The Third Way

What do you do when you don't want to sell your company and you don't want to go public either? We've been discussing this issue here at AVC for a long time. I think back to this post from 2008, almost five years ago now, as the kickoff of this long running conversation. This is something I care a lot about because my business model requires getting liquid but I hate the idea that my business model creates problems for the entrepreneurs we back.

Here's a great three minute discussion of this issue between Chad Dickerson, Etsy's CEO, and Sarah Lacy, from last thursday night's PandoMonthly event.

I've been having frequent private conversations about these issues with the CEOs of our portfolio companies and it's great to see some of that become public in venues like the Pando event. This is an important topic, not just for me or for AVC, but for the entire startup ecosystem.

The entire talk between Chad and Sarah is almost two hours and can be seen in its entirety here.

#VC & Technology

Comments (Archived):

  1. gregorylent

    an aside .. pando seem to have set itself apart from the tech blog sphere .. nice

    1. William Mougayar

      …and following McAfee in a strip club and tattoo parlor in Portland. that’s pretty unique.

      1. Mohammad

        I also think its quite unique to take your phone out in the middle of interviewing a CEO and start message your messages (as Lacy does).Is this really what is has come to? Are there no boundaries for mobile etiquette at all?

        1. Arlan

          I know this may seem like a strange answer, but I think Sarah may have been answering her phone because it was related to her pregnancy or something back at home…and not about business. That, or she was using her phone as sort of a notepad that she had questions on or where she wanted to get a fact right before asking a followup. I don’t think she would have done that if it were just anyone messaging her.

        2. fredwilson

          I missed that

      2. andyidsinga

        Portland ftw! portland portland portland portland 🙂

        1. William Mougayar

          Way to go 🙂

    2. fredwilson

      I like gigaom as well

  2. Rohan

    Maybe we should call it “the middle path” . 🙂

    1. fredwilson

      But is it in the middle

      1. JamesHRH

        Exactly – its the other direction from IPO.

  3. JimHirshfield

    So Chad’s ambiguous. Doing the survey monkey thing or not? Sounds like that’s the direction he’s leaning.

    1. Chad Dickerson

      I was ambiguous because we don’t have a specific plan or any specific pressure from anyone, but I think it’s smart to always be thinking and learning about the landscape. The IPO is the “easiest” and most well-worn path. I brought up the SurveyMonkey deal as an interesting alternative way of approaching liquidity for investors.Even if you do go IPO at some point, I think you can approach it a different way — this is why I brought up Jim Koch and the Boston Beer IPO, which I find inspiring:

      1. JLM

        ,The Boston Beer IPO is one of the smartest financings ever done and the chart speaks for itself. Not surprising when you look at the guy’s background. Wicked smart?If a beer company can harness its customers — who do not have to identify themselves to the company to be able to buy a six-pack — so can you and Etsy.Plus being a sales platform to begin with, I expect you to simply put your shares on the site. Hell, I’ll be buying.Well played.JLM.

        1. Chad Dickerson

          I would encourage anyone interested in the topic to read this interview with Bill Hambrecht. It’s notable that the Boston Beer customers who bought stock mostly became long-term holders.Excerpt:Q: Can we find new ways to use technology to reach buyers through these social networks while providing institutional access?Hambrecht: One scenario would be to form a co-op partnership with an issuer’s best customers giving the retail bids for up to 50% of the deal at a preferred price. Samuel Adams founder Jim Koch took his company [ Boston Beer (SAM)] public but gave his customers a chance to participate. He placed little hangers on bottles in six packs announcing the deal in the months beforehand. The response was overwhelming and could easily have comprised the entire issue. Now, more than 15 years later, 30% of the original 30,000 Sam Adams customers still hold the shares, worth $127.12 apiece, versus $15 originally. When customers believe in your product over the long term, they also believe in your shares. That’s the kind of shareholder base you want.

          1. JamesHRH

            And wow, this quote is even more right on the money.

          2. Richard

            See also Bowie Bonds (David Bowie)

          3. JLM

            .Plus when your stock hits an 8+ bagger you will have to celebrate and what beer would those celebratory investors be drinking?Sam Adams, me thinksJLM.

        2. fredwilson

          Put the shares on the site! Maybe all marketplace businesses should make the market in their stock.

      2. JamesHRH

        Thanks for the link Chad.There are so many bang on quotes regarding his preference for his customers, over his transactional financiers in that article:- ‘I don’t care about you now & I won’t care about you in the future.’- ‘Do you drink much beer?’- ‘I don’t care about wine drinking Wall St types.’His resume would lend you to believe that he was looking to impress those types……an all time iconoclast.I guess that is par for the course when you revolutionize one of the largest, most well established industries in North America.It totally makes sense to make your customers your investors, as you already have an obligation to them. Why not limit the pool?Nice.

      3. JimHirshfield

        Thanks Chad. Appreciate you chiming in.

    2. fredwilson

      He’s not leaning any way. But he has options

  4. kidmercury

    at some point there’s going to be a reset and it has to go back to earnings and dividends. it’s all a game of hot potato till then. looks like you’ll get another cycle if companies like blackrock step up, and if public valuations of the big players with real earnings goes up enabling them to make acquisitions (i.e. google, amzn), but it must go back to earnings. the longer the disconnect goes on the more painful the correction will be when it comes.if people don’t like dividend tax issues then (1) get congress to change it or (2) use other jurisdictions to your advantage.

  5. pointsnfigures

    If the entity kicks off cash flows, family offices are a great source of exit. Dodd-Frank is going to speed the transfer of monetary assets from public to private markets where they are relatively unregulated (hurting the wealth creation process for the masses). There is a nascent movement here that will become a landslide in the next four years.

  6. JLM

    .The issue of the long term capital structure of a company — how it is owned and in what vehicle — is in some ways based upon how the original capital was raised and the future structure that makes the most sense given capital markets.If the capital was raised from investors who are in the business of helping to stand up companies and then to reap the whirlwind they have funded and this was known going in, then that basic compact must be respected.In much the same way you must send your babies off to college and they come back all grown up, a company and its leadership must respond to the financial markets with an eye toward maximizing — maybe optimizing — value and distributing it in accordance with the original deal.I shed no tears for startup founders who are reluctant to go to the pay window. That is the business of business and guess what? You will live through the experience.The other 98% of the deals that did not get funded or failed will not be shedding any alligator tears on your behalf.That is a pretty expensive glass of whine with that cheese..

    1. Aaron Klein

      No time to watch the video right now, but it strikes me that this is a hobgoblin’s choice. I’ve flat out told my investors that we don’t intend to IPO. Assuming we get the chance to stay independent, we’ll just do a secondary offering so that early investors can cash out all or part, the founders can take some money off the table and we can rotate in long term investors.

      1. LE

        “I’ve flat out told my investors that we don’t intend to IPO.”Assuming you told them that, as I’m sure you did prior to funding, what was their reaction – what did they say?

        1. Aaron Klein

          “I can understand…who would want to run a public company in this environment?”That could change but I don’t feel like it has to be in the cards.

          1. LE

            Yeah sounds like a woman spouse who wants a baby and agrees with a man date when they meet that the time isn’t right for a many years. Then later starts to hock them into submission. (Sounded much better before I PC’ed it with strike tags.

          2. Aaron Klein

            Could be. Everyone’s interest is going to the pay window. If an IPO is the way to do that, that’s going to change my thinking.It has only been upside to make this point to investors, though. Their eyes are opened to a lessening of “exit risk.”

          3. awaldstein

            Being open is the only way. There is NO way you can be at your stage and know where your payout is going to happen.

          4. Aaron Klein


          5. rudyc

            What environment are you speaking of exactly? The problem in my opinion isn’t the environment as much as it’s the ease of being able to take a company public. Twenty years ago, with the exception of a few internet companies, the only places these companies would have traded is over the counter.I think there’s absolutely no way a company that hasn’t made a profit should be allowed to sell stock to the public, period. It used to be that a company needed x amount of quarterly profits to even consider going public..

          6. pointsnfigures

            the regulatory environment starting with SARBOX and now Dodd-Frank will induce companies to stay private. Betcha in the next four years, reverse IPOs are the rage and companies will go underground.

          7. JLM

            .The merits of being public are being constantly re-evaluated and this is a PERFECT example of the oppressive and expensive yoke of regulation.Companies are literally being strangled in their SOx DF swaddling clothes.This gets back to a familiar conversation you and I have been having.I think the Reg D implications of the JOBS Act for debt may turn out to be huge. Family offices, RIAs should be on this stuff for yield like crazy.With CD rates where they are, there could be a tidal wave of money flowing in. Tsunami perhaps? Debt is the cheapest capital out there at these rates.If you can get your hands on it. Not getting a loan at 4% is no different than not getting the same loan at 20%. No loan.JLM.

          8. Aaron Klein

            This is true. I generally shy away from debt but your point is well taken, once you’ve got a business generating huge and growing cash flow and paying off the debt isn’t a bet but simply a matter of time.Your whip out post changed my thinking on that.

          9. JLM

            .”Whip out” is a variation of “pay window” and while I generally like folks to know about these things sometimes you have to ration knowledge or everybody will be making their own wine and beer.If you want to understand “whip out”, then you should go here.http://themusingsofthebigre…But be warned, they are not teaching ya’ll about “whip out” at the B schools.Don’t blame me if you start cheating on the pay window with “whip out”.JLM.

          10. mikenolan99

            And that is how a blog gets added to my daily feed. Well done.

          11. Donna Brewington White

            You know, I subscribed to your blog, but I haven’t been getting the email notices. Come to think of it, I haven’t received any (feedburner notices) for AVC either in the past couple of months.

          12. JLM

            .Mine should be via direct email. I get them myself. No problem.Probably want to subscribe again as I do NOT see you on the list.JLM.

          13. kidmercury

            for sure…..or migrate to jurisdictions that are friendlier

          14. JamesHRH

            It used to be that going public was a huge status symbol, too. Now its not.

          15. Aaron Klein


          16. Aaron Klein

            – SarbOx- Frivolous shareholder lawsuits- Being a small fish in a vicious ocean of HFT robots- Inability to control who your shareholders are and make sure they are focused on the long term, not the next quarter

          17. Cam MacRae

            – Spending a large chunk of your time explaining your business to analysts instead of customers &/or partners.

          18. JamesHRH

            Investors not at their first rodeo.

          19. Donna Brewington White

            Have you found that this limits the pool of potential investors?

          20. Aaron Klein

            The opposite. That statement has expanded it, because they know I’m thinking about other ways to get them to the pay window even if an IPO is a bad choice for the company.

          21. Donna Brewington White


      2. Charlie Crystle

        or stock buyback from cash on hand 🙂

        1. Aaron Klein


    2. Dave Pinsen

      Late to this, but a quick Control F search doesn’t show any mention in the comments here of ESOPs or LESOPs (employee stock ownership plans or leveraged employee stock ownership plans), which are ways an entrepreneur can get some liquidity while giving his employees equity in his company. These are probably more common where the entrepreneur owns most or all of his company; I assume if the entrepreneur has taken a lot of OPM from venture capitalists or angels, that would complicate things a bit.

      1. Charlie Crystle

        great comment

        1. Dave Pinsen


  7. JamesHRH

    Independence is a chimera.Every CEO has obligations that limit independence: the Public market; whomever holds your paper; your investors.Its a pick your poison proposition.Setting up a debt structure will be awesome until its not….then whomever holds the paper calls the shots.I think it is a great idea for this generation of founders. More than ever, they define themselves and their companies as parts of the same whole, which I think is fair (and likely what drives great outcomes).This post makes me think of a conversation I had with someone about Warren Buffet. The questions was “why would you ever sell to him?”. He is quite plain about how he looks for book value pricing, etc. – you are not getting overpaid, that’s for sure.The answer was: he is the best boss of large companies that you can find. Way better than somebody from Wall Street. And not ‘that pinhead CEO that wants to take us over.’

    1. brian trautschold

      ‘Every CEO has obligations that limit independence’ – this is a lesson I feel *many founders/ would-be-founders don’t realize…you may post on twitter about not having a boss or the world changing freedom of starting your company and making dents…but at the end of the day, ‘whomever holds the paper calls the shots’…good point on buffet as well… incredible knack for keeping companies working/ thriving. He even let me put him in a headlock once.

      1. JamesHRH

        That last sentence is a total humble brag tease that, on principle, I should leave alone.Principle loses to curiosity today. I’ll bite. Let’s hear the story.

    2. Aaron Klein


  8. Elie Seidman

    I think that this “middle way” is important not just for the public vs private reasons but also because by having no great options other than selling or taking it public, it creates a certain “shoot the moon” or “hit a grand slam” behavior. As entrepreneurs we see success defined that way for ourselves and for our investors and we feel an urgency to go fast fast fast. But not all things – even things that can endure forever – can be in the class of fast fast fast. And many of the things that looked at first that they could be in that class end up not really being – they just got shoehorned there for a brief period of time due to a LOT of capital (e.g. Groupon, LivingSocial). The ecosystem and the results look quite different when there is something between failure – you close the thing down after a few months or quarters – and you sell it fast or raise a ton of money and take it public. My instinct is that we’ll see more companies that make it not just to 5 years but that make it to 10, 15, 20 and 30 years.

    1. LE

      “As entrepreneurs we see success defined that way”Primal behavior. Bias toward thinking things are only important if they are talked about and observed by others. [1]The gold medal is better in a well known Olympic sport. Same as with any industry. In music, how many people know or care who the first violin is at the local high school vs. the quarterback? Who cares who the CEO of ADM (a 20bn company) is?[1] When growing up it only mattered that mommy complemented you on the great [redacted] you took.

  9. John Revay

    Taking a company Private……that is already private.

  10. Seth Godin

    Is Sarah actually checking her email during the interview? Multiple screens for viewers, and now multiple screens for those on the screen!

    1. Chad Dickerson

      from the stage, it looked like she was checking some notes. 🙂

      1. JamesHRH

        One can only hope.Unless she was planning to integrate tweeted / emailed questions on the fly.

    2. Arlan

      Yeah I commented earlier that I think it was notes or maybe even a message about her pregnancy that was too important to ignore. It’s amazing how well a woman can multitask sometimes:) -a chick with a dude’s name

    3. Rich Ullman

      haha. I moderate roundtable discussions every month with about 10 founders around the table, and I make it a point of telling them upfront that when I’m looking at my phone, it’s to check the stopwatch and refer back to (ever)notes.

    4. LE

      Yes. And I totally missed that.

    5. Aaron Klein

      I’ve sat ten feet from her three times during these interviews. She is always checking notes to make sure she’s covering all the bases she had planned.

      1. LE

        “She is always checking notes to make sure she’s covering all the bases she had planned”That’s a fault of the camera work and production standards. There should be coordination in the editing or camera work. Otherwise it makes her look rude. You see this happen sometimes on 2nd rate interview shows where the control room hits the wrong button and you see the interviewer checking notes. It should never happen. Like an hot mike.

      2. JamesHRH

        Good to hear.

    6. andyidsinga

      just wait until we have google glass or similar …the zombie/deer in the headlights looks will light up on the meme trackers 🙂

  11. Richard

    There has never been a better time to use the debt market. What is needed is a game changing exchange/clearing house. The debt market has been notoriously lame about embracing technology to increase liquidity. Look for an independent exchange to step into this gift horse opportunity. 

    1. JLM

      .If one can access debt in reality, it is obscenely cheap.Capital of every stripe — debt or equity — has a price tag and a degree of difficulty.Today is the time to take on as much cheap capital as possible, if you can actually get the deal closed.This is one of the reasons why the impending crowdfunding rules are so important — everyone is focused on equity while the debt side of Reg D offerings may be the real play.Investors are getting nothing — no return at current CD rates — on cash and the ability to get 4% on a local company might just be the ticket.JLM.

      1. Richard

        There has never been a better time to use the debt market. What is needed is a game changing exchange/clearing house. The debt market has been notoriously lame about embracing technology to increase liquidity. Look for an independent exchange to step into this gift horse opportunity. This debt liquidity problem is not just at the retail side. Even at the institutional side for large cap companies, there has yet to develop an electronic exchange that comes close to either the equity or derivatives market. You are correct. The retail side is salivating for 5% return (10 yr is less than 2%).  Dont count on the legacy  buy/sell side to step up and deliver. We need new blood here. 

        1. Dave

          A clearing exchange for debt is an interesting concept but it hasn’t taken off yet because at the end of the day most debt deals are one off creations to some degree. But you are starting to see momentum at the larger end where there is more liquidity with platforms like the Blackrock platform. Loans for smaller and medium sized borrowers are not generally standard enough to be traded through an exchange. Even mid-sized and larger syndicated loan deals would struggle with an exchange traded concept in the current market.At this point you don’t have the degree of standardization in the debt market that you have in the equity markets or in the exchange cleared (non-bespoke) derivatives markets to facilitate exchange clearing. Relative to the typical common stock that trades on an exchange you have a huge number of variables…Interest rate type (fixed, floating, floating with a LIBOR floor), covenants (Term A/B, cov lite, full covenants, bond deal, bank deal, etc.), security interests (first priority, second lien, all assets, certain assets), maturity/tenor (so many choices for most larger issuers), callable/no call/soft call. Plus you need a lender/agent/someone to make the hard decisions of what to do if it all goes wrong. Most companies have no desire to work with a vast disparate group of debt holders if they need covenant relief. Even syndicated loans can get tough to manage but I’d hate to be a borrower who needed a waiver from some debt instrument traded through an exchange.Certainly derivatives trade complex securities but only the simple versions of most securities trade through an exchange.

          1. JLM

            .I agree with everything you say. You are right on everything.Having said that I have personally sold millions of dollars of seller financed real estate notes through brokers in Florida.At par typically with only 6 months of seasoning.Why Florida? Lots of gray haired money that does not want an equity risk.There are a lot of country club networks which peddle notes. The sweet spot is right at $250K per note..

          2. robertdesideri

            “but it hasn’t taken off yet because at the end of the day most debt deals are one off creations to some degree”Could have said same re VC and angel not that long ago. Many did. Until n00bs became slightly literate courtesy the more intelligent VCs, and it then changed. Standardized. Like Swaps. Good all around save those who banked on receiving $25k+ for cut&paste.Lots of capital around. Always has been. Plus, as @JLM stated, there are sweet spots and liquidity reservoirs, with more coming online if they don’t f’ up Reg D mods. Debt is a beautiful business.

      2. Charlie Crystle

        JLM–what are the important numbers and ratios?

        1. JLM

          .DCR — debt coverage ratio is the big one.At 1.75 x DCR you are in traditionally well recognized high quality credit territory.How much of the cash flow is coming from existing customers — more than one year — versus new customers.The historic run rate v the projected run rate. Huge consideration for new companies just getting out of the cradle.The credit quality of the customers who are providing the cash flow.Number of customers being added v number of customers being lost over short and long time horizons. Churn rate.Then just all the normal credit underwriting balance sheet ratios.JLM.

          1. JamesHRH

            You should compose a checklist manual for business.This is two days in a row with awesome off of the cuff lists.

          2. Charlie Crystle

            Thanks JLM

      3. fredwilson

        We agree with you JLM and have a plan of attack underway ready.

        1. JLM

          .Put me in coach. Haha, I bet you do.You should think about crowdfunding your next fund and kissing the LPs good bye. Same guys would probably invest anyway but on your terms.Your comment makes me want to ensure that all my weapons are clean and well oiled.JLM.

    2. Charlie Crystle

      what are the key factors lenders are looking for?

      1. Dave

        The basics, revenue and profit. In technology, high levels of recurring revenue = more access to cheap debt capital. Varying forms of growth capital available for fast growing companies with a range of terms that are hard to explain concisely because they range from true debt to mezzanine debt with equity and debt characteristics (i.e., preferred stock with more limited equity upside).

        1. Richard

          If you look deeper into the issue of exchange trades debt, it is much more complicated than this. Think revenue, spreads, electronic trading, private equity. There has been a drum beat for 200 years on the bore of  retail side holding of  fixed income. Ask yourself why? 

      2. Richard

        not sure what you are asking?

      3. LE

        “key factors”Not speaking for all lenders or situations but you have to be aware that when doing this type of financing you can get yourself in a situation where if certain things don’t happen as spelled out in the covenants you will be in deep shit.As only one example I had a friend whose loans were called and was effectively forced into bankruptcy because of loan covenants.One year his biggest concern was which BMW to buy (didn’t want the big one because then the union would use that against him in the next negotiation round so he settled on a 5 series) and two or three years later after the Pharma industry was curtailed in their promo efforts (a large part of his business) he had to file for bankruptcy. He had signed personally but managed to transfer personal assets in the name of his wife somehow. He’s now operating a small franchise and literally restarting from scratch.

      4. Aaron Klein

        Repeatable growing cash flow.

  12. Charlie Crystle

    This is definitely on my mind lately. Selling a startup makes sense partly because of risk going forward and partly for liquidity. But I like the idea of buying out investors and continuing to build on a platform of tech and customers.There’s a time when investors no longer have something to contribute (not all investors are as creative and bright as you, sir) and become obstacles to what’s in the best interests of the company, employees, and customers.Looking forward to hearing @philsugar weigh in.

    1. LE

      “we’ve considered selling, partly because of risk going forward”You have your answer then on what to do. Are you a gambler or are you able to focus on the potential downside of not selling?

      1. Charlie Crystle

        I’m a gambler but able to see both sides of it.

        1. LE

          You need someone who is not emotionally attached to the situation to objectively evaluate the “both sides”. Most likely that’s not any of the people who you are close to right now.

          1. Charlie Crystle

            likely, thanks

    2. PhilipSugar

      There are two big challenges here.The first one is a very high class challenge. You are SUPER successful and don’t want to sell or go public. As I’ve said a million times if you are in the venture business you need those 10xers. I’m not going to address this one but there is money out there to deal with it.The second is where you are not a 10xer. You can’t “whip” it (actually JLM Myles Bass and Edward Moldt did teach this theory at Wharton) because as you state there is “risk going forward”. I can’t get PNC to figure this out for a solar park that PECO by law has to buy electricity at a set rate for…….Bankers understand real estate not much else.So to me unfortunately you are the bank. You have to play chicken with the investors and say I will pay you this much and if I don’t you win, and if I do you are out. Now this is painful because the investors will want a high number and you will want a low one.This is where as I’ve said its really important to have an investor that has made their bones in the game. Lets take a simple example: If she has already made $200mm on her $100mm fund if you offer to do a buyout for $6mm on the $3mm she has invested she is thinking: Ok, I am going to get my 20% carry which is $1.2mm and after tax I can get my whiny spouse a Ferrari so they don’t complain on their rides to the Hampton’s and have a money left over for some renovations.On the other hand if he has only made $60mm back on that fund he is thinking $6mm doesn’t do squat and I can’t raise another fund and make some sweet 2% management fees.In my mind the right number and I love when Fred throws these out, this is nothing more than a SWAG, is approximately the current free cash flow for the next three years for the minority owners. You run it like you currently do and they get all the money, that means roughly 7 times the cash flow of the company if they owned 100%, about the same as the note JLM is talking about on an office space.

      1. Aaron Klein

        Great comment. As always, understanding the motivations of your “customer” is paramount.

      2. JLM

        .Well played, Sugar Man.But did those Wharton guys call it “whip out”?Everyone understands whip out once they get the lesson.Be well.JLM.

        1. PhilipSugar

          Oh, the Wharton boys could play the game awfully well, I don’t think we used the term “whip out” but certainly we would not be afraid of the non-pc connotation of that. One of my most embarrassing moments there was when a woman asked me in front of a group if I had realized Trojan had changed their logo….I sat there and thought what???? She said I guess you don’t roll it down far enough. One favorite I remember was donating the building to a “charity” that you setup and getting back the management fees. There is a reason that Milken still has and as always had his picture in Steinberg Dietrich Hall.

          1. JLM

            .Millken — very interesting life experience — colored outside the lines, looked into the abyss and stepped back. French kissing with Death will do that for a fellow.Did not invent sex but came very close..

          2. PhilipSugar

            I don’t love the money is the god theory but I do not think telecommunications which includes the internet would be the same without him…quoting from wikipedia:”It was said, for example, that Milken raised $1 billion for MCI Communications, then an upstart provider of long-distance telephone services, in the space of one hour on the telephone. Cable TV companies, like John Malone’s Tele-Communications Inc., were also favorite clients, as were Ted Turner’s maverick Turner Broadcasting, cellphone pioneer Craig McCaw, and casino entrepreneur Steve Wynn. Before long, the CEOs and CFOs of many smaller and mid-sized companies previously limited to the slow and expensive private-placement market were making early-morning pilgrimages to Beverly Hills seeking to issue high-yield and/or convertible bonds through Drexel Burnham. Without question, many leading entrepreneurs of the 1980s owe their success at least partly to Milken’s perception of this market opportunity. One of his favorite sayings: “There is no shortage of capital; there is only a shortage of management talent.”

      3. LE

        “Edward Moldt”Hah! Edward Moldt. I interviewed him when he was an entrepreneur years ago as a student at Wharton way before he became a prof there (or whatever he was I had left by then). The interview turned into the future of medicine being medical doctors being able to diagnose patients by video. He was working on that idea at the time. I probably have the audio tape somewhere I’m sure.

        1. PhilipSugar

          I truly loved him and Myles. It was a big fight at Wharton, those that had made a ton of money and were true entrepreneurs and those that were “book smart” I owe them a debt I never repaid. Maybe I will going forward.

      4. fredwilson

        Great comment!

  13. Daniel Weisman

    It’s nice to see more companies taking such a sophisticated approach to the all important liquidity event. The recap of SRAM (the bicycle components manufacturer) during the summer of 2011 is another great example of utilizing the debt markets to “bridge finance” an IPO so that both the investors and founders/entrepreneurs were able to achieve a desirable outcome. More businesses that are on the precipice of the private vs. public decision should know about this option and I’m glad that you are getting the word out, Fred!

  14. Rich Ullman

    I like Chad for taking the hard (but true) route. Buried in this (because its a separate issue) is Sarah’s comment about the importance of media companies being independent — and thus maintaining a distinct and independent point of view. I think that’s hugely important moving forward as the number of them (media entities) multiply. They will need to deliver upon distinctiveness.

  15. LE

    Thanks for the 3 minute warning. I actually watched this twice. Didn’t know Lacy was pregnant again.So Etsy is going to sell stock to the etsy community… comes at the very end then the rest is cutoff.”I think that is one reason we want to think ahead …. what I really want to do with etsy is I want the community to be a part of it”.

  16. LE

    One thing I don’t understand when watching this and hearing what Chad had to say (as well as Sarah) is this impression that it’s all about them and damn anyone elses interests from investors to other top people at the organization. Kinda like “it’s my toy, my sandbox, my game, and I will do it to maximize my needs and pleasure even if others feel differently”.

    1. fredwilson

      I said right in my post that we have been talking about this issue with our portfolio companies. They are not acting selfishly.

      1. LE

        Comment not directed at your specific situation so much as a general observation based on what I heard as well as from other entrepreneurs.Additionally USV is just one investor in etsy:…So of course I wonder if the other investors feel the same way.Sarah Lacy: “Selling your company is not satisfying, for alot of people taking your company public is not satisfying” “you take this first dollar of seed money and you know this thing is coming that you don’t want to do”.Not satisfying?!Ask anyone who started a business in the 80’s and they would give their first born to be in a situation to get seed money with the only string attached that they’d have to let go of their “satisfaction”. It’s an entirely entitled attitude.

        1. William Mougayar

          It’s quite something to see USV follow thru their subsequent rounds. Says a lot.

  17. awaldstein

    Fascinating interview although painfully long.Listened sort of while working on something else.477 views in two days is really low although less than 2000 subscribers for a media channel is also miniscule. Don’t know if it’s the topic or the format but something is out of whack.

    1. LE

      “although painfully too long”Wonder what would happen showing the same video to other New Yorkers vs. people from the midwest? As I’ve mentioned I like dealing with NYers because they communicate quickly and to the point. There is no wasted time no pausing (or you loose the cab or the guy behind the deli counter). I’m wondering if you feel the way you do partly because of that.There was a way on a HDR I had a few years ago to play something at 1.25x speed that came in handy in similar cases. You lose some nuance of course but it tends to be less aggravating and a clear time saver. I wonder if this is a feature that any of the online video services offer for playback.

      1. awaldstein

        The video is there for everyone of course wherever they are.Less than 500 people started it per the numbers on a global basis. The CEO is an interesting individual, Etsy one of my favorite models. Interesting topic for many.If I get 500 reads on a blog post I consider it a throwaway.

        1. LE

          Not disagreeing with you only curious knowing the way things play in different parts of the country. I am almost certain even w/o research on this actually.And as you have pointed out “starts” is also only starts. Additionally although the video has only been up for two days the “starts” also depend on where the video has appeared if it’s made it’s way by any good gatekeepers. Which probably other than Fred it hasn’t. (Should be interesting to check the view count in 24 hours.)That said this isn’t doing that bad by Pando Monthy standards.Checking youtube and sorting by view count shows the top video is Elon Musk with 37k views but it’s been up for 6 months (it’s an hour long). Second at 5.5k views is Dustin Moskovitz 8 mos. ago (enough time to have a baby?) “Teel” 2 months ago has only 3.6k views.FirstRound capital’s holiday video 2012 has 100k views and was posted 1 month ago. But that’s fast moving and has music. Maybe that’s the answer. [1] Pando monthly gagnam style.…[1] Match these videos with a reality show type soundtrack and you can make soup. (I’m not kidding by the way the soundtracks make the dialog on the breakout reality tv shows at least the ones that I have watched.)

        2. JamesHRH

          I find now I just watch long enough to see if the interviewee is on the ball. I use that to judge how often to check in on AVC afterwards.

        3. LE

          It’s now showing close to 1700 starts.

    2. Aaron Klein

      I’ve never watched them via video. There is a magical intensity to this event in person.

    3. fredwilson

      I totally agree. It could have used a big edit.

  18. jason wright

    phew! for a split second i thought you’d morphed into Tony Blair. that would have seriously cramped your future travel ambitions.The third way? Offer shares in the company to the registered users. radical, isn’t it? Native, certainly.

  19. rudyc

    Wow! I don’t think I’ve ever heard such an eloquent way of saying, “F_you to your investors”. All money whether it comes from a bank or individuals comes with strings. I’m sure if this company and him are worth what he thinks there both worth an investment banker will come up with a novel approach.From an investor standpoint, it seems that they’re probably going to be a fight soon…

    1. JamesHRH

      Rudy, its a pretty common complaint. Regulatory requirements of PubCo’s restrict the flexibility & speed of change for a CEO. It could be comparable to fighting with one hand tied to your side.Because great entrepreneurs have figured out that they are very valuable to long term returns, they are merely trying to keep themselves in the best position to win. Smart investors support that, IMO.

    2. fredwilson

      I am his investor and I don’t see it that way

    3. Robert Holtz

      It is hardly an “F_you” if he is incorporating into this thinking achieving an ROI for the investors. He may even be securing a better ROI for his investors than an IPO can deliver given present circumstances. Few people understand that the Sarbanes-Oxley Act of 2002 has basically effectively destroyed the U.S. public markets. It benefits EVERYONE if a company like Etsy can find a way to build a third model that others can follow. It isn’t just good for investors, it is good for startups that don’t even exist yet. No VC exit = no VC money. An IPO is not like it was in 1994 and selling is not always the best possible destiny for a company — especially one like ETSY that for all intents and purposes is still early in its journey. If the $$$ are to flow, someone needs to be innovating on ways to make investors whole without undermining the future value of the company in the process.

  20. andyidsinga

    off topic – but I *love* that giant ring Sarah Lacy’s hand! It has an ever so slight steampunk quality to it.. just add a few gears under the glass.

    1. fredwilson

      I sure hope she bought it on Etsy!

  21. LukeG

    Is there a transcript of this somewhere?

  22. William Mougayar

    There is something to be said about nurturing your customers by making them shareholders without being compromised by the divergences of an IPO and public markets. Your customers are your best Advocates, your brand Ambassadors and your market Evangelists.By allowing them to (potentially) become shareholders, you’re turbo-charging the power of their advocacy even further.Chad- Would you sell 10% of Etsy to its customers/users/partners to make them shareholders and use the proceeds to a) continue growing, b) pay off any existing shareholders/investors who might be pressuring you to go public. Then, issue dividends to shareholders later.

    1. awaldstein

      I need real life examples of this please.As an idea, sounds great and perfect. Ideas often doLinks?

      1. William Mougayar

        Advocacy related?You (and I) are an advocates of AVC. I’m an advocate of LocalSip. Etc. But large companies need tools to better manage systematically their armies of advocates, eg like Influitive does

        1. awaldstein

          Sorry..examples where companies in lieu of using the public markets financed their future through their customer base.From your example above.

          1. JLM

            .The Boston Beer story — Sam Adams — is one hell of a story.Guy running it is no dummy — Harvard JD/MBA, Mitt Romney classmate.Sold stock to his customers cheaper than he sold it at the IPO.He thought he might get 30K interested beer drinkers, he closed the book at 100K. He was way oversubscribed.He advertised his deal on and in the six-pack itself.…At first in 1996, the deal was a stinker but now it looks brilliant at current prices. You have to buy and hold.JLM.

          2. awaldstein


          3. LE

            Koch was a staple of Inc. Magazine back in the 80’s. Here is an article from 1988 (says 2000 but it’s from 1988):…A few things of interest from a quick scan of that.- His Uncle was a partner at Goldman and one of his initial financial backers (As they used to say on SNL I guess you could do better than that?)- His uncle thought he was stupid for getting a computer system w/o any sales. (This was totally old school thinking back then I remember it well when I bought equipment (and computers) and the first question asked was “do you have the business to support that”. There was no concept of say, a Bezos investing and building infrastructure so you could support the business at least among a certain class of business people which are the people giving advice to those starting out with limited financing.”That call really galvanized me. Up until then, I’d never sold anything in my life, and selling is a scary thing-“”You’re talking to an individual who is either going to buy your beer because he likes it or tell you to get lost.And that frightened me.””Finally I picked out a bar near my office at The Boston Consulting Group, where I was winding up my tenure as a management consultant.”The problem with Koch when he was starting out, feeling scarred at the thought of cold calling for sales (and hence staying away from it) shows you things that you don’t learn in Harvard or anywhere else. But it’s something that anyone can do and something to keep in mind (guys from a privileged background) how you can differentiate yourself.I find it really amusing the way Koch portrays his impression at the time of how salespeople are viewed almost as third world participants in business. Someone who can sell can always make a living as opposed to a guy whose skill is simply to push paper in any specialized area.

          4. Abdallah Al-Hakim

            super interesting story about Sam Adams. For this to work with other companies, the main ingredient needs to be strong customer passion about the product or the brand. This passion needs to come from both sides!

          5. William Mougayar

            The Beer company that Chad mentioned did that. And SurveyMonkey to some extent as a non-traditional perspective. Conceivably, you could crowd-finance LocalSip from your ecosystem of stakeholders & make them shareholders.

          6. JLM

            .Advertise on wine bottles.JLM.

          7. William Mougayar

            Interesting idea. It deserves some thinking.Have you seen it done?

          8. awaldstein

            Interesting concept.I’ll ponder it.

          9. LE

            “financed their future through their customer base.”If possible a potential way to keep customers loyal and from jumping ship to a competitive platform. A big “if” of course. Depends on the delta (in goods and pricing) between you are the competition no doubt. As well as how many owners you can attract. After all frequent flyer programs used to work quite well.

  23. Albert Hartman

    There must be another way besides IPO or M&A for a private company that is growing and coining cash to reward its equity owners. Maybe have aggressive frequent dividends and a private market for equities. Early owners could sell their shares to later owners wishing simply for a longer term, lower risk but higher-than-bank-interest money stream.

  24. Steven

    What happens when the investors refuse to buyout and still wants the company to be public?

  25. reece

    Chad is the man and i love how Etsy continues to do things differentlycan’t wait to watch this whole thing

  26. jimmystone

    this is interesting. given kickstarter’s comments in past and its growth trajectory, interested to see how they solve this issue.

  27. josh guttman

    It’s an interesting discussion, likely brought to the forefront by Survey Monkey’s recent financing. I don’t know all the details about Etsy’s financials, but I do know there are only a handful of private internet businesses that produce the margins and free cash flow of Survey Monkey. It’s a special company. Because of those margins and free cash flow, they were able to raise a large round of debt financing and pay back their investors a comfortable return, while raising additional working capital and avoiding the scrutiny of the public markets. It doesn’t hurt that their CEO could afford to invest $50mm of his own capital in the round. All in all, it’s an unusual case and may not be an easily replicable financing strategy. More often recently, we’ve seen high priced equity rounds on unprofitable or barely profitable numbers that give early investors the opportunity to sell their stakes to newer ones. Though it would be great to see more businesses deliver the financial performance that Survey Monkey has achieved.