Staying Independent

Possibly the most interesting running conversation I've been having with entrepreneurs lately is how they can keep their companies independent without having to go public and turn their cap table into a casino. There are a bunch of entrepreneurs thinking seriously about this issue and I've been thinking seriously about it too.

Of course if you bootstrap your business and never take outside investors then this is not an issue. You control the timing and the choice of exit and there are no investors to concern yourself with. But there are plenty of entrepreneurs who have built interesting businesses using outside capital – angel, seed, VC, or some other form – and they have a portion of their cap table that is seeking a return on their capital on some reasonable timetable.

The emergence of a vibrant secondary market may point to a solution. If one set of investors eventually cashes out to another set of investors who eventually cash out to another set of investors then you have a formula for staying independent while giving your investors liquidity over time.

To some extent this has already been happening in the buyout and private equity world. One financial buyer trades the asset to another financial buyer and so on and so forth. The venture capital industry could potentially adopt some of these practices while leaving the entrepreneur and their management team intact and in control.

Angels and early stage investors who have portfolios with high loss ratios might hold on to their strongest performers for five to ten times their money. Later stage investors who have much less downside risk might hold on for three to four times their investments. Companies could build enterprise value over time generating returns to their various stakeholders who might change over time.

Another possibility is leveraged recaps and possibly dividends. If you build a business with excellent cash flow, there will be cash that can be used to pay out dividends or used to service and pay down debt. Dividends are not tax efficient under US tax law. The Company will pay income taxes on its earnings and then the investors will pay taxes again on the dividends. That is why leveraged recaps are more attractive in the US. Instead of paying dividends, the Company borrows funds it can easily service and pay down over time and uses those funds to repurchase stock from its investors.

Both of these approaches (dividends and leveraged recaps) require that the Company have strong recurring cash flow that when multiplied by a cash flow multiple will provide a meaningful gain to the investors.

Let's look at a model of how this might happen. Let's say a company required $10mm of startup capital to get to breakeven. Let's say $3mm of it came in for 20% of the business and another $7mm came in for another 20% of the business. The investors would then own 36% of the business. If over time, that business could earn $20mm per year of pre-tax cash flow, then it would have roughly $12mm of after tax cash flow to pay out. The investors could be paid out $4.3mm per year in dividends (36% of $12mm). Over the course of five to ten years, those dividends could deliver a 2.2x to 4.4x return to the investors. The issue with this approach is the tax inefficiency resulting from double taxation and the long time frame it would take to earn a decent but not amazing return.

On the other hand, $20mm of cash flow could be used to borrow $100mm (5x coverage) and that $100mm could be used to repurchase the 36% from the investors. The investors would get a 10x return on their investment and the founders would get all of that equity back. It would take 7 or more years to pay off the debt including interest and that would be a large debt balance for a company to carry.

Clearly the leveraged recap is preferential to paying dividends as a way to take out investors with cash flow. Some variation of the leveraged recap will be the way to go for as long as dividends are tax disadvantaged to leverage.

None of these approaches is likely to result in returns that are as good as what could be obtained in a strategic sale at a big premium or an IPO in a strong market environment. A company with $20mm of pre-tax cash flow is likely to have close to or greater than $100mm in revenue and could possibly exit or IPO for between $300mm to $500mm in a strategic sale or IPO in a good market environment. If the investors own 36% of the Company, their proceeds in that kind of an exit would be $110mm to $180mm, higher than what could be obtained in any cash flow based exit scenario.

But none of this says to me that new approaches to liquidity for venture investors should not be on the table. If the entry price is right (rare these days) and the investor is patient and if the entrepreneur and company is willing to get creative, there are ways to get early investors liquidity at acceptable rates of return that compensate for the risk of the early investment that do not require selling the company or taking it public.

I am working on this on a few fronts. Nothing urgent or imminent. But I am confident we will see our firm utilize some of these different approaches in the coming years. I think we have to if we want to continue to serve the interests of entrepreneurs and the companies they create.

#VC & Technology

Comments (Archived):

  1. Matt A. Myers

    Does this conversation shift sometimes to “Oh shit – we/I better exit through IPO if we want to survive another 5 years and make any substantial amount of money?” This is what I see with most of the giant IPOs as of late, and the ones coming..Note: I’m not implying / don’t see this being a practice you’d support, nor that you want to make investments in companies you don’t think have long-term survival and viability.Companies staying in the secondary markets sounds good to me, mostly because currently I imagine most of those investors hopefully know what they’re investing in, have done due diligence..¬†Re: Different fronts – Are you referring to tapping into/leveraging the new JOBS act rules?

    1. fredwilson

      I am not sure how going public helps a company survive

      1. Matt A. Myers

        Good point, I more meant that as apart of the money-grab that I see most of them becoming, and by survive I meant for a limited time before the engines and hype that might be perpetuating something’s success – and where over the next few business cycles their model will start to crumble due to ‘disruption’ / a better model.IPO’ing could be used to buy up strategic assets, though I think you could likely instead find venture firms to fund this if the company and plans are solid.

        1. Dan

          Groupon reference? (and not the strategic assets bit)Curious if you see the secondary markets providing real liquidity for the average well performing company? Seems like all the hype around secondary markets has resulted from highly anticipated IPOs – this is a pretty anecdotal statement.

          1. Matt A. Myers

            I don’t think average well-performing companies can really see as much as long as the bigger hyped large companies/pre-IPO companies are grabbing the majority of the monies available. There are more nuances I am sure I don’t know though, however what’s in the media makes it seem like secondary markets are being used to create hype and also for some investors gambling and hoping for a large IPO to make their returns.

      2. Carl Rahn Griffith

        We have to think about all those poor investment bankers, Fred – they need something to do… ūüėČ

      3. howardlindzon

        Going public is as hard as a startup, except you now have two startups, the ticker and the company. ¬†Both are living breathing things. ¬†Going public helps a company survive for brief moments of time….see the Travelzoo $TZOO ¬†rise during the Groupon craze. ¬†Now that it’s over and their business never evolved past globbing onto the momentum craze of Groupon, they are in worse place than before that craze started. ¬†…¬†Something like 70 percent of all stocks round trip and become penny stocks. ¬†The odds suck. ¬†We are only talking about more money and a different set of timelines. ¬†If you want to go fast and you are a bit older like me, and you take VC money, deal with it. ¬†If you can do waht Bloomberg did and maintain 88 percent control, you are an outlier and you get to make the rules.

        1. ShanaC

          I remember watching that on TV – it seems the only way to feed the beast is to control your own fate, irrespective of quarterlies.Very counterintuitive…..

        2. fredwilson

          oh man, you are so right. hard to serve two masters. particularly when one of them cooks dinner at home

      4. Cromwell Coulson

         ******Personal disclaimer. I run  OTC Markets Group, a public marketplace platform so I benefit fromcompanies being public traded.  ****** There are many benefits of going public besides raisingcapital or cashing out management and investor shares.The placing of a value on your company’s stock, the branding event, thetransparency of your business model, the liquefying of investors equity thatcreates a wealth effect on their personal balance sheet, the choice forinvestors to be able to sell if they disagree with your direction or need cash,the ability of new investors to buy and building a governance structure thatcan endure changes to management and shareholders.Going public should provide a company with more enduring governance structureto deal with the wider circle of owners and will give it tools to survivebeyond the life of the founder or early investors.  In many ways it is achange from a monarchy when controlled by a founder, or an oligarchy whencontrolled by a few large investors, to what is intended to be a democracy asthe ownership widens.  Democracies arethe most enduring form of governance when done well.A problem with a NYSE or NASDAQ  listing is that it is offers one size fit all governancemodel designed to fit the largest companies, that have professional managersand a wide shareholder base of passive investors that own the stock as part ofan index.   Stock exchange corporate governance requirementsadds a complicated layer of a board that is controlled by independent directors.  This oversight is needed to protect outside shareholdersfrom the agency principal conflict, however it reduces power of directors thatare management or large investors (VC and PE firms).   Stock exchange governance is often a priceworth paying if you are a huge company in major index’s that can attract allthe cheap beta capital. It does not fit as well for the smaller companies have founders,families,  managers and the boards owningsignificant amounts of stock.   Directorsare significant owners and outside investors collectively have a smaller voteso they are in a tag along role.  We see manyowner-operated companies quietly traded in the OTC Market to provideinformation to and offer liquidity for their investors.   When we looked at U.S. companies on our bestmarketplace, OTCQX, they averaged over 30% ownership by management anddirectors.  For these owner-operators companiesthere should be a balance of power that does not relegate large shareholders tothe minority of the board. On a side note, rather than taking the risk of a leveragedrecap, the company can just buy back the shares over the time it would havetaken to pay back the debt.   And beingpublicly traded provides better confidence that investors selling into thebuyback are getting a fair price.   

  2. Julien

    I have been thinking about this issue a lot as well, but not from the “financial” point of view, form the user point of view. There are tons of example out there of existing companies which have been aquired (not necessarily with a huge premium) and then, either completely shutdown ¬†or just slowly sunset (ack!). These companies offered products and services which had users, and even fans.¬†I am not sure why the entrepreneurs eventually sold, but even if they put some cash aside (good for them), and if investors have been (even partially) paid back, I don’t think that eventually these companies created a lasting value.¬†When looking at other industries, the shape is more like a pyramid: a few (very few) large companies, then, a larger amount of suppliers, partners… etc, and an even larger amount of contractors, or very small companies providing a service.¬†I feel like the web had the huge players and he very small ones, but there is no love of the “middle” size players, yet, they are usually the ones creating jobs, and innovating the most.

    1. fredwilson

      this post is all about those middle players

  3. Carl Rahn Griffith

    Very interesting. Kind of reminds me of my time in the re-insurance markets. Lots to think about in this blog post, Fred – my little brain needs some more coffee, first!

  4. Kasi Viswanathan Agilandam

    “I think we have to if we want to continue to serve the interests of entrepreneurs and the companies they create.”That is a very messiah’ic (coined just now) statement. Liked it a lot.

  5. awaldstein

    i’m just saying thanks for this Fred.Learned some things I didn’t know through your crisp presentation. Not relevant for today for me but I bet in some tomorrow this will be critical info.

  6. Jerome Camblain

    I think your leverege recap is a LBO.Using the cash flows of the company to finance the acquisition by the founder / exit by the VCs.The founders will load the company with debt in order to buy out the VC’c.I see one issue: LBOs usually only leaves debt to one party: the buyer. Here the founder/buyer might still have other smaller investors remaining shareholders. Can they also get out, or will they be forced to support the pile of debt the founder thinks the company could carry, open to any adverse wind?

    1. Jerome Camblain

      ¬†LBO Mezzanine debt is not cheap; mostly as recent companies have a short track-record, no history of managing during down-time…and bankers have to unload that debt through securitization.As you like new business ideas: the launch of a fund buying a basket of debt issued by this “leverage recaps” – high yield, low correlation with financial markets, and a on a forward-looking segment of the economy.

      1. Yaniv Tal

        Isn’t it possible that this interest would be less than federal tax?

        1. Jerome Camblain

          don’t know as I am based in Europe. But interests are surely a deductible charge that reduce profit to be taxed.

    2. ShanaC

      Maybe we need to see the growth of small debt LBOs – the whole point of the debt was to make companies more efficient. It might be more reasonable to say it should be debt to make a company grow.

    3. fredwilson

      yes, but i prefer leveraged recap. different words. same thing.

  7. kidmercury

    “Let’s say a company required $10mm of startup capital to get to breakeven.”lol…..need to shave a few zeroes off that…..i know we’ve had this discussion before and i agree 100% that there are lots of ways to build a business and not everyone has to go for “dude in a basement on ramen” approach. but once we start looking at taking public markets out of the equation, we really need to bring costs down.¬†dividends! my favorite. your point about US tax law is legit, no doubt. so we need to move out of the US. there is some powerful inertia here. hey, that’s fine. folks can always enjoy the alternative if they’d like.¬†if you go public the CFO increasingly needs to be a trader and needs to understand volatility. then you have a chance at using volatilty and the casino aspect of the market to your advantage. but that is a tricky prospect.doesnt crowdfunding lift the SEC shareholder rule from 500 to 1,000? that should give companies a lot of breathing room. or is there some type of dealbreaker there, perhaps regarding max company size/revenue?SEC reform, and reform of the monetary system as a whole, are absolutely necessary. the industry as a whole shows absolutely no interest in this. as they will soon realize this is a very big mistake.¬†9/11 was an inside job,kid mercury

    1. kidmercury

      also, debt financing in all of its myriad of forms is going to get tougher. maybe not tomorrow, but within 10 years. that is one of the big implications of the credit crisis we’re now in. ¬†

    2. Yaniv Tal

      Not every company can get away with having only ramen on its cap table ūüėČ

    3. Kasi Viswanathan Agilandam

      “Few zero’s” is too far fetched or stretched statement.¬†May be¬†possibly¬†one-zero down … if you knock off few zero’s then what you are breaking even is 1-man’s salary!! and not a company. :-).

      1. kidmercury

        lots of incubators invest 100k or less…..and i think those incubators will become more efficient in their ability to quickly guide startups and amortize costs that their startups share. the problem is that revenue is delayed because they have the option of flipping forever, and because users are equated with future revenue. ¬†software costs practically nothing…..that is the real revolution. that is why as the economy continues to deteriorate software remains so promising, because it as the cost structure that will enable survival through a big contraction. in my opinion people who want to spend a lot of money are better off focusing on other opportunities that cost more.¬†but sure, maybe some software companies need 500k, or 1 million.¬†

        1. Carl Rahn Griffith

          Man cannot live by software, alone…

  8. Yaniv Tal

    Great post! This is the first I’ve heard of a leveraged recap. It sounds like a potentially good route for a SaaS company since revenue streams can be more predictable with that model. I’ve been thinking about the exit strategy for our business. I would hate to end up selling to our competitors since I think they run¬†incompetent¬†evil empires so traditionally that would just leave the IPO. I follow Jeff Bezos and I really appreciate his¬†reverence¬†for long term thinking. It’s difficult to adhere to that with a public company so kudos to him for pulling it off. With none of the traditional models seeming particularly dazzling, I’ve been looking for alternatives. The secondary market is one, though there are rumblings of VC’s wanting to close that faucet, and this looks like a great viable option.

    1. ShanaC

      Do you think a lot of content companies should go private if they are run on a subscription model?

      1. Yaniv Tal

        My point about SaaS was that companies with proven subscriptions should be able to negotiate better terms for debt which would make this leveraged recapping more attractive. I think the decision to stay private is a personal call for the founders.

        1. ShanaC

          Hmmm, maybe we need more SaaS type models

  9. markslater

    “turning your cap table in to a casino”i’m stealing that! frikin awesome.

    1. Carl Rahn Griffith

      So, a cap table becomes a craps table? ūüėČ

      1. Kasi Viswanathan Agilandam

        u meant grab or crap or crab?

    2. fredwilson

      steal away. all my good stuff is stolen too.

  10. brian trautschold

    These type of solutions are what every founder is¬†fantasizing¬†about..¬†Luckily for startups of this generation the cost of scaling is exponentially lower and the lean mantra is baked into our psyche, so we can prolong injecting huge capital long into our company’s lives – also, the VC market can raise the $1B rounds for the Twitter(s) which continues to push IPO down the road.¬†Really looking forward to hearing more – as founders we fear the loss of identity and startup “innocence” that will¬†inevitably come with the IPO option

  11. jimmystone

    What’s your take on leveraged recaps that pay a divided instead of repurchasing stock?IMO dividend recaps are extremely dangerous b/c misaligns incentives btw entrepreneurs and investors. returns should be earned by helping the company grow – not by adding debt to enrich investors.

    1. JLM

      At the end of the day, the company is owned by its shareholders. Investors are shareholders by virtue of their investment. To treat them as something other than shareholders is a bastardization of reality.Boards of Directors (even Boards of Drama) owe their allegiance to all shareholders, not just the largest or controlling shareholders.It is difficult to do but the discharge of one’s fiduciary duties — the highest possible financial duty imaginable — must take into account the 1% owner as much as the 45% owner. All shareholders must be treated equally even if they are VCs.This may not appeal to your democratic sensibilities — the majority rules and winner take all — but it is true.

      1. howardlindzon

        amen…part 2

      2. jimmystone

        When are dividend recaps ever in the best interest of a portfolio company? Separately, doesn’t the Board have a responsibility to all stakeholders – not just shareholders? Thanks for the insight – I’m learning a lot.

        1. JLM

          The term “stakeholders” was invented to let sensitive folks sleep better.The harsh reality is that shareholders own the company. Directors represent shareholders. That is a legal and fiduciary duty. It is a very high duty, indeed.Dividend recaps are best when folks decide they are best — management and Boards reasoning and talking together.

          1. jimmystone

            Good stuff on the stakeholder vs. shareholder explanation. Thank you. Still, not sold on dividend recaps as preferential approach for the entrepreneur to investor liquidity. The sponsor receives her investment back (or more) and then has a call option on future growth. At least in a recap scenario where the company repurchases sponsor stock, management is exchanging future debt service payments for ownership.

          2. JLM

            I am not singing the praises for any particular approach.But look carefully at your logic as you have enunciated some substantial differences.Dividend recap — money certain in hand and a free option on future growth.Recap scenario — money uncertain in the future and no option on future growth.Does one strike you as less risky and more certain than the other? Does one cap the upside?

          3. jimmystone

            Need to clarify definition of recap scenario.From the perspective of the investor:dividend recap – money(proceeds from debt) certain in handand free option on future growth.recap scenario – money (proceeds from debt) certain in handbut no option on future growth.I‚Äôm not arguing that sponsors don‚Äôt like dividend recaps.I’m arguing that they’re the worst way for entrepreneurs to provide investors‚Äôliquidity. You’re adding debt to your company but not getting ownership inreturn and now you’re paying higher debt servicing instead of investing in thebusiness. Meanwhile, the sponsor gets a nifty return and effectively a freeride.¬† If I‚Äôm an investor whoalready hit my return bogey, why do I spend as much time now as in the pasthelping the entrepreneur win?

          4. ShanaC

            The shareholders may own the company, but many companies have responsibility to create long term value to the people who buy and/or use their stuff/service. (actually, all, if I think about it for another 10 seconds)It’s called not killing the golden goose.Directors may represent the shareholders, but they represent them in terms of the best interest of the company. If it were a choice between a lower value for the company for 2 years but a higher one for 10 years (after inflation) – what do you think the decision should be?

          5. JLM

            You are arguing with yourself in a circular fashion. Nothing wrong w/ that.The Directors will set policy which the Company will execute to make money. No altruism at work yet. Pure business. Markets, customers, revenue. Money is made when customers are satisfied.Then the Directors will do what is in the best interests of the shareholders with the aforegoing already accomplished.There is absolutely no conflict at work here.It is a false choice to suggest that the alternatives are “either – or” when, in fact, they are “both – and”.

          6. ShanaC

            I’m not sure. There are definitely companies that over time do actually kill their customers off because in the short term they make more money.And technically speaking, it is both-and – but the reality of the innovators dilemma is that it becomes an or over time.

  12. Roger Ellman

    I would love to know more about the new approaches you mention, the fronts you are working on!

  13. JLM

    Pay Window — don’t ignore the Pay Window.This discussion strikes me as taking place in a vacuum. Not finding fault w/ any of the observations or motivations attributed to any of the players but if you take OPM, then you have to play by those rules.Sure, you can alter the game by giving back the OPM. But understand that is a “relaunch” of substantial financial proportions, that is not just shooing a going concern down the Primrose Path.When you owe a lot of money, you make different kinds of decisions. When you go to the Pay Window, you open up a lot of personal alternatives. Almost all of them good.Entrepreneurs and investors should discuss the likely outcomes and exits long before they arrive — really before the ink dries on the check and the money is in the bank.I am one to reach for the entrepreneur’s lens more often than not but this strikes me as particularly shortsighted and naive. Go to the Pay Window.The assumption that financial outcomes will stay consistently excellent and all good for protracted periods of time — for the entrepreneur — is to disavow the reality of markets. The worm will turn and the bad half of the apple will show its ugly face soon enough.How much better could the Instagram guys have done v the Groupon guys? Ride that pony hard and go to the Pay Window when it opens.When the Pay Window shows up — go to the damn Pay Window and never, ever look back.One last observation about people — we seem to live in about 4 year cycles and it is important psychologically for us to use our waxing and waning energy in that cycle.As a young person, you will have lots of other alternatives and opportunities — made better still by being able to say — I hooked that monster, got it into the boat and cleaned it up at the dock. I am a money maker and I can do it again and again.Everybody wants to invest w/ a winner but that requires you to make a round trip. Make that trip through the Pay Window and never look back.

    1. Carl Rahn Griffith

      So, so, true…

    2. awaldstein

      Perfectly stated.i’ve done it right and wrong.Sure I’ve learned from waiting and losing. I’ve gotten better by taking the full trip round the bases to home plate.

    3. Matt A. Myers

      I think many, like myself, as we understand and see these 4 year cycles then allows us to see that large amounts of money going to something that is likely to die, or struggle or be wasteful and be more of a drain on innovation, and therefore slowing down the benefits to society as a whole.Perhaps though this will cause people to quickly ¬†learn to not trust larger mutual funds or do their research first, bad investments / investors will then be out of money and unable to continue to help bring people to the pay window without proper due diligence / understanding..Pay window = Great for entrepreneurs, not necessarily great holistically for the larger ecosystems involved.I think that’s the angle a few of us come from.

      1. JLM

        The entrepreneur/philanthropist who writes the check to fund the research that finds the cure for breast cancer — has to make the money first.We each play our individual part on the world’s stage — let the others play their part and let the entrepreneur be true to himself.Pay Window

        1. Carl Rahn Griffith

          As long as there is some altruism arising from those who are at the Pay Window; let others indulge themselves in yachts, villas, fast cars, and all the other flotsam and jetsam of a life with excessive riches and no focus…

        2. Dan

          Speaking of pay window, not sure if you saw this news on omgpop, but sounds like they made sure everyone got paid. Thought you’d appreciate JLMhttp://www.businessinsider….

          1. JLM

            Huge. The way the game is supposed to be played.Damn good karma.Well played!

          2. Matt A. Myers

            Is that just damage control for his bad-mouthing an ex-employee developer though? Which came first, I wonder..Makes me wonder too if it was more of a Zynga requested thing, based on his treatment of an individual ex-employee.

          3. Brandon Marker

            You know he had a nice, awkward meeting with Zynga higher-ups that day. 

          4. leigh himel

            Oh yeah. ¬†That’s some serious PR chops (thank you Facebook i’m sure)now if the story is true, its pretty cool regardless but always prefer that stuff not be related to spin doctoring.

          5. laurie kalmanson

            I worked at a startup that was failing, and the straightup ceo (hired by the founders) let the board know that there was enough cash left to do right by people, and that would either happen or he would leave. It happened. He’s still around, and even more awesome today.

          6. JLM

            Character. Respect. Honor.WIN — now maybe but in the future absolutely.Karma is a bitch. But a bitch with a damn long memory. Don’t screw with her.

          7. laurie kalmanson


        3. Matt A. Myers

          I understand. It’s apart of the ying/yang balance, push and pull. However you can still fund cancer research (or promote preventative/proactive health) by making $100 million a year from a sustainable ecosystem, than draining $1 billion in a quick cash grab – and also then not allowing people to vote with their money longer term, Eg: I continue to use your service because it’s good vs. here’s money for what your service could be work, pre-paying our future support for you that may or may not exist.

          1. ShanaC

            I’m actually curious about for profit setups with nonprofit like goals that can scale (sorry hot bread kitchen). Does anyone know of someone?

          2. Dave W Baldwin

            You have to look at the longer timeline.  As @JLM:disqus is stating, you have to pay the bills.  So, the longer timeline might reach for the very disruptive with logical attachment to bigger goals (curing cancer, doing away with need of sutures, self duplicating of engineered atom/molecules taking 3D to different level, accelerating the accelerations and so on) which means you need to have a goal what your first development is going to do and how it fits the bigger picture taking into account where other developments will be in 18 months, 3 yr, 5 yr and 10.It is okay to make profit at different points for the truly good person will be investing part of their own profit on the next round (= equity).

          3. ShanaC

            Oh I know, I just was thinking that I need a way around that, where you can aim at a larger goal(curing cancer) using small steps, in which these small steps also lead you to profit and scalability. It isn’t something I hear about often

          4. Yaniv Tal

            Look into Michael Porter’s theory of having “shared value” replace “social corporate responsibility”. It was initially targeted towards large corporations but is equally¬†applicable¬†towards startups. The basic idea is that companies cannot and should not be blindly¬†philanthropic. The only way that a corporation should really affect change is to focus on activities that are both and at the same time profitable for the business and good for society. Having this “shared value” produces a situation where what society wants and what the company wants are in line and the two re-enforce eachother. Bill Graham has an hour long youtube video on a similar topic. He brought up Octopart, one of Y Combinator’s own startups as an example, though this was in the slightly broader category of “don’t be evil”. It’s a popular view which I hope will spread and I think is very much inline with the new democratization of business. Companies that don’t understand this will fail, if not now then soon.

          5. JLM

            Being philanthropic with a company’s money is just showboating. Worse still if it is my money as a shareholder or an investor.Doing it with your own jack is honest.Be honest and stop showboating.

          6. ShanaC

            I’m less concerned with being blindly philanthropic than the product itself being used in a way that could be detrimental to people.

          7. Matt A. Myers

            @JLM:disqus  I think the point is that the money spend would be beneficial to the business itself, in a measurable way Рyet there would be positive societal impact as well.

          8. Yaniv Tal

            That’s right, wouldn’t you spend a few dollars on advertising and branding? Spending 2% of profits (not cash, but profits) on something that aligns with your business’s core value prop and actually makes the world a better place is more effective than spending a bigger chunk on traditional advertising. But here’s the catch: you have to be authentic. Companies more and more are all about values. If you’re screwing somebody in the community just to make an extra dollar, it only takes one tweet to tell the world. So the question all¬†entrepreneurs¬†and companies should be able to answer: What are you all about? Live it. Believe it. If you’re really all about the money and people have another option, they’ll ditch you – first chance they get.

          9. JLM

            As a shareholder, I don’t want hired guns determining what causes to support w/ my money. I am not talking about “positioning” the business but simple “causes”.This is not running the high hurdles here, you know when you’re authentically pursuing a business objective and when you are just showboating.I would argue strongly that this violates the fiduciary duties of the Board.You cannot do stuff w/ OPM because YOU think it is cool.

          10. QJH

            I was talking with a lawyer this evening who recommended that execs think of every dollar of company money spent as the equivalent of handing over personal stock certificates, because at the end of the day, that’s how fiduciary irresponsibility can catch up with them when the bank runs dry. A smell test at the least.

          11. Yaniv Tal

            I’ll buy that. Everything the company does has to be in its own (fiduciary) interest, but the board should be thinking long and wide about how to¬†achieve¬†those interests. A great example could be drawn from Apple’s iBooks 2 textbook initiative. If it doesn’t succeed, it will be because they were thinking short term when they came up with their repressive¬†licensing terms¬†and pricing model. Here’s an opportunity to 1) fundamentally change education in this country and 2) grow into a new market. Note that one of these is great for society and the other aligns well with their value prop (iPad / iBooks).Instead of trying to squeeze everything they could out of the licensing terms, they could have made it much more attractive.. maybe even too attractive. What would they have to lose? Even if they don’t take those schools and authors for all they’re worth, that company would have a generation of educated individuals indebted to them and attached to the brand for the rest of their lives. Would making this decision violate the fiduciary duties of the board?

          12. ShanaC

            Aka – this is the big issue with pinkwashing. Most people who do align with Breast cancer nonprofits do so because it feels good. :/

          13. QJH

            You might find someone by investigating companies that have L3C (Low-profit LLC) designation. I haven’t quite wrapped my head around it, but my limited understanding is that the IRS has loosened¬†compliance¬†requirements for companies with some amount of “social benefit.” I know that legislation for this has passed in only a handful of states so far.

        4. fredwilson

          Mike Bloomberg has buildings named after him at Johns Hopkins and Harvard Business School

          1. JLM

            It is very difficult to find fault with how Bloomberg has made his money, invested his money, spent his money, has invested his expertise.In many ways he is the quintessential Renaissance man of business, philanthropy, politics and good sense.Kind of reminds me of you, my friend.Awww, you’re blushing. True.

          2. fredwilson

            that’s because he has influenced me

      2. Emily Merkle

        Take what you earn. I think where we can all do better is – ask questions! It is ok to not know! But do due diligence if you can. And – assume nothing.

    4. Mark Essel

      If anything the types of liquidations Fred is discussing are focused on sustaining long term value. It’s like a pay window at a McDonalds drive through which yields returns over 10-20 years.I like the way you attach the Pay Window to human psychology. To ignore cutting strings is to ignore the fundamental human need for freedom, exploration, discovery, and exotic experiences.

      1. Carl Rahn Griffith

        Let’s not forget the most basic human ‘need’ for many – Greed.

        1. Mark Essel

          Ok , I forgot ūüôā

          1. Carl Rahn Griffith

            Because you’re a good guy, Mark – a greedy guy would have it at the top of the pile :-)Caveat – I see greed as a very different animal to wishing to create wealth/success. Totally different. The two have become blurred, sadly.

          2. Mark Essel

            I’d like to earn enough to not have to worry about it, and I know what that number is (or at least I think I do).I can understand greed, and to me it’s not meaningful in of itself. Wealth is only useful if it’s frees you. Pick a number and call that FU money. Know it.My hours and days are just barely my own at the moment.

      2. JLM

        In the long term, unfortunately, we are all dead.Live in the present and live well. You deserve it.You cannot buy cheeseburgers with NPV of future cash flows.Go to the Pay Window.

        1. Mark Essel

          I do live well. My momma didn’t raise no fool.I prefer business sales that retain or grow in value. The other kind communicate the (ir)rational psychology of ownership (competition killing, aqui-hires, strategic). Not knocking those sales, just a preference.

        2. Emily Merkle

          I want to put a ding in the universe

    5. howardlindzon

      amen…..its about shareholder value (not at any cost I guess) but you know what I mean. ¬†You took the money now deal with the pay window….All that said, I imagine mathematically there are a few cases that could and should go the way fred is talking about, but they are outliers and you can’t build businesses around outliers. ¬†If not, you are changing the game. ¬†I don’t think I want to see the game changed.

      1. JLM

        Here’s the big truth. The game NEVER changes.Oh, you may think it does and that you look good in skinny jeans — but the truth, the truth, you can’t handle the truth —The GAME never changes.Go to the Pay Window and never look back.

        1. leigh himel

          I’m going home and throwing out all my skinny jeans right now. ¬†ūüôĀ

          1. JLM

            No, no, no — metaphorical. You, cher, look great in skinny jeans. Trust me.

          2. Donna Brewington White

            I was thinking the same thing, Leigh. Although I might keep them around for motivation.But, wait a minute, unless you’ve had a drastic weight gain since I last saw you in October, keep your skinny jeans.

      2. fredwilson

        i want to put a stake in that “outlier” mentality. i think it is wrong. the way we are going is not sustainable.

        1. Mark Essel

          I’ve been thinking about what sustainable really means. Does it mean eternal, without relying on the vital energy of humans? We are discrete time simulations, playing out over a brief lifespan. Sustainable may just mean reliable or hastle free existence.Unless we can accurately predict the future (we can’t), sustainable is hard to define, or imagine. What is sustainable now may not be tomorrow, what is a runaway train today may be a sturdy foundation tomorrow.

        2. Carl Rahn Griffith

          Gladwell has a lot to answer for…

    6. ShanaC

      It seems you keep describing the pay window as a cash based discussion.Also, can you go on about 4 year cycles about people?

    7. Donna Brewington White

      Keep telling us this until we are saying it in our sleep.

    8. fredwilson

      you know i love the pay window mentality and the phrase. but Mike Bloomberg never went to the pay window and i think he’s awesome.

      1. JLM

        I do not advocate the Pay Window for all folks. It is an essential liquidity event for neophyte entrepreneurs and those who have taken OPM. VC money.In the case of Bloomberg, if memory serves me, he was already a wealthy guy having been the head of equity trading for Salomon and upon getting canned after the sale of Salomon received a $10MM severance payment which was his seed money.So Brother Bloomberg did not have the pressure of having taken substantial amounts of OPM. And thus no necessity to look at the Pay Window through a lens held up by a VC.His business, the ubiquitous Bloomberg terminal, was a cash flowing jewel from the start with each installed unit commanding a dear ransom. He had 2-300,000 installed units before the PC revolution.The other thing I like about Bloomberg was his conversion from Democrat to Republican to Independent.He is a huge and generous philanthropist having supported thousands of worthy causes with big, big, big checks.

        1. fredwilson

          mostly right. but he took something like $250mm of equity investment from merrill lynch. he paid them back with a leveraged recap.

      2. Emily Merkle

        Bloomberg rocks.

  14. JLM

    A bubble is a bubble even when one likes it and even when it feathers one’s own nest.If you can sell a company into this bubble — whether by IPO or other means — do it. There is nothing wrong w/ taking advantage of a market freely set by others and with obscene and unsustainable multiples.These multiples cannot sustain themselves almost by application of the law of gravity — a fledgling w/ an impressive but smaller cash flow is understandably different than a more grandiose sized company with a larger cash flow.At some point, the upside is limited and growth will slow down. The second that is realized with any company or industry, the multiples will plummet back to earth.Not a pessimistic view of the world but a whiff of reality that will not hurt you but arm you to make good and better decisions.Go to the Pay Window.

    1. John Best

      Someone needs to hit cafepress or similar to make a “Go to the Pay Window” tee. I’d buy that.

      1. JLM

        In the works as we speak. Being printed. Will be available within a week. Fred has to work out the logistics. I am production, Fred is management. This is going to be fun.If you send me a snail mail address, I will send you one. Free, because you were the first to ask.First movers get the best benefits.

        1. John Best

          Epic, will forward it on!

        2. John Best

          I’ve mailed what I think is your address, or I’ve freaked out someone random.

        3. William Mougayar

          “There is no free lunch, but there may be a free T-shirt.” JLM

          1. Carl J. Mistlebauer

            All this talk of “free t-shirts” all the time is making me insecure! ūüôā

    2. ShanaC

      You sound a bit worried about this market.

    3. howardlindzon

      its what you do after you sell now that matters. ¬†in 1999, that new money went to exotic hedges and bullshit cars and houses…now it will get reinvested in 25k lots to thousands of entrepreneurs and when the valley gets to crowded …you will go to angel list capetown and disrupt the german copycats who would have gone there before angel list existed. ¬†Yes there will be failure, but failure that makes the engine smarter and more sophiticated and eventually bored of web and back to basic materials and than back to web etc…..anyways…this is evolution and this blog and the comments and the ecosystem are just bringing it faster. ¬†thanks freaking god.

      1. William Mougayar

        “now it will get reinvested in 25k lots to thousands of entrepreneurs” From your mouth to God’s ears I hope. And sprinkle some into Canada too.

        1. leigh himel

          ya i saw that article about Toronto being 4th startup ecosystem…..While i’d like that to be true…

          1. William Mougayar

            Pass the salt ūüôā

      2. fredwilson

        i like buying my wife the ring i always wished i could have bought her

    4. fredwilson

      by that measure Google should have gone to the pay window in 99/2000. that would have been tragic. there are limits to your mantra

      1. JLM

        There are limits to everything. Finding those limits is the challenge.

        1. fredwilson

          right. exactly.

    5. William Mougayar

      As many times as you have said Pay Window and I stopped counting, there should be the same number of those statements printed on that special T-shirt. Stamp “Pay Window” all over the T-shirt, front and back, diagonal, horizontal, vertical and in reverse, and with big dollar signs. On a serious note, if there’s another bigger Pay Window ahead (and Internet startups are born believing that), then they’ll skip that first window til the next one. That takes guts to do that. This reminds of a Pay Window joke. When the little kid saw the pay window at the theatre for the first time, he asked “Dad, how did the big man get into that small window behind the counter? They must have got him in when he was a baby.”

  15. William Mougayar

    This sounds like the money is used for a partial equity buyout as opposed to for fueling growth. So, the assumption is that the company didn’t need to extra cash to fuel growth. Is that correct?It seems to be a bit like the recent Hoosuite/OMERS “investment” of $20 million, of which ~$5M went to previous investors. So, it accomplished both objectives seemingly.

    1. Ricardo Diz

      Well put. Indeed, it’s a way to buy these investors out with possible impact on the potential growth. Naturally, this is only possible if the balance sheet is strong enough for it, which might not be the case for a lot of tech ventures…I’ve seen this strategy being used with Tourism-related companies, where it’s easier to have assets acting as collateral to¬†debt. Unfortunately, the balance sheet flexibility that is needed is also related to market confidence, so this operation is not possible in every market…

  16. JosUijterwaal

    sorry, but it sounds like the same reasoning behind packages of subprime mortgages….in search of quick liquidity and ‘fast’ RoI

    1. Alex R

      I get the analogy, but the real estate market is much more prone to¬†over-inflation¬†that the cash flows of your business. ¬†It is each easier to predict your future cash flows than the value of your real estate investment, because there are far fewer externalities. ¬†That said, your cash flows are not¬†perfectly¬†predictable, and there is a chance you can’t pay back your interest. ¬†So, it pays to be¬†cautious.

  17. Yaniv Tal

    I’d just like to point out how ridiculous it is that VC’s want to see your exit strategy on your PowerPoint deck. I would argue that it’s much more important to have a revenue plan than to know what your exit’s going to look like 5 years out. How often can the company actually be right about that? If you force us to smear BS on the last slide, how do you know that the rest is¬†pristine?

    1. Carl Rahn Griffith

      I’d wager the IG folk didn’t have the FB deal/timeline on their Exit Strategy .ppt! ūüėČ

      1. Tom Labus

        Or financials 5 years out.Talk about creative writing!

        1. Carl Rahn Griffith


    2. JLM

      It is not important that you have the right exit sussed out, but that you are thinking about it.The first victim of contact w/ the marketplace is the plan but you have to have a plan to know from whence to deviate.

      1. Carl Rahn Griffith

        Pivot = Profit.

        1. ShanaC

          PtP – pivot to profit

      2. Rohan

        ‘In war, I’ve found plans are useless but planning is indispensible.’ ūüôā

        1. Yaniv Tal

          No doubt, that’s what the business plan’s for. And it’s a living breathing document complete with beautiful color coded cells.I’d like the PPT to be a little more truthful considering I have to say it out loud and BS stains the teeth.

    3. FlavioGomes

      Its not really just about the exit or timing of the pay window when they ask that.¬† Its the process of thinking about exit that helps you define your business goals and uncovers unexploited opportunity.¬†You should always include the exit angle in your business building strategy even if you don’t plan on exiting in the long term.¬† It gives VC’s the necessary warm and fuzzy check box and it may just help you better position your business for success.

    4. fredwilson


  18. Tom Labus

    So much of this depends on the personalities and financial needs of both the founders and investors (if they exist, most companies don’t have them).Some owners are more comfortable with a going business and cash flow and are not necessarily motivated by cashing out or selling. While with others cashing out is their prime motivation.It’s great that companies can prolong their private period before being public or if ever.

  19. Jeff T.

    Leveraged recaps make complete sense to me, much more so than dividends.  This is for my own understanding, but if Facebook were to get a massive loan and buy up all their shares on secondmarket, would that be the equivalent of a leveraged recap?

    1. Nilesh Trivedi

      ¬†Yes, that will be a leveraged recap…leverage = debt, recap = recapitalization

  20. howardlindzon

    Let me chime in about independency here as well instead of a blog post I am about to write. ¬† When I think of dependency at 46, I think of Wall Street, versus hard money. ¬†Investors around the world are getting so sophisticated as to financing and entrepreneurs as well that less burdensome ways of financing are becoming possible. ¬†Because of that, we can also expect another aspect of ‘staying independent’ to take hold….I dont’ need a Wall Street broker or bank to help me at any point in my lifeline as a company. ¬†Instagram went from zero to a billion with the help of smart angels, great mentors, the social web, social leverage of their networks and vc’s. ¬†They were bought by Facebook with no bank involved. ¬†In our last cycle, the big banks were involved 100 percent of the way in Silicon Valley. ¬†If Kevin and team dont fall for the ‘private wealth’ spiel of Goldman and Morgan, than a whole $1 billion would have stayed independent from Wall Street and Too Big Too Fail…a bigger, much needed and more important game changer than worrying about changing the game of the ‘pay window’¬†

    1. JLM

      You raise a huge and very interesting point.Wealth is being created without having to go through the fraternity initiation process of finding an i-banker and going through the hazing ritual — not just w/ an IPO lens but also with a M & A advice lens.There is a new font of knowledge being developed at the VC level — we can get you to the Pay Window without having to shave 15-25% off by getting mugged on Wall Street.This is being created by a lot of free education and dialogue on the Internet. The compartmentalized knowledge in the Wall Street club is no longer that precious or that useful.Guys like you and Fred Wilson have made a huge contribution to demystifying the basic investment thesis — make some damn money.Go to the Pay Window but don’t pay for valet parking.

      1. Carl Rahn Griffith

        I especially love VC – and many other things – when they take a Disruptive approach. Must be the old Punk in me, lol.Screw The Suits.

        1. fredwilson

          i’m an old punk too my friend

          1. Carl Rahn Griffith

            The punk spirit never dies.

      2. howardlindzon

        i do love valet parking though…sometimes you have to pay. ¬†i will pay goldman to broker the building of bridges but other than that…adios asshats. ¬†

      3. howardlindzon

        Here is my new post on Instagram and how it reminds wall street that it failed¬†…

        1. JLM

          Valet parking is for mullets.Of course, on the last day of a BMW 740iL lease I did have the entire left side removed 6″ deep by the valet at an Opera event, so my wisdom may be just a bit jaded.Have you ever seen $20K worth of body damage? And then they wanted to charge me for two hail dents. Go figure.

      4. JamesHRH

        Every financial market gets insular and cynical. VC getting you to the pay window has the same optical hazards as Wall St doing it……Lots of people in hard industries will look @ FB buying Instagram and point to Matt Cohler. They will say he just got himself paid, in a big way, by getting one company & CEO he knows well to buy another company & CEO he knows even better.Personally, I don’t know the guy. But, if I had to bet, I would go with crazy smart, grounded and connected. Regardless of the reality, he is still open to accusations of self serving and out of touch with reality behaviour……which is what people think of Wall St.Nature of the Pay Window beast, me thinks.

        1. fredwilson

          yup, matt is crazy smart.

      5. Timothy Meade

        ¬†So it’s Disrupt Wall Street – Not Occupy Wall Street. NB from Cringley:… (#11 on that page).

        1. JLM

          The world is becoming transparent and what was being done by the Wizards of Wall Street is not that mysterious when a bit of antiseptic sunlight is applied.Money is looking for deals.Deals are looking for money.Investors are not stupid.Entrepreneurs are not simple minded.The banks cannot be trusted — long on the 4th floor and short on the 19th floor.The Internet now making the introductions that once upon a time were being made on Wall Street.The world is getting smaller, more efficient and more skeptical.And, why the Hell not?

          1. FAKE GRIMLOCK


          2. Zo

            VCs are middle people too.Should Fred be regretting his decision on Kickstarter?

          3. FAKE GRIMLOCK


          4. fredwilson

            i’m only regretting that i didn’t think of it before Perry

          5. Dan Ramsden

            It isn’t so much an issue of disintermediation as transference of intermediation from one source to another. It isn’t so much an issue of disruption as improved efficiency, and the middle people, as Grimlock calls them, are not vanishing but are new middle people. This slide overview we recently published illustrates what I mean, but the upshot is this: the new financial intermediaries are the networks themselves.

          6. FAKE GRIMLOCK


    2. Brandon Marker

      Great point on the sophistication investors are gaining, as a whole. I hadn’t thought of it in those terms.

      1. JLM

        Haha, Brandon, who are you fooling. You personally are in the mainstream of changing the way the world looks at start up money.You, my friend, are providing the education which makes the investors more sophisticated in real time.Sandbagger.

        1. Brandon Marker

          Haha that gave me a good laugh this morning. I am¬†definitely¬†working to facilitate that, but I just meant as a whole outside of our realm of crowdfunding, tech, etc.It was unintentional sandbagging ūüôā

    3. heif

      right on

  21. Sebastian Wain

    Offtopic:i) It would be nice to have the capability to download VoiceBunny’s podcasts. The streaming “over the air” is difficult in the road/metro.ii) Adding a brief ad to the podcast can pay for that.

    1. fredwilson

      click on the link that says “subscribe to this podcast” you will get two options:1 – subscribe on soundcloud and listen via the soundcloud app in your phone, 2 – subscribe in itunes and listen via itunes

  22. will lucas

    How did you calculate the 36% ownership?

    1. JLM

      20% x 100% = 20% net20% x 80% = 16% net20% + 16% = 36% net

      1. fredwilson

        strategy: if you wait until the next day to reply, it is likely that someone else answered the question (and answered correctly).

  23. vruz

    Keep us posted!:-)

  24. Cam MacRae

    What the US really needs are franking credits e.g. a tax credit to the dividend payee for the value of corporate tax already levied.

  25. will lucas


  26. LE

    “Clearly the leveraged recap is preferential to paying dividends as a way to take out investors with cash flow.”The dividends are less risky though for the company since if business conditions change they can stop paying them. ¬†If they borrow the money to repurchase they are on the hook for the money but the investors are in great shape (in addition to the tax reasons) because there is no longer any risk to them.”If over time, that business could earn $20mm per year of pre-tax cash flow, then it would have roughly $12mm of after tax cash flow to pay out.”To me that’s the big “if”. ¬†There are many cases of companies refinancing leveraging etc. and going bust based on assumptions. These assumptions tend to be made by financial people who don’t realize all the ways a company can stop being profitable given a change in business conditions, the market or some other event known or unknown.¬†

    1. FTR

      Also regarding dividends ¬†“The issue with this approach is the tax inefficiency resulting from double taxation and the long time frame it would take to earn a decent but not amazing return.”I thought many LPs are tax exempt and with flow through taxation on the investment vehicles would it still be double taxed?

      1. fredwilson

        yes, but you still have the tax at the corporate level. so that means tax exempt investors are getting taxed once instead of not at all

  27. Ela Madej

    Interesting. That’s also the first time I’ve heard abt leveraged cap…¬†

  28. NY Financial Press

    If the bank would help better just with revolving. it will make life easier

    1. FlavioGomes

      Banks are zero or approaching zero risk enterprises.¬† I’d be confident in saying Web startup’s make bank managers nauseous, unless of course you have negotiable collateral and slightly less so, sustainable proven positive cash flow.

      1. JLM

        Banks are dead. Absolutely and irrevocably. Dead.

        1. Tom Labus

          John Reed may have been the last American banker,

          1. JLM

            A banker was a guy who would make you a loan because he knew your family or had complete faith in you. A time when one of the most important C’s was character and it was the first C.

        2. FlavioGomes

          They are apparently in somewhat better shape this side of the 49th but in the context of tech venture investing, we chant the same funeral dirge.

        3. fredwilson

          sadly, i agree with you

  29. French VC

    Great post.¬†I think the leveraged recap would be more appropriate for european VCs since IPO are not as frequent as in the US. European VCs are afraid of investing because they know they have few opportunities to cash out with more than just decent multiples. That’s why they do not invest much, and that’s why European start-up fail to scale.Sarenza, a leading e-commerce company selling shoes has done this recently. Cofounders now own 80% of the company and refused an offer from Amazon.…Sorry these articles are in french…

    1. fredwilson

      i love it.

  30. ShanaC

    It seems to me that we’re talking about the inefficencies and expense of stock dilution vs debt to grow a company. Do you think we need a better way to deal with debt than the current solutions (aka, expensive and non-existant)?

  31. justinmares

    A part of me wonders if this issue will result in a new class of venture investors within the next 5-10 years who invest only in lower-risk scaling companies and seek returns in the form of dividends, where an IPO would be a happy bonus.¬†We’re seeing the traditional VC get squeezed at the early level (by angel groups, super angels, etc.), and I don’t think it’s unreasonable to think that a new class of VC could emerge upmarket that requires a steady return rate and an occasional IPO. Thoughts?

    1. jimmystone

       Growth equity firms (General Atlantic, Summit Partners, T.A. Associates, etc.). Need to be able to write a decent sized check when a biz is trying to scale.

      1. justinmares

        Sure. So you don’t think those returns would be enough to justify a big check? What about a hybrid model where a growth equity firm participates in a growth round and has their equity bought back by other investors at a later point?¬†

        1. jimmystone

          It really comes down to fund size and strategy. Most VCs don’t have the dry powder to write $20 to $200 million checks across multiple portfolio companies. They make smaller investments and take more risk but their returns are, in theory, greater than the growth equity guys.Even if a growth equity guy could earn 10x on his $500k early-stage investment, why would he? $5mm bucks hardly moves the needle on a $1bn fund…

    2. fredwilson

      it will need to be a new investor i think. it’s too hard for existing investors to morph to a new model.

      1. jimmystone

        ¬†Interesting. So you think there’s a void between traditional VC and traditional growth equity? Is this mainly b/c the cost of scaling current tech businesses is lower than in the past?

  32. matthughes

    Wow, this discussion is an eye-opener for me.Thanks for posting this Fred.

  33. Daniel Wright

    Decoupling firm success and investor success is problematic and ultimately unsustainable (if the goal is to foster a thriving community for innovative companies and not pump and dump schemes). So it is worth considering how financial (as opposed to material) innovation can lead to that decoupling.Not saying that’s what Mr. Wilson or other VCs are doing now, quite the opposite, but beware of making powerful tools that can be used as easily for ill as for good.

  34. bijan

    great post.very interesting to think about the impact this could have.¬†i know a few founders that have told new investors, “you can invest in my company, but i have no plans to sell or go public”. they are scared the public markets will tell them to cut back on R&D in bad times, and to do unnatural things during good times.¬†i’m happy to hear you think outloud about new models here.related: I remember the very first investment we worked on together (we both lost it to a corporate acquirer) and i said i wanted to own 20%. You replied, “where is it written on some tablet out there at VC needs to own 20%?”that lesson stuck with me as a new VC and helped me tremendously as i freed myself from the status quo.¬†

    1. laurie kalmanson

      lovely. see also: when the gap was building stores on all four corners at an intersection, because “wall street expected it” and then the inevitable cutbacks/closures — instead of growing in a way that made sense for the business.

  35. Todd Wahnish

    Great post and great discussion- as my own startup comes close to launch, been thinking about this a lot lately. 

  36. JamesHRH

    Reading this post makes me think…….retail investor = chump @ the poker table¬†

    1. fredwilson

      could be

  37. Albert Hartman

    Great article. This topic is going to become much more important as the JOBS crowd-funding bill gets implemented and lots more businesses get investors. These businesses generally are much smaller and may not be IPO or fast acquisition candidates – cash flow will be their only asset for awhile.A 2.2X to 4.4X return over 5-10 years is a poor IRR (18%) for VC ambitions. But for a bond holder, they are awesome (18% is much better than 4%). Sounds like there needs to be a way for startup investors to turn over their dividend-bearing shares to get their cashout pop to more patient bond investors who are looking for a cash stream.

    1. fredwilson

      this is just one of many things that are changing, need changing, and will change in startup funding

  38. Patrick Kane

    A (cynical) note on the buyout model. Secondary deals were the way to put money to work when real entrepreneurs didn’t want to sell or when you were too lazy to do your own deal sourcing. Most LPs hated it too. Imagine being an incumbent LP in a deal at an 8x valuation with fund A, and then fund B pays 12x to acquire them and you’re right back in. How can you charge 2 and 20 for money recycling?I did see secondaries work (for the companies, and for the investors) when fund B had a core strategy that they applied across all deals, and they did it really well. Most of the low hanging fruit would already be taken care of in the first deal (working capital management, better financial reporting, etc…), so it came down to tougher areas like internationalization, ERP implementations, industry roll-ups, etc… but then you are back in investment mode for a company you just bought from a sophisticated seller for a high price. You won’t be taking out too many dividends in the near future.Finally, new equity usually required an entirely new capital structure, which is expensive (see i-banker comments below), and don’t forget management profits handsomely in most of these situations, and working with pe guys is a pain in the ass, so are you really ready to double down in a new round?

  39. DannyJames

    I think many of you will enjoy this one: Ground Balls Win Games…

  40. Modernist

    Thanks for this post and the discussion it sparked.  One of my all-time AVC favorites so far.

    1. fredwilson


  41. Donna Brewington White

    For some reason, this makes me think of the “math problem”Interestingly, that post signaling disruptive thinking about the VC business was also in April. Is there something about April?

      1. Donna Brewington White

        Ha! Suspected this.

        1. Emily Merkle

          To me I think we go wrong with modeling good behavior with family only – as my girl Hilary said, it takes a village.

  42. MikePmalai

    Financial engineering is not the solution. If entrepreneurs are demanding long term capital, give them long term capital. That requires rethinking the LP centric venture capital model.Tech needs a Berkshire Hathaway-esque investment vehicle that gives entrepreneurs the autonomy and long term capital they need.

    1. fredwilson

      great point. i had not thought about addressing this via the VC firm structure. it would take a top tier firm to do this. LPs aren’t going to give a brand new firm evergreen funds.

      1. MikePmalai

        Warren Buffett has great commentary on management independence and the value proposition he offers to entrepreneurs:”…sellers sometimes care about placing their companies in a corporate home¬†that will both endure and provide pleasant, productive working conditions for their¬†managers. Here again, Berkshire offers something special. Our managers operate with¬†extraordinary autonomy. Additionally, our ownership structure enables sellers to know¬†that when I say we are buying to keep, the promise means something. For our part, we¬†like dealing with owners who care what happens to their companies and people. A buyer¬†is likely to find fewer unpleasant surprises dealing with that type of seller than with one¬†simply auctioning off his business.In addition to the foregoing being an explanation of our acquisition style, it is, of course,¬†a not-so-subtle sales pitch…And if you aren’t interested now, file our proposition in¬†the back of your mind: We are never going to lose our appetite for buying companies¬†with good economics and excellent management.”

  43. laurie kalmanson

    i’ve heard punks talk about the $$$ they want to make with payday being the focus, not the product or the service; that rarely works i’ve heard wannabe big shots deride “lifestyle” small to medium businesses as “only” generating steady returns and growth — no hockey sticka billion dollar payday is a lovely thing, but having that be the goal is not a path to winning

  44. jason wright

    What is so compelling about being “independent”?¬†

    1. fredwilson

      ask flickr users, ask delicious users, ask friendfeed users, etc, etc, etc, etc, etc, etc, etc, etc, etc, etc etc

      1. jason wright

         In the frenzied financial gobblefest that is the commercial web users are merely the meat in the money sandwich, every burp and vomiting and back-slapping time.

    2. Emily Merkle

      I don’t know about you, but there’s something about being your own boss that turns me on.

  45. YoniAssia

    I think there is a bigger question at hand, why is there an assumption that going public moves the company to the dark side ? my comment became a post… In short, what really needs to happen is for the smart money (looking at products, vision, impact) like USV to grow (up), raise 100B funds and create buy side demand in the public market for the good KPI’s . Why is the hedge fund industry 30X bigger than VC ? Shift the power, create DAU multiple standard instead of P/E multiple and the public markets will once again serve the public.¬†

  46. georgebc

    Assuming you wanted to keep a company private, how do you properly incentivise early employees under this scenario? Do you still issue normal stock options and then provide liquidity through a leveraged recap, do you issue some form of phantom equity, or avoid equity and do a profit share instead?

    1. fredwilson

      yes, that’s what you would do

      1. Emily Merkle


  47. Mason Myers

    I very much appreciate this post and I have a few recommendations.1)¬† To avoid the double-tax problem from distributions/dividends, I have found it very helpful to invest through flow through tax entities like LLC’s.¬† I realize that traditional LP’s don’t like flow-throughs, but USV attorneys should be able to set-up blocker C Corps and other things like that will help your non-profit LP’s avoid the Unrelated Business Income¬† I wrote a little more about this is my post “Enlightenment about Investor Alignment” at my blog on investment, investors, etc. at¬† I would also recommend exploring new fund structures for USV that give you more flexibility in aligning USV with your entrepreneurs, such as an “evergreen” structure used by Oak Hill and Golden Gate Capital and my small fund, Greybull Stewardship (¬† It causes a little more unalignment with your LP’s as you need to find mechanisms for LP liquidity along the way, but I think with the reputation and success of USV you should be able to find ways to balance the LP alignment with your entrepreneur alignment.Mason Myers

  48. fredwilson

    and all the crap too

  49. Emily Merkle

    If you are good it will come in time – but life is in real time