
We need counter capital - DHH - dsr12
https://dhh.dk/2019/we-need-counter-capital.html
======
mdorazio
> Why isn’t there a market for selling a minority stake of your profitable
> tech company to people who’d be happy to be paid back in distributions and
> dividends, rather than capital gains?

Off the top of my head, a few reasons:

1) How is an investor supposed to cash out of such a deal in a reasonable
amount of time? What's the secondary market for the stake, in other words?

2) There is already a large sector specifically devoted to funding small,
profitable businesses: banking. Banks are climbing over each other to give out
business loans to companies with solid financials. If you're confident in your
business, what's wrong with a loan? I often see this as founders wanting to
have their cake and eat it too ("I want money, but not an actual obligation to
pay it back").

3) Despite what founders often think, small businesses, despite profitability,
are often high risk investments in the medium term. If you're going to gamble
on a risky investment, you typically want the potential upside to be
correspondingly high (i.e., the VC model).

~~~
dhagz
With regards to your second question, I think the preference to selling a
minority stake over taking out a loan is that the loan is debt, the minority
stake is not.

A lot of what DHH is arguing for here was only possible for 37Signals/Basecamp
because of how they structured and ran their business. He basically bought a
seat as a (non-controlling) member of their LLC, and that was really it. So he
bought a share of their profits. And Bezos had the option to sell the stake
back after 7 years.

~~~
mdorazio
Right, which is exactly why I put the cake comment - small business owners
want the benefits of VC capital (no debt repayment or interest) without the
downside (up-or-out constant growth pressure). For the investor, it just
doesn't make much sense.

Thanks for clarifying how the 37S deal worked, though. Having a structure like
a 7 year buyback clause goes a long way toward mitigating my first point.

------
jasode
_> So why is that kind of deal not available to more founders? Why isn’t there
a market for selling a minority stake of your profitable tech company to
people who’d be happy to be paid back in distributions and dividends, rather
than capital gains? It seems like a glaring gap in the market. [...] There’s
got to be a way to make this work._

It's not available because no smart investor has found a way to make it work
... yet. I'm not sure we can extrapolate Jeff Bezo's particular motives for
investing in Basecamp into a widespread market solution. Back in 2006 when DHH
said Bezos made the investment, Bezos was already worth ~4 billion.[0] In
other words, being a multi-billionaire allows the luxury of making some
investments "for fun" instead of worrying about being fired as a manager of a
fund.

In my 2 previous posts[1][2], I attempt to explain the logic of why VCs /
hedge funds / private equity ... do what they do and why they care about
"growth".

So, one way to make it work is that you (the royal "you" as in the daring
contrarian maverick investor) _prove_ to the world that you can take some
money and make it earn 8%+ returns by doing what DHH suggests. Nobody
prominent has done that so nobody copies them and therefore, the "market
solution" looks non-existent.

Does everyone want a new _alternative_ asset class that simply buys minority
non-controlling stakes in smaller companies and just takes a slice of the
dividends? Let's call it the SmallCoDividendsFund. Ok, show the world how you
reliably return 8%+ every year from DHH's strategy and limited partners will
be beating down your down door to give you more money! You don't have to write
essays evangelizing the alternative investment thesis; instead, just _invest
real money_ in SmallCoDividendsFund, get awesome returns, and all the media
outlets will provide publicity and encourage copycat investors.

[0]
[https://en.wikipedia.org/wiki/Jeff_Bezos#Wealth](https://en.wikipedia.org/wiki/Jeff_Bezos#Wealth)

[1]
[https://news.ycombinator.com/item?id=15728480](https://news.ycombinator.com/item?id=15728480)

[2]
[https://news.ycombinator.com/item?id=21365966](https://news.ycombinator.com/item?id=21365966)

~~~
toomuchtodo
> Does everyone want a new alternative asset class that simply buys minority
> non-controlling stakes in smaller companies and just takes a slice of the
> dividends? Let's call it the SmallCoDividendsFund. Ok, show the world how
> you reliably return 8%+ every year from DHH's strategy and limited partners
> will be beating down your down door to give you more money! You don't have
> to write essays evangelizing the alternative investment thesis; instead,
> just invest real money in SmallCoDividendsFund, get awesome returns, and all
> the media outlets will provide publicity and encourage copycat investors.

I own startup equity, index funds, real estate, even a stake in someone's
poker winnings. I model SaaS company valuations for fun. I would consider
myself a sophisticated investor.

If you gave me access to a fund that acted sort of like Berkshire Hathaway,
where someone went and picked out (with a careful eye) growth tech companies
(that have also been derisked and had reached a point where they were
profitable and self sufficient) that might not ever go public but would throw
off cash, I would be interested in buying into such a fund, even if the shares
were somewhat illiquid. You might even call it something catchy, like a
"Continuity" fund. This is similar to how investors get exposure to SpaceX
through a Fidelity fund that isn't publicly traded. Private markets are the
new public markets, apologies to Matt Levine, without all of the hassle of
being public (looking at you Tesla! 420 secured).

A problem that might be encountered is that more money doesn't necessarily
generate more growth (depending on the market space constraints), so LPs
beating down your door is a hinderance. You want long term investors who are
happy to collect their cut while you're busy executing, not obsessing short
term over share value.

------
tanseydavid
The sentiment in the DHH post really hits the mark as far as describing
dynamics of the problem.

But, sadly, I think that any given investor can hardly be bothered to think
about these things -- at least as it applies to them.

IOW -- "sounds good (except for when _I_ am trying to make a return on _my_
money)"

