Getting The Deal Done
There’s a scene in Ben Horowitz’ book The Hard Thing About Hard Things when LoudCloud was burning through cash and financing options were challenging and so they went public. The valuation of $450mm was much lower than they had hoped and getting the deal done was hard but they got it done. It saved the company and ultimately the company, after changing its name to Opsware, sold to HP $1.6bn.
Here’s the opening text from a story about that LoudCloud IPO:
Shares in the company climbed 15 cents, or 2.6 percent, to $6.15 on a volume of 15 million shares. This gives the company a market value of about $450 million, less than half the $1.1 billion it planned for in its earlier filings.
Thursday, Loudcloud raised $150 million when it sold 25 million shares for $6 each to large investors such as mutual and pension funds. Lead underwriters Morgan Stanley and Goldman Sachs twice changed the size of the offering to make it more appealing to investors.
Initially the company planned to sell 10 million shares, or a 9.6 percent stake of the company, at a range of $10 to $12. The terms changed to 20 million shares, or a 30 percent stake, at a range of $8 to $10 in mid-February. Thursday, the company altered the terms again, offering 25 million shares at $6 each, or 34 percent of the company.
“It’s desperation,” said Dave Nadig, a portfolio manager with MetaMarkets.com, who said he will not buy the stock. “I think they’re pretty much standing on street corners trying to find people to buy. They need the $150 million to build their business.”
Sometimes you just need to get the deal done. When you are burning through cash and need to finance your company, the terms might suck, but the cash doesn’t. So you do the deal and live to fight another day. Marc and Ben did the right thing at LoudCloud and Jack Dorsey did the right thing at Square.
If you believe in your business and yourself, take the money and get back to work. A financing is not an exit. The price matters less than the cash most of the time.
is Square a USV investment?
But @jack is. :)(Not technically but you helped put him on the map.)
Reminds me of the guy who is a big deal restaurateur now (the toast of our town) who I helped a bit early on in his career (as I did his father with some advice) however was never given an opportunity to invest in what he was going to do. Which I wouldn’t have done (my spin now) simply because his own father didn’t have faith in him and he seemed like a total obstinate loose cannon.  Yet one with great creative food instincts. But pointing to the “luck” theme here if his father had more faith in him I might have as well and there would have been great upside to me for sure.
or he helped put me on the map.
See now Obama was never as generous with Oprah and it’s always been pretty clear to me that he would be just another Harvard Lawyer without her help early on. (I actually remember when he was on that show way back and followed it like I followed Trump early on..)Anyway now I can actually find backup for this:https://en.wikipedia.org/wi…
“A financing is not an exit.” & “..live to fight another day”. Well said Fred.I often see founders so passionate about their business and its prospects that they would rather run on fumes than take a much needed cash infusion at less than desirable terms when the traction has yet to take hold.Would you starve your child if it’s not organic? I’ve seen that too.
Maybe it’s just coincidental, but the security with the third-highest potential return over the next six months, as calculated by Portfolio Armor on Wednesday (it runs these screens every trading day) was another payments company:With the $SQ IPO happening, worth noting the #3 name in our ranking now is another payments company, $HPY (#’s 1 & 2 are $AMZN & $GOOGL).— Portfolio Armor (@PortfolioArmor) November 19, 2015
As an aside, I really like the look of embedded tweets. Nice use of images, font sizing, links, and white space by Twitter. If I were running a financial news site, whenever companies released big news after the market close, I’d put together an article consisting almost solely of embedded tweets by key journalists, CEOs, analysts, traders, investors, etc.
What you didn’t mention about Opsware is they IPOed in March 2001 during a very unfavorable investment climate for Internet companies, which caused it to reduce its proposed offering.But what the Street failed to understand then is that they weren’t an Internet company, but they were the first significant cloud company, and arguably kicked the door open on that segment.The comparison to Square is apt in terms of getting the deal done, but maybe the environmental circumstances are different? Today, the IPO investment climate is better than what it was in 2001.
The hard thing about hard things is that you can’t control luck.But what the Street failed to understand then is that they weren’t an Internet company, but they were the first significant cloud companyWell as I like to say what is the scope of all misunderstanding? In other words how many things didn’t the street understand back then which they were correct about?Andressen/Horowitz was wrong about Loudcloud at the time they started it. Doesn’t matter if the timing wasn’t right and the idea might work later. Or that they cashed out in some way.  Doesn’t matter if it pivoted into something that worked next. Same with Jobs and Next or Altman and Loopt. Next failed even though it got Jobs to a better place. Ditto for Altman.  The luck factor is the primary reason why we look at Jobs and A/H (or Altman) in admiring terms today. The fact that they are smart and worked very hard is a quality shared by 1000’s of people that didn’t have that luck or timing.Of course what has to be factored into all of this is the age of the entrepreneur and what that person who is doing things that require large amounts of luck has to loose if the idea fails. What might be a foolish gamble for a person of one age (and family standing) might be worth a chance for someone who is younger and has many plan b’s or a safety net to fall back on. Starting a business with the hope of making money but not through the primary purposes of providing a good product that customers want is not typically what one focuses on because there is no clear path to that type of serendipity.http://www.siliconbeat.com/… By the way SV looks at things, not by the way any individual not caught up in the startup machine might I have to mention.http://thenextweb.com/apps/…
Apparently, VC was unaware that they were the first cloud company as well.
It’s better to lower your price before the market does it. It’s a much better message.
This is very true. It is a very odd world where a $3bn valuation for an IPO of a six year old company is reported as a “disappointment”.
Proper PR spin was not applied in advance. Media needs to be primed in advance if the objective is to avoid things like that (or even if it’s not).
Reporting a valuation of 9B without reporting float of 200 M feels like gamesmanship
Standard banking strategy, as far as I can tell. Why not leak a high number to try to frame the argument? I am sure they would have happily raised more money in a more bullish market. This seems like plan B. May well be a big pop, in an effort to lure public market investors back to IPOs. People will forget about the terms stuff if so.
Good points. Things like, who had liquidation preferences? Who were the institutional buyers ? What was the private offering, if any, on the table? Etc. are needed to get a true pic of what investors are thinking?But even here the raise is not the exit at least for the employees.
For a funny twist on this theme, which serves the company but not the shareholders – check this out: http://www.financialmail.co…
This story goes for seed rounds too. I am thinking given risk reward, the next $8M seed valuation I see investors should get 2x liquidation preferences and dividends with it too…. : )
A bird in the bank is worth two on the cap table.
You would be surprised that in negotiation with people who are big gamblers how fucking often they go for the two in the bush. Which they think is actually 10 in the bush. I am serious about this. Nothing is worse then trying to negotiate with a gambler as they are often delusional about the upside and totally ignore the downside.
have we met? 😉
On the other hand being delusional about upside is called prescient vision in hindsight.That man could fly – Da Vinci – delusionalMobile Phones for everyone – delusionalEveryone in “the struggle” – delusionalI am proud of my delusions – because I may achieve 40% of them
Golden rule: don’t run out of money.
The guy with the gold makes the rules!
When you are out of money, you are out of business.
I just finished this book, it is awesome.Some of my favorite quotes: “The struggle is when food loses it’s taste”,”The struggle is when you are having a conversation with someone and you can’t hear a word that they are saying because all you can hear is the struggle”,”The struggle is when you go on vacation to feel better and you feel worse.”That whole chant of the struggle on chapter 4 is pure gold. and my favorite: “The struggle is what greatness comes from.”
While going through an accelerator 3 years ago, my colleagues and I used this term (“the struggle”) all the time. “They’re in the struggle. She’s in the struggle.” For a lot of us the struggle was deciding whether to eat or pay rent.
It seems that “between a rock and a hard place” is where many of us reside during some stages of starting a business.
And that’s why it’s so important for us to talk to each other all the time, so none of us forget that we’re not the lone stranger 🙂
To me that struggle also emphasizes how much it matters that the entrepreneur / founder be aware of and work on their emotional state. I’ve seen a couple (and read about plenty more) who are down to their last dollar or opportunity and it makes all the difference. Not to mention I’ve done it myself, although more on the bootstrap / customer funded end than venture capital.
It was pretty transformative for me. I feel like I traded in my weather vane for radar 😉
If you believe in your business and yourself, take the money and get back to work. A financing is not an exit. The price matters less than the cash most of the time.On one side of the table, sure! On the other side of the table, the price matters more than the cash! :-)Ah, suspicions confirmed! Investing is looking for a business with traction significant and growing quickly but desperate for some cash and, thus, willing to sign a deal with onerous terms! I’m just an entrepreneur just trying to learn! It’s great to see a glimmer of light through the fog, where the world starts to make sense! :-)!Close to (@JLM) “You don’t get what you deserve. You get what you negotiate.” And, try to negotiate from strength, not weakness. Or revenue $10 and expenditures $9 — happiness. Revenue $9 and expenditures $10 — misery. Or, keep down expenses, stay profitable, grow more slowly, and sleep better!
This is my biggest beef with the whole “unicorn” hype. It is actually hurting founders. Entrepreneurs have to realize that a “valuation” is simply a forecast — it is not real. Build a sustainable business, make prudent decisions and don’t worry about the forecast. As you point out, sometimes the prudent thing to do is ignore that forecast. Trust that, if you are doing your job right, your ego (and stakeholders) will be satisfied when the day is done.
From your lips to two seed investors ears.You are so inside my head today!
Will be interesting to track SQ’s opening. Taking a haircut (more like a crew cut) pre-IPO is prob a smart move, but such a precipitous drop in valuation, in a relatively short period, suggests mgt is a tad out of touch. Moreover, SQ’s Starbucks deal is a disaster. They lose money on each transaction, while it accounts for 11% of needed sales.Jack’s gonna feel the heat more now than ever managing two publicly traded companies.
Maybe, but likely not initially intended to be.
Perhaps, however I’m sure they understood the value of having an account like Starbucks.
Havnt they nixes the Starbucks deal?
SQ lost $72M on SB deal past 3-years. Allegedly they’re transitioning out of deal within next 12 mnths.
It’s a total metro cut. He could model with that look and haircut. If he showed up looking like that where I work everybody would be staring at him and he would stand out like a sore thumb.
Ha, wasn’t being literal, LE. I had no idea Dorsey got a haircut, and could care less. My comment was in the context of SQ taking a haircut on valuation.
Getting a quiet, sane haircut before what will be a noisy, unsane day. Something kinda cool about that.https://twitter.com/jack/st…
There is something particularly refreshing about a haircut and shave.
Not for me! I’d cut my own hair if I could.
Started on a #4 crew cut when bootstrapping to save money – now its all I do ! (my wife tidies up what I cant see), and the bald patch save me time
Sharp look. Nice to have enough hair to get a haircut like that. I wouldn’t have done it the morning of something important though, I’d be annoyed by the hairs that inevitably end up down your shirt.
Watching CNBC – opening bell, they just referenced Fred’s blog and his comment”Sometimes you just need to get the deal done. “@Jack agreed
.Square should be irked by the pricing head fake. The company got screwed by the underwriters. The underwriters screwed Jack Dorsey and company as the bounce proved.As to Dorsey, he needs to decide where he is going to work. The Boards of these companies — Twitter, Square — should be dragged behind a horse (figuratively speaking) for their inattention to their fiduciary duty and the duty of their CEO.JLMwww.themusingsofthebigredca…
Agree 100%. Impossible to do a good job serving so many masters. Each is a full time job and more in itself. I hope he isn’t taking off as well for kids soccer games. Or getting more haircuts. It’s all ridiculous to me.I wonder if there is a legal cause of action in the future if someones investment value drops as a result of the “inattention to their fiduciary duty and the duty of their CEO”.Maybe if he wasn’t dicking around at two companies he would be in a better position to not get screwed on the pricing because he’d be able to bone up and spend the time to understand the process. He isn’t married but looks like he is with a “low maintenance” type of woman (I am joking of course)http://heavy.com/tech/2015/…
You need like a radio show or something.
Because of my strong opinions or because I say interesting things or?
First of all, you are entertaining. You make me laugh out loud. And you are surprisingly clever. Often my response when reading your comments is “I didn’t see that coming!” You have strong opinions that are at times controversial but you bring up points that others may not consider. You say things that no one else will say. I’m not even sure they SHOULD be said. But it’s part of your charm.The thing that made me laugh so hard yesterday was a small thing but I’m still laughing. “Or getting more haircuts.”
Well thanks for that! What’s odd is that I really didn’t start to be funny until perhaps 10 years ago approx. The reason is that I was raised in a family where humor wasn’t appreciated and even looked down on. I had two sisters and they never thought anything that I said was funny (or interesting) they were the type that would say things like “oh that’s terrible” like they were middle aged church ladies. Parents ditto. Same with my first wife. My wife now will laugh at most things that I say. And so I’ve had much more practice.By the way what I found funny about Dorsey was the entire posing with the barber as if that shop was THE BEST PLACE IN THE ENTIRE WORLD TO GET A HAIRCUT AND THE BARBER IS A MASTER OF HIS CRAFT.  When I am a billionaire I will have the barber come to me I will not go to the barber.
I can’t help but wonder if not having your humor shaped by “norms” at an early age gives you a greater range to work from as a adult. Fewer restrictions.
I think so a good point.. For the longest time I was actually very shy. This stems from elementary school. I found some reports cards recently. The teacher said that I was quite the chatterbox in class. My mom must have read me the riot act (there were riots back then you know, the 60’s) and that totally killed my buzz. So I shut up lest getting punished. Also the fact that everything I said was questioned and maybe ridiculed (at home). This had the effect of making me really think (an upside) before opening my mouth. Key thing can’t stress that enough. Otherwise get called “stupid” and made fun of let’s say. And not thinking that I could pull one over on anyone (because my parents were good at calling bullshit). My theory that great con men have parents that were not like mine so they see the world much differently. (I’ve spot checked this and it appears to be a pattern).To this day I always try to reverse engineer people as to why they are they way that they are.Note the upside in the way I was raised. The problem with new age parenting is that parents look only at the downside and handle with kid gloves to much. Don’t realize how resilient kids really are.
I think this is a classic dilemma faced by talented people. Everyone wants their time and attention and there is only so much.
In the past 25 years of work and watching big companies work, nothing has surprised me more than the performance of BoDs.
It seems that two of the most important things in running a business are knowing what you’ve gotta do and knowing when to do it.Easier said than done.This post really speaks to me.
Interesting to see Square trading up more than 50%. This article inspired me to write a post on “Square and its Silicon Valley problems”. When expectations are now so high that a $3bn valuation (now nearly $4.5bn) is regarded as “a disappointment”, the world has become a very strange place. http://www.globalcorporatev…
Sometimes you just need to get the deal done. When you are burning through cash and need to finance your company, the terms might suck, but the cash doesn’t. So you do the deal and live to fight another day. In medicine there is a similar concept that is taught to medical students. Something like “if someone is choking and needs an airway don’t worry about infection just use anything laying around and cut a hole in their trachea”.Example:http://www.dailymail.co.uk/…A doctor is being hailed a hero after he saved a woman who was choking on her steak in a restaurant by performing an emergency tracheotomy using a knife and hollowed-out pen.
According to Twitter it’s @jack’s birthday. What a day.
Great opening for SQ, 13.64. Congrats on being a public co.
he’s having a decent day, and by the looks of it, a decent birthday
Ways to get the deal done, so you can get back to work:- drop your price- drop your barriers to entryIn essence, be realistic.Once you’re in the game, you’re in the game.
I agree that cash is the crucial priority for the company. Keep in mind, that Goldman and Mogan Stanley have their own agendas and are not timid about pressuring clients (what would the perception, and internal consequences, be if the investment bankers couldn’t complete the IPO and one of this size?) Also, I find fascinating that Gavin Baker, FMR’s OTC portfolio manager, (an unusually talented pm) is on CNBC, or perhaps not so, given FMR’s own battle to preserve the relevance of managed funds. We are seeing competing agendas all hoping for airtime. The companies that are out there, contributing innovative real products to the world, and their shareholders, are of the highest value, in my opinion. And they need cash.
are you related?
Lol. Not that I know of……….. Unless Jack is from Maryland……
gotta get the money together to go all the way from New York to LA.
If this is right much of the ESOP is underwater but the series E got their ratchet.https://twitter.com/haslett…
have you seen countrexamples? where taking the cash long term killed the company
tons of examples of from dot com days:pets.comwebvanetoysetc.,All of these raised way too much money way too early for a market that was not ready for what they had. If they had paced it, some of them could have survived, but that was not the game they were playing.
This is not a direct comparison to LoudCloud’s example. The company needed cash. Raising too much too soon is a different issue. Silicon Valley had a great episode about this (S2.Ep1).Dan, some of those companies were doomed regardless of taking cash or not. It seems like taking too much cash sets you up for a down round.
Powerful phrase, “the terms might suck but the cash doesn’t.” At times, it’s more important to simply survive and live to fight another day. In these circumstances, I usually express to my clients/partners, that the terms/values could always be worse. Great advice…
In Commercial Real Estate (Real Estate period) the value of real property is based opinion of value using an appraiser as one tool (Market Value). The majority of any transaction actually in the end comes down to what the buyer is willing to pay and what the seller is willing to accept.Square was willing to accept less to gain (The thinking) more in the future.
“…believe in your business and yourself, take the money and get back to work.” Made this mantra a while ago, and took the money. There were dissenters, but I have yet to regret it because we’re still in business, growing, learning, and winning fights every day.
second best management book I’ve ever read. best is the sadly-forgotten Andy Grove’s “High Output Management”
If Ben Horowitz wrote this article it might start with:”Cash Rules Everything Around MeC.R.E.A.M.”-Wu-Tang “C.R.E.A.M.”
Interesting point.. !
Great illustrations of Square’s path to IPO, including valuations through each funding round: https://equityzen.com/path-…
Re Private. It’s nice when you get a % gain guaranteed too