This Founder Made $99 from $82.5mn Exit; The Lesson?

http://www.nextbigwhat.com/founder-exit-negotiation-casestudy-297/

by ankitoberoi • 13 years ago

63 24 13 years ago

nextbigwhat.com

steeve• 13 years ago

The story is originally from the DailyMail [1]. For those who don't know it, the DailyMail is a tabloid.

EDIT: It seems the original source is actually the New York Times [2], so I stand corrected.

[1] http://www.dailymail.co.uk/news/article-2317924/Five-founder...

[2] http://dealbook.nytimes.com/2013/04/30/in-venture-capital-de...

ankitoberoi• 13 years ago

Thanks for sharing! NBW clearly chose a much better title.

WoodenChair• 13 years ago

The picture of Steve in that article is just classic. I couldn't help but smile - what a funny look and turtleneck.

melling• 13 years ago

I still have that turtle neck.

ig1• 13 years ago

Basically blogspam version of the NYT article that was discussed yesterday:

https://news.ycombinator.com/item?id=6764482

trevelyan• 13 years ago

For the record, my unfunded startup makes me more cash every time a customer pays.

jheriko• 13 years ago

investment is always a bad idea if you don't need it imo.

i don't particularly think venture capital is a 'morally upstanding' industry. its always painful to see rich people get richer because they are rich (even if it is because they are making smart investments and are really earning that money).

drivingmissm• 13 years ago

It really shouldn't be painful to see people succeed. Successful investors are putting money back into the startup ecosystem. Venture capitalism funds amazing technologies and businesses that can't get capital through traditional banking or stock/bond markets (including life saving medical treatments and devices)

joshuaheard2• 13 years ago

In a capitalist system, there are two ways to make money: labor and capital. Labor makes money from the production of some good or service resulting from the labor. In the case of a startup it is the founders' time, effort, and expertise in starting the company. Capital makes money off the use of the capital. In venture capital, the use of the capital (money) comes with a high risk, that the venture will not succeed. Therefore, there is a higher return. Nothing immoral about it.

rayiner• 13 years ago

Nothing immoral about it, but it's not quite as rosy as you portray it to be. Most venture capitalists don't play with much of their own money, but rather play with the capital of their limited partners. As an industry, they provide pretty anemic returns to those limited partners. But almost all make a lot of money personally, because their standard arrangement with their limited partners is to charge a portion of the principal and a portion of the return as a fee. Why do limited partners keep taking those deals? Who knows? A combination of inertia, desperation, and bad judgment. Many big institutional pension funds are under tremendous pressure to yield very high returns and at the same time often aren't run by the best and brightest Wall Street has to offer.

Also, as a startup founder, your investment of labor also comes with a high risk in the form of opportunity cost.

kjackson2012• 13 years ago

If I remember correctly from another article yesterday, the company went through 7 more rounds of funding after the founders were kicked out. Most of the heavy lifting was done after their ouster, so quite frankly they don't deserve anything from the sale. The company could have easily folded and everyone could have gotten zero.

bmurali• 13 years ago

It doesn't surprise me, many founders get carried away with the tide of funding money and associating with VC's that they loose track of their hold and control over a company that they built. Doing that at times you get hit by "Too much is too less" reality.

kayoone• 13 years ago

Its easy to say "Many founders give away too much of their company too early" but in how many of those cases do the founders really have a choice ? Most often raising money takes too long so you are left with "go with this or die" unless you are some rockstar startup.

mindcrime• 13 years ago

do the founders really have a choice ? Most often raising money takes too long so you are left with "go with this or die" unless you are some rockstar startup.

Sure, the choice is in your second sentence there. Do the math, and if a round of funding is going to dilute you to the point that you aren't going to get any return from continuing to work on the company, cut your losses, let it die, and move on to the next thing. It might wound your pride, and nobody wants to see "their baby" die, but if continuing on means getting screwed, then don't do it.

philsnow• 13 years ago

Said a different way, consider the opportunity cost of continuing to work on this idea that will probably not be a big payout for you.

If your idea will improve the world in some useful way (and if the rest of the owners will let you continue on with the company), and if you think any replacement CEO won't be able to execute your idea to your satisfaction, it could be worth it for you to persist. Or it may be better to, as mindcrime said, cut your losses and work on your next idea that will improve the world.

ajays• 13 years ago

It doesn't matter if you're a founder or a janitor; what matters is how many shares do you have? Just because you're a "founder" doesn't give you any special fiduciary powers; you're just a person with lots of shares to start with.

cscharenberg• 13 years ago

Exactly. This wasn't "his company" the instant he took funding. Investors do not give out loans, they buy ownership stakes. Multiple rounds of funding will reduce the founder's ownership to a tiny share if they are not careful with terms.

fit2rule• 13 years ago

Rule number one of business: do it because its fun. Rule number two of business: rule number one is wrong.

Founders can get hung up in either of these two issues, I think, in the negotiation of early capital seeding. If you're doing it because the customer wants you to do it for them, then you've graduated. Hold on to everything you're making, and don't give it up: keep the customer always in your sights. So-called capital often costs soul. Good businesses, with soul, have it because their customers give it to them - not 'capitalists'.

gpcz• 13 years ago

I took a class at the University of Michigan called "Entrepreneurial Business Fundamentals for Scientists & Engineers" that goes into a lot of the mechanics behind different investment avenues and the risks/rewards of venture capital.

If you ever intend to seek venture capital, it would do you well to play around with the numbers in a capitalization table. You can find decent ones online from a search. What you'll likely realize is that venture capital is only good for the founders when things go perfect -- that is, when the business does nothing but grow and never has a low-growth moment. If you ever have a "down-round" (a round where the valuation of the company is lower than the previous), that will sabotage basically everything. Therefore, if you don't believe your product is going to be a complete revolutionary slam-dunk, please save yourself and the VCs pain and misery and seek means of finance elsewhere.

Another thing to remember is that VCs typically project out for a 7-10 year exit. If you don't do that, they consider it a failure on their end. Bloodhound got their Series A in 1999 and sold in 2011, so the VCs were likely in failure-mitigation mode by that point.

pbreit• 13 years ago

Not a great article. I'm assuming it refers mainly to liquidation preferences but erroneously states "give away too much of their company too early".

xacaxulu2• 13 years ago

I'd rather make money from my company in smaller amounts while remaining unfunded than to fork over huge chunks to investors. Even if the overall amount was much less, the percentage of gains would be much higher.

mildtrepidation• 13 years ago

The point of investment is acquiring capital to build and/or grow your business. If you don't need that capital, there is no reason to look for investors.

There's a gray area when you can build the business on your own and it may or may not take off without further development or marketing. But if you have nothing and you need money you don't have to build something, then you either don't do anything or you look for funds. It gets less simple at that point.

xacaxulu2• 13 years ago

Agreed. I think it's just become a bit easier to say "hey let's get investors" than to look for slower, more sustainable options for growth. The appeal of investor capital is strong and like you said, necessary in certain cases.

This Founder Made $99 from $82.5mn Exit; The Lesson?

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