false) sense of future options and control….which is all many of us need to go from “I wish I could do that” to “I f*ckin LOVE doing this!”
“But I also like building a portfolio of companies that are focused on making money and kicking out cash to shareholders. No exit is necessary.”I love this. Been thinking the exact same way for a while, more and more. This could be the wave of the future.
Would it get confusing in the long run if they ever got to IPO? I mean, first there are dividends, now there aren’t?
Oh, I don’t know… I can think of worse dilemmas for an early investor than whether to discontinue dividends to accomodate an IPO. Anyway, the odds of an IPO are slim. The more likely event that would lead to the dividend confusion to which you refer is a VC round.
🙂 Still doesn’t make the situation any better- clarity is often a good thing
The wave of the future? This is going back to basics. Standard business, you sell and make a profit. Anything else is speculation which is fine as long as you realise that 🙂
Worked out well for TPG w/ J.Crew. Not the tech sector, but still.
Interesting post. Although the ratio may not be good over a ten year span, how is the recent trend with the advent of pre-IPO cash outs like Second Market (or Google for that matter)? They are only a fairly recent development from what I understand. While IPOs used to be the desired end game, they are no longer the ‘holy grail’. With the advent of angels and super angels, so must the ecosystem develop on the other side, which is happening with Second Market or Google/Apple/FB, etc as the new end game options. Is a trend developing over the last two or three years that bears this out?
we need more time to knowbut i am hopeful
Isn’t all this a little perverse? If I wanted to be very negative, I would link this to subprimes or Ponzi’s schemes… When I was a VC, it was all about Don Valentine’s advice to founders: “look, we’ll put up allthe money, you put up all the blood, sweat and tears and we’ll split the company. Then if we have to hire more people, we’ll all come down evenly; it will be kind of a 50/50 arrangement.” Now founders still suffer and some make money thanks to other “smart investors” who hope to make more money. Secondaries are not really new right? But is it because there is a crisis with VC as an asset class and IPOs being impossible but for a happy few that new creative mechanisms should emerge? Danny Rimer is smart and he knows why he pays $300M for Etsy but I hope high-tech innovation will come back to its roots, plain and simple, not too much financial engineering, just value creation with entrepreneurs…
How about the CinemaShares model? Establishing a sort of private market driven by fans, customers, passionate users? Ideally they have proprietary insights around the user value of the product and may be willing to make a bet, compared to some trigger happy hedge fund in midtown manhattan.Correctly rearchitecting the ‘liquidity’ problem for entrepreneurs & investors is one of the most important re-ignitors of job growth in this country, when one realizes that small businesses create the majority of new jobs.What if passionate etsy users could buy shares, even for $100 bucks in some market? An added layer of endorsement aside from passing a link on fB. The problem is separating the crooks from the innovators. But sometimes, it’s OK to let the crooks in if it enables the innovators….
i like the kickstarter model even betterno need to sell equityjust presell your product
About the Skype IPO having issues, one has to be worried about google voice being released. Sure google voice is limited at the moment, but it is integrated straight into our browsers with gmail that most of us already use. Google is leveraging their existent user base and offering a new product, and they have been successful at doing that up to this point. I was just reading an article about google voice before I read your post, they said that google voice had 1 million calls in its first day….that is not too shabby. As an individual investor I would wait and see what google does before I invest in Skype.
But they haven’t really been successful at this all that much. Sure, GMail is awesome but Google Wave is dead. For every success they have, I’d argue they have a failure to go with it and none of the successes actually return much profit. They were and still are a one trick pony: search. Google is scary because they have a ton of capital to bring to bear on any segment they want but ultimately all they do is draw attention to the segment and those already competing in it. If I’m Skype, I’m much more afraid of the latest smartphones with front-facing cameras and Voip clients…those are much more likely to affect them than any Google offering.
Front facings phones, unless I am mistaken is currently only the iphone 4, which requires you to be on wifi to do it. Also since data plans in the states are moving from unlimited usage to pay as you use, even if you can use the data network it is not going to be cost efficient since video chat will use up kbs in no time. So lets assume front facing phone is video chat basically from your lap top just slightly more portable…but just wait till the ipad has a camera build in…I am going to go ahead on a limb here and say the next model they release. With that said, Skype requires you to download an application, google voice does not, any where you have a browser you can use google voice…lets say internet cafe, so google voice is more flexible. Also right now google voice is free to call any landline from you computer in the United States…Skype is not, another point for google voice. Regarding failures from google, I am not saying they can do no wrong, all I am saying is google voice is in direct competition with Skype, and seems to be cheaper and more flexible which are good business advantages to have from a software stand point. So as an individual investor I would like to wait and see where it goes before investing in Skype.
Let me preface my questions with a caveat. I’m not a VC and dont know much about the business yet. I’m still learning. I am however wishing to start a company with an idea I’ve recently had and am actively thinking of how to structure it to be appealing to both Angels and VCs.Is it not possible to structure the company’s stock and cash position policies to allow controlled buyout from the startup itself? I do know that VCs for their risk would love a 10-to-1 payout, but what about the option of a 2-to-1 buyout ratio if the company is profitable, has some spare cash, and manages to save a bit? It seems that this sort of structure is similar to a loan on the business’s end, but more flexible. A startup in death valley need not worry about forking over vital cash to pay interest. And once past breakeven, setting aside a bit designated for “investor liquidity” may not be infeasible.The cash reserve could be used for other opportunities with investor consent, as well, and turned back under the soil as fresh fertilizer. Or…. when the balance builds up, the needy VC could cash out all or part at the pre-established ratio.Would this type of structure in an operating agreement make an LLC a more attractive option for an angel or vc investor?Thanks,Shatuga
most investors will not want to cap their returnswhen investing in a startup the chances of complete loss is so large thatyou need unlimited upside on the ones that work
Agreed that these “non traditional’ liquidity transactions are necessary given the dearth of IPO activity.But the counter to all this is, as you state, that the lack of exit liquidity on an aggregate basis is a result of too much liquidity in the system on the front side. Said differently: too much aggregate capital pumped in to generate the necessary returns on the way out.Which leads to this “At some point the investors who fund the venture capital asset class will not be able to keep funding it.”Or a shrinking of the asset class; which is what many believe is necessary. We’ve heard about the denominator problem in the LP world with respect to amounts designated for alt investments. If the denominator of capital flowing into VC is smaller, requires less total exit liquidity to meet needed return thresholds.I guess the bigger question which is at the crux of this is whether with the regulatory changes and history of the last IPO bubble has created a world today in which it’s not reasonable to expect IPOs to be the realistic exit vehicle at the magnitude that is needed to generate the returns. Is there too much friction in the system (SOX, etc) or is it simply a matter of the co’s not having the fundamentals to justify the necessary valuations. I think that growth in the secondary markets is only good for spicing things up, providing an alternative strategy, and potentially helping the public markets to have more of an appetite for tech offerings again.
great commenti agree with your analysis
I like this, but that opens up a question- where are these companies supposed to go long term?
Neat stuff, thanks for the post. I think it would be in the industry’s interest to address the regulatory issues impeding IPO’s. Clearly that’s not an area of strength for the industry, but it’s getting critical, imho.
Skype will be a tough one – especially with the new gmail phone service – which is pretty easy to use – and quite ubiquitous.The biggest issue with angel liquidity to me has to be the issue of asymmetric information. Insiders have it – outsiders don’t. That can be solved with NDA’s etc… but if you start to see insider selling along side the angels – then you will run into a situation that management will have to be very careful about. Ultimately, if you really want angel and insider liquidity in private companies like public stocks – you are going to have to run the businesses as open as possible. Then everyone is on the same page.
The great Peter Lynch always hammered home an important point about insider selling – there can be many reasons for it: upcoming college fees, risk diversity, want to buy a new condo in Miami, etc.But there is only ever one reason for insider buying ….
skype may be more ubiiqutious for those internationally already. If it a product that a wide group of people go to, by all means, google should try, but…
This is indeed a nice outcome for Etsy angels, and will help spur some more investing by those same angels, I presume. And as a seed/early stage VC, I very much hope that a lot more of these transactions will occur. But Fred, isn’t thinking of these sorts of exits as a “way out of the liquidity issues facing the VC business these days” somewhat a flawed argument, at least beyond the short term?The only way this is a sustainable “way out” is if the secondary investors – the Indexes and Insights of the world – make big returns on their late stage bets. And that is 100% dependent on the IPO and very large scale M&A market. With no vibrant IPO market, firms like those have a very challenged business model. So liquidity options don’t improve for those guys, they’ll do a lot fewer of these sorts of deals. If liquidity options DO improve for those guys (read: IPO market opens up) then we’ll have a sustainable market of these types of transactions.Best case: IPO market improves and we’ve now added a new and very attractive exit option for seed investors.Worst case: IPO market doesn’t improve and this option becomes as rare as it was a few years ago.You can’t have one without the other.
i see this as buying time for a bigger M&A exit or possibly an IPOi believe it takes at least a decade for most companies to be worth the kindof money we all want them to be worthbut not everyone in the cap table can or is willing to wait that longso tiers of capital can come in and play the right role at the right timethe companies that are doing secondary transactions in our portfolio couldsell today but i am pretty certain if they hold on for another five or tenyears they will command a much larger valuation on exiti should have explained that in the postgreat question Brad
_i believe it takes at least a decade for most companies to be worth the kindof money we all want them to be worth_Coincidentally, most VC funds are 10 years with an investor option of extension. That’s why it can be particularly important for VC funds to have a liquidity option and why Fred likes it so much. Likewise, investors don’t want additional illiquidity in their private equity investments.
Why do you think it takes a decade? Let’s contrast that back to that post about the fast selling companies- what kind of companies are we building now?
i like your thinking here fredbut the skeptic in me has to also note — one of the big flashing alarms sounding the PE/LBO bubble about to burst was when it became commonplace (c. 2005-2007) for one LBO firm to sell a portfolio company (or large interest therein) to another PE/LBO firmas one, i am thrilled angels are getting high returns and liquiditybut i hope like hell it doesn’t become common for businesses and investors to start viewing private placements as “exits”
Rob Kalin has a compelling vision and understands where he wants to take Etsy. The fact that he quotes from the “ClueTrain Manifesto” and understand how social media and commerce need to exists together will provide a promising future for Etsy.
when Rob announced to the company that he was coming back as CEO, the firstthing he did was throw a ceramic mug (probably made by an Etsy seller) up inthe air and let it smash on the floor and create a lot of “broken glass” heleft it there, then opened the Cluetrain and started reading from it.it was a motivating talkyou have to do more than motivate, but starting there is a good idea
That’s so inspiring to hear that he is dangerously unstable. Why do you guys trust this tool with your money? I know Etsy is ‘successful’ Do you have any idea how much MORE successful it would be if it wasn’t run by egotistical children? You’d probably have sold out for $600 million like two years ago already.
He wants to take Etsy straight to the bank.. he’s been trying for a few years, but it is run like such crap that potential buyers get the creeps once they check out how the site is actually run.
When you talk about the “VC asset class” and a need to focus more on liquidity, do you mean to include the entrepreneurs in the asset class as well?On one hand, Venture Backed entrepreneurs are different animals than other entrepreneurs. You take VC money and you sign up for the asset class and the expectations/hopes/dreams/rules that come with it: one of those rules is to aim for liquidity at some point.On the other hand, focusing on liquidity vs finding scalable revenue streams — the unique job of “the entrepreneur” — can be a distracting exercise.So is it the investor who must focus more on liquidity in the asset class or the entrepreneurs as well? Or is the entrepreneurs’ responsibility as well, but only prior to the decision to start a company?
Nate – I don’t think “looking at liquidity” and building value in the business are mutually exclusive and thus shouldn’t be at odds with each other. Sure, there are inherent characteristics of the asset class (the life of a typical VC fund, dynamics of fundraising, etc) which an entrepreneur has to “agree to” when taking VC. But at the end of the day a VC round is simply a financing mechanism at a stage in a company’s life cycle. And so is an IPO.My view is that entrepreneurs need to focused on activities which are building value in the company – namely building a compelling product first, then figuring out monetization, then how the offering scales and generates cash flows. With cash flows, multiple liquidity options should be there – be it IPO, M&A, secondary offering, dividending of cash, etc.
i agree zack
Congrats to etsy, first of all.Secondly, if we don’t double dip, how likely is it that at least some of the IPO market will open up?If it does, does it mean we are letting angles leave money on the table? What risks do they have by staying illiquid for long long periods of time?
It’s an important Cross roads Fred and your comments and insights are a great addition to the conversation………and you are a Jets fan …sooo
so are we going to sign revis????
I am new to this, but it seems that the angels got a fair shake here, which is a good thing, not only for them, but for the ecosystem in general.Building my first startup. …Do you know what I want? I want to realize my company, and I want those that help to get out with something that makes them happy. I can imagine building another company someday down the line. Also, I can imagine wanting to support someone else’s company when I have the means. Coming out of something where those involved left happy is only going to help there.That said, I hear horror stories that suggest that I am looking to get screwed with that attitude. I refuse to be taken advantage of, but that doesn’t mean I am ok with it happening to others. Bad feelings all around, and you have lobsters in a bucket: everyone is pulled back.It seems to me, if good products are built, and if they are appropriately supported, many people can benefit. I’d guess that the more dynamic the funding structures available, the better the chance that investors and entrepreneurs can get what they need/deserve.
An RIA I met with in Menlo Park last week (a Portfolio Armor subscriber) brought this topic up during our conversation. Working in Silicon Valley, he mentioned he had a number of clients with equity stakes in venture-backed tech companies. He noted that venture capital returns have closely tracked stock market returns since they are so dependent on IPO exits, and IPO exits are of course scarce in weak markets. He agreed that retail investors’ continuing outflows from equity mutual funds were an inauspicious indicator with respect to the IPO market.
What I don’t totally understand is- Is this happening because of the lack of upstream liquidity or would this type of cash-out happen anyways when some early investor is approaching their 10X mark in ROI?And is the weakness in the IPO market a symptom of the lack of quality companies that are clearly on their way to becoming sustainable companies? If we’re still reminescing about the IPO market of 98-2000, that was a figment of illusions and aberrations where so many companies should have never IPO’ed. Many startups will always be just startups that do enough damage in the marketplace to be acquired for under $100 million, and that’s as good as it gets- that’s the reality.
we have plenty of high quality companies in venture portfolios but being a public company is not an easy choice anymorei think this is happening because people want to be investors in Facebook, Zynga, Twitter, Etsy and many more companies but they can’t buy those shares on the public markets
My comment about quality companies was by no means directed at USV companies (where your ratio is plentiful of course), but more at the market at large.What I was trying to say is that the gap seems to be between what public markets expect today from companies, and where even the best new tech companies are in terms of being public market-ready. Show me solid sustainable EBTDA, Q/Q revenue growth, solid profit margins, etc…and the public markets will welcome these companies. Public markets aren’t buying stories or speculative/risky companies the way they did in 98-2000. It’s become strictly a financially conservative playground.The nature of Internet startup companies (especially consumer-focused ones) is focused on adoption-related metrics which Wall Street can’t understand or quantify as bankable patterns. Of course, over time, the FB, Twitter & Zynga’s will become financially strong, but the Wall Street appetite for speculation over profits isn’t there anymore.
I think the whole development is an incredible thing, in an Adam Smith Wealth of Nations sort of way, and I’ve been hoping and suggesting you’d post about this.Now angels get to focus further on their specialty– nosing good early stage deals and doing their early stage magic. Then get the hell out, without having to pretend they actually understand the later stage aspects, and put that money, even quicker now, into other early stage deals (rinse and repeat).They hand off to later stage investors, who pay a premium for having had the earlier folks do the dirty work, and they add their value where they add it best.Everyone’s happy, in theory, and so far, largely in practice.
i have found myself on boards where the conversations revolve around quarterly financial results, legal issues, and other things that i am simply not interested in.that’s a signal to me that i’ve done my job and its time to move ondifferent strokes for different folks
this would be the start of a nice trend…selfishly speaking as usual of course first but in general for america and small business investment in the web and future. congrats as well. again.keep cranking.
Following FIFO on investment risk retirement…That is really a good gesture by the Esty founder(s) to reward the first risk takers and worry about rest later.How the VC’s LP allowed this? normally the VC’s make sure that they get the preference with words like “drag-along” …something something.
Hi Fred,As someone who has been funding, leading and nurturing emerging companies in both private and public contexts for 20 years, I have often thought that the risk reward scenario for investors in emerging companies could use some diversification. I believe that the investing public has vacated the IPO market for reasons beyond a lack of personal or corporate liquidity. Most investors in IPO’s make their decision to invest on the basis of whether they believe that there is a greater fool out there who will take the stock off their hands at a profit within what is often an unrealistic period of time. When investors lose confidence in the market (not enough greater fools) the market collapses. Why could we not offer a different reason to invest.I believe that emerging companies have one asset that could be the secret to unlocking significant new IPO activity and providing investors (especially corporate investors) a significant incentive to invest.The one asset that emerging companies have, that languishes on their financials for years usually, is significant net operating losses that they may be able to use in the future to offset taxable earnings. If these emerging companies were able to offer investors a transfer of some of these losses (for instance, maybe investors could get $0.20 of losses for each $1.00 of IPO investment that they hold for some minimum period) then profitable corporations would be incented to jump start the market. Considerable thought would have to go into how to ensure that this does not produce a bunch of bad offerings but with the right qualifications I believe that the results could be very helpful to rebuilding investor interest in IPO offerings.Obviously, the Federal Government would have to establish some sort of allocation and qualification system to ensure that there are reasonable controls in place for such offerings to avoid abuse and limit reductions in tax revenues (in BC our Provincial Government has such an allocation system in place for Venture Capital tax credits that works very well).Given all the “interesting” stimulous programs coming out of Washington these days, maybe they would be willing to help rebuild a key engine of economic growth by letting emerging companies advance the use of their losses to some extent.Ken Galpin, CEO [email protected]
Fred, no idea how to independently verify this but your point about M&A being the one bright spot rings true (and will likely continue to) if all the media reports about US firms building massive cash piles are accurate (http://www.ft.com/cms/s/0/a… . . . these cash/STI’s are only going to either hiring, greenfield or M&A and given that there seems to be ample startup supply, its probably a reasonable assumption that as this cash gets activated, you’ll see even more motion in VC-backed M&A.The flipside though is that traditional PE/LBO also likely has a ton of supply after taking such large co’s out of the public markets (think Hilton, Equity Office etc), and these portfolios are probably still looking to the public markets for liquidity
I’m confused. Sounds like this solves the liquidity problem for angels (which is a big win, though only for the few highly successful companies like Etsy) but how does it solve the liquidity problem for VCs?
i think this market will develop over time into something that can do thatas well
I am not sure I understand what you mean by the “overhang of the Skype position.” I haven’t followed the story much, but eBay sold 65% to an investment group last year right, and are holding 35%?How does that 35% affect the IPO of Skype?
they will eventually want to sell those sharesthe public markets don’t like thatit is called “overhang”
Angel investors who get more chances of exit liquidity can upgrade and become VCs later, given 10-year returns turned negative in late 2009 and 1Q2010 (as reported here http://www.mercurynews.com/…. When returns are bad, there’d be shakeout of how things are done the existing (or old?) way. But it is also when returns are bad, those who have holding power (pension funds, FoFs, whatever) should stay put and enjoy a much more positive 10-year returns down the intermediate and long run.
As you can see from their S1 http://sec.gov/Archives/edg…,Skype is phenomenally profitable and will price the IPO based on a multiple of cash flow/earnings. I wouldn’t use it as a wind sock to gauge public market appetite for the plurality of tech ipo’s in the backlog which mostly have negative cash flow or inadequate cash flow to substantiate a valuation on that basis.I am sure you agree that eventually everything stops at the public markets. Index’s prospects for success are highly correlated to the public market’s receptivity. Even the M&A market must answer to public markets eventually.Congrats on the tx, nonetheless, regardless of liquidity, it is a great mark to have for fundraising…and fundraising
http://sec.gov/Archives/edg…Skype is very profitable and will price on the basis of CF and earnings multiples. Not a good wind-sock for VC inventory (which is valued based on other metrics which precede financial performance).In the thermodynamics of finance, the public markets are the ultimate arbiter of valuation. The M&A market might deviate, but it must always reconcile with public market valuations.I think you are right back where you started, waiting for public market liquidity.
This is really interesting to read the financial discussion of a company that I have been a part of for over 4 years as a seller.It’s really disconcerting to me to have it reduced to dollars and cents, investor capital and returns on investments, and just so much business. Do any of you investors ever think about the people who invested their own money, sweat, tears on Etsy? The people who believed the initial vision of ‘handmade’ and have watched it all fall apart as the venue prepares for the public IPO?Do you investors care about the integrity of the site you invested in? Are you even aware of the constant state of unrest sellers on the site are in due to poor customer service, poorly tested and rolled out features that lately have had to be rolled back because of so many problems, the complete lack of communication on behalf of Etsy to inform it’s user base of changes and the lack of follow-through on issues they actually do occasionally address? Not to mention they are so far behind other selling venues in terms of tools and features that make the buying and selling experience easier.I’d be really interested to know exactly what it was about Etsy that attracted the kind of venture capital and angel investments it has. I and many others were under the impression it was about the nature of ‘handmade’. But as the site allows more and more non-handmade items on the site (and I’m not speaking of vintage or commercial craft supplies) it moves further from that vision.Do investors actually spend any time using the sites they invest in? Have you ever tried to search for something on Etsy? Do you even care about the fact that the category system and listing and tagging system is so flawed that it actually rewards users who abuse the system?I’m guessing none of that really matters to investors, that the bottom line is recouping your investment and making more money, regardless of how that money is made.
yes i am very aware of what is going on at etsyi was there two days agoi understand all of the support issues and i have been actively involved intrying to find the right managementi think the combo of Rob plus a strong team under him is the best managementfor the company and we just attracted a very strong executive from Googlenamed Adam Freed to focus on operations under Robwe now have almost 60 engineers and very strong engineering leadership. thesite and service are getting better every dayand i do buy on Etsy. i like to buy gifts for friends and family on Etsy.i visit Etsy about five to ten times a month, maintain a favorites list, andunderstand what is missing and what would make it even betterfor me, our investments are not just about money. we invested in Etsybecause we believed then as we do now, that it could make a difference inpeople’s lives. that is more important than money.
Rob Kalin is not a good leader. He needs to be removed as far away from Etsy as possible. Most people who have been involved with the business on a day-to-day basis for more than a year feel extreme feelings of distaste for his actions, personality, words and failure as a leader.
Thanks for your article, Now there is more reason to comment than ever before!
I have go second this…..===========================This is really interesting to read the financial discussion of a company that I have been a part of for over 4 years as a seller.It’s really disconcerting to me to have it reduced to dollars and cents, investor capital and returns on investments, and just so much business. Do any of you investors ever think about the people who invested their own money, sweat, tears on Etsy? The people who believed the initial vision of ‘handmade’ and have watched it all fall apart as the venue prepares for the public IPO?Do you investors care about the integrity of the site you invested in? Are you even aware of the constant state of unrest sellers on the site are in due to poor customer service, poorly tested and rolled out features that lately have had to be rolled back because of so many problems, the complete lack of communication on behalf of Etsy to inform it’s user base of changes and the lack of follow-through on issues they actually do occasionally address? Not to mention they are so far behind other selling venues in terms of tools and features that make the buying and selling experience easier.I’d be really interested to know exactly what it was about Etsy that attracted the kind of venture capital and angel investments it has. I and many others were under the impression it was about the nature of ‘handmade’. But as the site allows more and more non-handmade items on the site (and I’m not speaking of vintage or commercial craft supplies) it moves further from that vision.Do investors actually spend any time using the sites they invest in? Have you ever tried to search for something on Etsy? Do you even care about the fact that the category system and listing and tagging system is so flawed that it actually rewards users who abuse the system?I’m guessing none of that really matters to investors, that the bottom line is recouping your investment and making more money, regardless of how that money is made.
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