Video Of The Week: Founder Liquidity
I am surprised this video only has 483 views as of now. It’s a talk I did with Chris Dixon eighteen months ago about founder liquidity. It’s an interesting topic and worth a discussion here this morning. It’s about six minutes long. Enjoy.
That first line sounds incredibly vain, Fred. Very unlike you.. haha. But I do see the point you were trying to make.. (useful topic etc etc)For the rest – I have a funny exchange to share from Dan Ariely’ blog..——————————–Dear Dan,I recently got married, and my wife and I have been debating the topic of bank accounts. She’d like to combine them, because she wants to know how much is coming in and going out. I think separate accounts would be simpler for taxes, personal spending and budgeting. What’s your take?-JonathanThe fact that you’re wondering whether to follow your preferences or your wife’s tells me that you are either a slow learner or very recently married (sorry, my Jewish heritage would not let me pass up that opportunity). But to the point: I think you should have a joint account….(More on http://danariely.com/2012/1…——————-I found his response absolutely hilarious. Happy Sunday!
I do not think anybody in that conversation has been married very long. If you were you’d realize your money is hers and her money is hers. 🙂
Hahaha. Good one, as always Phil!
CASH MONEY IS KING.
You are sitting there, looking at the desires of a market & providing what they want.In addition, you are making the founders in a stronger financial position, thus shifting their focus to more long term and allowing them to do that core thing that good businesses — look at the desires of a market & provide what they want.
Exactly. I was thinking of the long term benefits this provides the entrepreneurs.
Fred, did you catch this exchange on Twitter at end of last week. Just point it out because it touches on the topic of this post and 4Square.https://twitter.com/rabois/…Keith Rabois said “everyone knows 4sq a myth” and “ends like Ning.”Totally unsupported, of course, but it ended with a nod toward “Founder liquidity causes major issues.”I was pumped that Dens stepped in:”Looking forward to proving every single one of you haters wrong. #HatersGonnaHate”
that was a great beef. i like the vision behind foursquare and thought there was a chance they could pull it off. but i’ve jumped off the bandwagon recently so i reluctantly have to give the edge to keith in this beef. google is just too powerful here. i also think the clock’s ticking on the “get a lot of users than make money some very distant day in the future” strategy.
do you think yelp is in trouble too? because foursquare is growing faster than yelp at this point and i think (i am biased of course) that it is a way better service than yelp because its mobile and social and yelp wasn’t built to be either of those things
i think they are all in trouble. yelp has a questionable business model that cannibalizes one half if its user base (find me a merchant that likes yelp) – and FS i just dont understand.Having millions of users and not making money from them is a challenge.and as users use the computing device in their pocket and not at their desk – you cant rely on the ad model like you used to..
i don’t agree on that latter pointi think the foursquare ad model on mobile is as good of a monetization model as i’ve seen
a big chunk of the mobile ad money is associated with location and maps (opus research). based on that, and the fact that the recommendation engine works well at least in new york, one would think that 4square has as good a monetization model as anyone in mobile
also interesting was Facebook CTO in Bus Week a couple of weeks ago commenting on what he saw as the mobile vision for Facebook. Sounds a lot like foursquare: “You might see that your friend is in town, or you might be on vacation in Paris and see that your friend Peter visited Paris two years ago and said the duck was great at a particular restaurant,” Schroepfer says. “The question is if we can get to a point on a very regular basis where people are having amazing, serendipitous experiences because of Facebook. I think the more we can make your life be like that and not be boring and lonely, the better.”
Problem is if the duck was good 2 years ago, that doesn’t mean it will be good now 🙂
That scenario is either “stunningly out of it ” or “stunning brain bubble”
you would obviously know.
How much $$ is foursquare leaving on the table? Google any of the following: foursquare enterprise analytics, business intelligence, customer satisfaction, customer experience, guest satisfaction, social media marketing, social media monitoring, social media listening, competitive intelligence, advertising analytics, customer analytics. Is it time for foursquare to be a data intelligence company?
i think yelp is in bigger trouble than foursquare. as markslater put it yelp has a questionable business model — their ad pricing is outrageous, i don’t see how anyone could want to purchase ads there. plus they are still reporting losses.i think foursquare is vulnerable to the google complex — maps, android, +, local — from the big network perspective and vulnerable to hyperlocal players focused on a single geography on the small scale.
More good news for 4sq – Apple Maps has sent Trip Advisor back 3 or 4 giant steps.
Yelp has always beens an empty suilt when it came to analytics which is why i decided not in advertise with them. There is no better company to evaluate based on its user’s activity than yelp. My guess is that the 2nd and 3rd moments of these numbers are tilting in the wrong direction.
I’ve always thought Yelp executed very well on a very boring, uninspired vision. They deserve credit for cracking the local sales model and generating revenue, but they are closer to GroupOn than say Twitter, in actually creating something truly special for our society.
competion is fodder for sucess
With 4sq, I really think they have a brand issue. I don’t have data to support it, but my sense is that people associate it with checkins instead of utility. Dennis was ahead of this when he explained that checkins were a commodity, but sometimes brands get defined by their first hit. Think about Princeton Review or Kaplan. Test prep companies right? Well ok, but that’s a small percentage of revenue compared to book publishing or online education etc.4sq’s app is much richer than checkins, but do the vast majority of their installed base really understand this?
as mad as a hatteras sad as a hater(a work in progress)
You know where the phrase Mad as a Hatter comes from – Not Alice through the looking glass but before then .Hatters brushed Top hats with mercury to get a smooth finish – Mercury is not good for you !
“To harass; to weary; to wear out with fatigue.” according to Samuel Johnson’s A Dictionary of the English Language published in 1755.I’m using it in this context. Here “mad” is ‘angry’.
Agreed but you are talking Symptom – I am giving cause for one and the same -Symptoms typically include sensory impairment (vision, hearing, speech), disturbed sensation and a lack of coordination.No disagreement here ! 🙂
i saw it and i favorited @dens’ reply because i love his attitude about it. the foursquare founders haven’t taken that much money off the table. i think keith’s issue is he is on the board of yelp and foursquare is competing more and more with yelp.
foursquare is competing with yelp the same way google was competing with yahoo in 2000. magic vs. lists. yelp is painful.
.Great talk. Very well played.You have an expanding presence on a number of important subjects which can be mined for real wisdom.Well played..
I like your reminder that VC’s are in the service business, to service the entrepreneur- with capital and advice.Every startup journey is different, and the more the entrepreneur and the VC have an open relationship about that journey, the more they will benefit from each other.You’ve done a number of video’s, but they aren’t easily found in one place. That’s another reason for collaging all of them and tagging them under one roof.
I’ve never really looked into what a venture capital does truly, but so far I am storing Fred’s business advice in my brain somewhere…you never know when you can use it.
That line struck me as well. Its really powerful when you turn things on their head. Same with being a CEO. You can say, I’m the CEO everybody reports to me, or you can say its my job to get rid of all the obstacles for people to get their jobs done. I’m sure there have been moments where Entrepreneurs have felt Fred wasn’t serving them, but the empathy really showed when he was discussing taking some money off the table so you feel comfortable swinging for the fences.
I saw the video when it was published, but enjoyed watching it again today, Fred. So now your view-count is a bit tainted. 😉
The key point through this is all about getting to a place of “mutually aligned interests.” Aligning on risk / reward by taking some cash off the table. Aligning on fees / structure / 3rd party. Aligning interests on making follow on investments to further grow the business.
i remember this onehas the secondary market changed much since the fb ipo?
it has cooled off for sure
Wow, this is great. Looks like it was part of a longer interview that was broken up into chunks. Here are the others:http://www.youtube.com/watc…http://www.youtube.com/watc…http://www.youtube.com/watc…
yes, it was an hour long conversation if i recall
Hey Fred – Shhhh – Don’t tell anyone – but when I see that you really understand what its like to be locked in to a lot of risk – I felt like GIVING you some equity. Cough splutter phhhww where did that come from ? :)OK – I’m over it now ! – but interesting comments – really
great post and great model
So in the past 18 months has the opportunity fund been making investments? What’s the update in terms of how it’s working. Great idea for sure. Founders have often put everything in for years with noting yet in their bank accounts to show for it. They need a way to take some of that value out so they can keep creating it. Seems like common sense when you look at thoughtfully.
i think we’ve made five investments so far and put out around $55mm. it is working very well.
Management fees have been a growing concern. Could you share a little more about reasonable rate structures? Thanks!
reasonable and market are too different things. reasonable is enough so that the GPs and the folks at the firm can earn a decent living. that is far below market
Would you characterize your current management fees as reasonable, or as market?
I realize it’s a challenge to balance the alignment of interest from all sides, and I know you do a better job than most. Thanks for your continued transparency. I’m hoping that it transforms the market’s expectations of what investors and entrepreneurs alike should not only tolerate, but expect and eventually demand. That said, would it be be unreasonable to expect a management fee that equates to something that doesn’t exceed a reasonable living for the GP’s and their employees? I’m not sure that if I were in your position that I would take a pay cut as such, but at the same time I might also avoid stating that I would prefer to not work for a management fee and then proceed to collect whatever the market will bear. Forgive me if I am missing something, but I see a momentary dissonance in what I otherwise believe to be a benevolent force swimming upstream in a culture loaded with scoundrels.
Chris,Since you’re concerned about signaling and thus fail to capture the value of your follow-on rights, what about always auctioning your follow-on right in every company the earlier of either (a) the next investment round by other parties; or (b) 30 months after your initial investment?
Excellent suggestion. currently scanning for ways that the auction process runs into the same issues…
I wish this was transcribed– I’m in a coffee shop with spotty service and I can’t get through a full thought!
I have said this before….Fred – you commented that the VC is a service business….you provide capital…and occasional advice.I think in the case of USV and other top tier VC & Angels you provide a Rolodex as well.in the case if Fred Wilson you also provide exposure via a blog as well.
Tough issue and it seems like a VC/entrepreneur conflict.The part where you say “we get them to think more like us” which in context means they are willing to take larger risks because they have some personal security via taking some money off the table and into their bank account – is where that conflict lies.The conflict is highlighted earlier vis a vis “make that big bet” or “shooting for the moon” and portfolios. Should an entrepreneur not take liquidity and therefore be more pragmatic and say “I don’t think this is a billion dollar company, I think it’s a respectable X million dollar company” aka hit a double instead of a home run.As you point out, the VCs can encourage swinging for the fences because they are working from a portfolio theory perspective – so if it’s a swing and a miss no big deal, they have other investments. But if the entrepreneur swings and misses it is game over/flame out. So taking money off the table could make a pragmatic entrepreneur “think more like” a VC… but is that a good thing?No right answer it would seem.
The right answer comes first – what is the company, fully formed?Then, other things are details that fulfill the right answer.
They have to make this call for themselves. But we can provide them with options
You know. It usually is a moment in time around raising money as well. It goes something like this: lets raise another $X spend ahead of the curve and get really big.You know if you raise and spend that money there is some chance it won’t work. Nobody likes to think that way but if you’re realistic you have to realize its a possibility.The VC wants to take that bet every time, but there is a difference. They only have about 5% of their chips in the pile while you have 100% so taking some off makes you feel better about taking the risk.You decided that you were going for broke the day you took VC money in the first place. This just makes it a little easier after you’ve had success.
Not that many comments because not a widespread issue.
Fred – I wrote this a while back and finally decided to share it – I took your name in vain on a subject that is I believe dear to you and I trust many of the AVC community (I didn’t know where to send this to – and I feel the subject fits hope you don’t mind)”Wealth that exceeds morality can be built – if daily bread for all is deemed dispensable.”I hope you find it interesting – it is a reflection on the value of sufficient. http://blog.kwiqly.com/2011…
I read it this morning. Family history is powerful stuff.
I’m curious to know what the annual personal lifestyle maintenance number is for someone like Fred and his peers in the early stage fund world. I realize this topic is so culturally taboo as to make it a laughable inquiry. However, what does the “operational” management fee translate to on a per person basis for folks at the partner level for VC and (slightly later) stage opportunity funds? (I’m a day late to the discussion and fully expecting someone to play the “that’s material non-public information” card). Nonetheless would love to have a ballpark figure.
Do the math yourself:((1.5% management fee + 20% carry) – OPEX) / GP to((3% management fee + 35% carry) – OPEX) / GPAnd you’ve got your ballpark range. Keep in mind that some GPs are more equal than others.
Understood… I’m looking to back-solve for the limits of deployed capital beyond which a misalignment of interest becomes apparent between investors and would-be “trigger happy” GP’s. This is obviously a personal question based on these particular GP’s lifestyle expectations, but I would guess that all fund managers have a spreadsheet very early on in the fund-raising process that sensitizes deployed capital against personal lifestyle. My question is, what is that number for these guys?
How long is a piece of string?If you’re going to rewrite your comment you should mark it as an edit.
Just probing for an opinion as to a reasonable number the market should tolerate for someone who states that they would prefer to work without a management fee if possible, but is challenged by the expenses of having a front office.
It all depends on the size of the shop. Lets say you have three partners and six associates/support staff. Lets say the partners all in (all expenses) cost $300k/year. Associates all in cost $150k/year, plus office expenses of $200k. Back of envelope that is $2M or 2% management fee on $100M. But $100M is light for that. With that size shop its more like $200M, so the extra goes to the partners.So that’s why you had some mega funds. In an especially ironic way VC doesn’t scale, it is a lifestyle business. So some people would get upset that you could not achieve a positive return and still make a ton of money. That eventually evens out because you won’t raise another fund with a negative return on your past one, but its negative in the short term.
Thanks Phillip, I’m coming at this from the slightly jaded perspective of having worked for one of one of these mega-fund managers for the bulk of my career (averaged $40 billion AUM). The order of magnitude of personal wealth potentially gained in spite of poor fund performance can be staggering. I really want to believe that there are those in the VC world such as Fred who intentionally structure better checks and balances into their funds both in terms of limited scale and smart management fees. I realize that it’s not nearly as much of an issue when you’re managing funds the sizes you describe above, but the same pitfalls exist for tens of millions as they do for tens of billions, depending on what kinds of numbers move the needle for you personally.
I would agree that when you control a ton of money you can make a ton of money. Its just the way it is and its all relative. Some people would be thoroughly offended a VC could make seven figures without any carry.I try not to worry about it because when I do I am now playing in the financial engineering game which I don’t want to do.
It should be similar to what a CEO of one of companies makes. We dont expect them to dip into their savings to take the job
Not too many entrepreneurs get 30 shots at a winner.The odds are skewed against winning. I wonder if any fund ever had a losers landing fund for those who went for it but didn’t make it.
Like the transparency! Liquidation is a form of insurance for thefounder, and there are many variables that are outside of the founder’s direct control, that should be insured against (ahem… patent infringement). USV should spell out the size and frequency of these liquidity event(s) as a condition to investment?
Favorite exchange”Their wife feels good…””Or husband.””Or husband, thank you, very good.”;)
25 years of bad habitsi am working hard on changing my vocabularyit matters
Agreed it matters. And what I liked about the exchange is that you immediately self-corrected.Founder, Noospherehttp://noosphere.io/
This is such a great way to think about liquidity. People that don’t understand the motivations of founders often say it makes them less hungry. There is little as obnoxious as rich people telling poorer people that they should stay hungry.Making it so that the worst case scenario is the millions in the status quo frees founders to go for the billions, as you’re saying here.I do think that employees (as opposed to founders) aren’t quite the same. The incentives are the same, to go for the gold, but for employees, this could mean leaving the company to do their own startup. Then the choice is much harder, because management needs to decide if doing right by employees on the past promise of the future is more important than having them stay.As far as management fees, I think A16Z is doing good things here as well.
what are A16Z doing on management fees?
Videos like this one reminds me that I want to work with Union Square Ventures. I’m a big fan of Albert and Fred. Maybe when we do our A round in a year or two.
Why not pay out a pro-rated “dividend” to all stake holders? Or is the “boatload” of cash not enough to do so and support operations and growth?
i don’t like that idea. i think i blogged the reasons why when FRC put something like that in place. you can’t make it voluntary and have it work well and you can’t make it required either
Call me on that.
Ahh, sorry.We’re discussing such a liquidity option on a new project (for down the road) in a way which is beneficial to founders and investor, and your comment will make me extra diligent in covering that option in the docs. It’s always been openly discussed, but we’ll be sure to specifically outline it to avoid issues later.
Makes sense. Good luck with getting it worked out fairly and amicably.
i think the better approach is to promote helping each other for the sake of helping each other.
I also think that the primary reason for doing this is to allow founders to diversify and more VC backed startup equity isn’t diversifying founders nearly as much as cash or other things they could purchase with cash