
The Lessons Google Ventures Learned from Secret - awwstn
http://mobile.nytimes.com/blogs/bits/2015/05/05/the-lessons-google-ventures-learned-from-secret/?referrer=
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numair
I have a great story about a startup run by a bunch of insane guys. One of the
founders cashed out a ton of money early and bought a $100k car; another
founder's dorm buddy proceeded to wreck it within a month. Ron Conway's son
used to bring cash to one of the founders, who blew it on drugs and partying
while supposedly spending it on business development.

Crazy. Irresponsible. Negligent. Bill Maris would NEVER invest in such people.
All of the Valley VCs who are outraged with Secret and the founders' cash-out
would NEVER want any of those guys in their portfolios.

Too bad those crazy kids ended up building a $250B company, huh?

I always find it quite rich, and quite immature, when investors try to tell
entrepreneurs how to live their lives or spend/not spend their money. The
Secret founders offered their investors a deal, the investors took it,
circumstances changed, and the investors got less of a bargain than they
thought. This happens every day. Should Mark Cuban return the billions of
dollars he made off Yahoo from selling them that epic turd of a company called
Broadcast.com?

~~~
untog
Oh, come on. Anecdote is not data. I'd wage a considerable amount of money
that people who do not trash cars and inhale kilos of drugs are a better
investment return, on average.

The perception that VCs should consider themselves lucky to have invested in
an immature asshole's startup sums up much that is wrong with Silicon Valley.
I don't wish for another burst bubble, but if it happened it might be a useful
reset.

~~~
numair
Secret was one of the most aesthetically impressive apps I'd seen on iOS,
ever. It had all of the little usability details nailed on its first attempt.
Even those of us who didn't appreciate its use case (myself included) couldn't
help but feel jealous of the technical ability of its creators. The founders
weren't random "immature assholes," and one would hope that the investors
weren't either. A lot of people were chasing those guys with money, and they
all knew what they were getting into. I wish people would spend less time
obsessing over the money and more time figuring out why the company (and the
two cofounders) fell apart; that's far more useful to learn/discuss. Hating on
people just because they got a couple mil is pretty stupid and childish,
especially when they are clearly more technically talented than their critics.

If there is a bubble in this industry, it is a bubble of amateurs; people who
shouldn't be investing or working in a field that is driven by extremes, and
always has been. Extreme people chasing extreme success at extreme odds. And
you know, everything in those extremes is going to look weird to people on the
outside. Young Gates also wrecked sports cars and nearly went to jail; maybe
these are all anecdotal, but the fact remains that you've got to accept a bit
of eccentricity in this industry, if you want eccentric returns.

If this whole Secret backlash thing continues, the kids in this industry might
need a history lesson on why Peter Thiel called his VC firm the Founders Fund,
and why it was so novel at the time. Investors always want to give founders a
tough time; until Thiel and Co. came along, Valley VCs practically colluded to
ensure that young entrepreneurs remained poor until an exit. I'm sure they
would love for that era to return, but thankfully there's just too much
capital for such a thing to happen anytime soon.

~~~
dmix
This is a great analysis.

The founders parlayed multiple VCs chasing them into gaining $3m for
themselves. I don't see anything wrong with that personally, it's the
investors money and it was voluntary.

I agree with Bill Maris though that it was far too early in the startup to be
doing that. The VC must have assumed their pull in the VC scene would take
them to some sort of success later on - so why not. But that is a risky
gamble.

~~~
pbiggar
I don't agree that it was too early to take money off the table. It's about
aligning incentives: the founders likely had other liquidity offers that must
have looked mighty tempting at the time. $3m each keeps everyone pointing in
the same direction.

It should be pointed out that the investors were no amateurs. Redpoint and
Index are Tier 1 VCs, who know exactly what they're doing. They were investing
in the next Facebook, and it turned out this was not it. That's the game VCs
play.

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MCRed
I think founders should take some money off of the table in every investment
round, beyond the seed/incubator stage. (In fact probably every employee
should be able to do this, maybe to a max of %10 or %20 of vested shares.)

The first reason is that you want he founders to be focused on the company,
and not struggling to make ends meet. That way they can make long term
decisions.

Secondly, every round the founders lose more and more control. They should be
compensated for this. Yes, they have economic dilution from the investment as
it is now, but some of the shares the investors buy should be founders shares.
This results in less dilution for the company, and is a repayment of the sweat
equity they founders have created.

One of the big problems with venture capital these days (and the reason I
won't take it anymore) is that it disrespects the founders by demanding
liquidation preferences for the VCs. As if the VCs who merely put up other
people's money should have rights superior to the people who literally put
part of their life into the company. That's not right. All shares should be
equal, and if not, the founders should at least be respected. (For those
firing up your keyboards to explain to me why LPs are necessary, two points:
1) I've heard a bunch of arguments for this already. 2) they've all come from
VCs and are self serving. You can't really make an argument that it's better
for the company or fair for the founders.)

Thirdly, too often I've seen VCs force founders to revest shares. But the
value of those shares was already earned. The founder incentive to do well
comes from increasing the value of the shares... and revesting the shares
denies the founders crucial voting rights that they have earned already. (And
makes it that much easier for the VCs to force a founder out, which is usually
a bad idea in my experience.)

~~~
ztratar
"The first reason is that you want he founders to be focused on the company,
and not struggling to make ends meet."

Pay yourself a higher salary. If you're paying yourself less than 80k, bump it
up. When you're selling stock, you're usually talking about tens of thousands
of value at the minimum. Founders and especially employees shouldn't seek to
take money off the table because it rewards them for hitting the wrong
milestones. Fundraising is not the goal -- a sustainable business is. They
should get rewarded for the latter and use the former as a source of fuel to
achieve it.

"Secondly, every round the founders lose more and more control. They should be
compensated for this."

They are compensated for this in the form of their net worth skyrocketing come
fundraising event. Really, the question is should they receive liquid
compensation. Sure, it would be nice for some risk to be left off the table,
but if you signal to people that you're selling your own stock, what does that
do to the employees mentalities? The cost is higher than the reward.

"One of the big problems with venture capital these days (and the reason I
won't take it anymore) is that it disrespects the founders by demanding
liquidation preferences for the VCs."

I agree! If the stock is liquid, I see no reason why VCs should get
preference... the only thought that comes to mind is that they wouldn't invest
if the preferred treatment didn't exist, or that the funding market would be
significantly smaller. Remember... VCs are paid a lot to mostly lose money.

~~~
socrates2016
Not all VCs are in it for sustainable businesses. Same goes for the founders.
This is the case for at least one company that Google Ventures invested and
made money on. I heard no outcry from Google Ventures when they made money
from that business. Hypocrites.

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pasta_2
Says a lot about Google Ventures that when something goes south with one of
their investments they'll go to the press and slam you.

Not the first time either.

[http://www.businessinsider.com/what-happened-between-
google-...](http://www.businessinsider.com/what-happened-between-google-
ventures-and-bustle-2014-3)

~~~
MCRed
Well, MG Sigler and Kevin Rose are/were there. MG is the vindictive type, and
to be honest, I see it as one of the Four Horseman of The Bubblepocaplypse
that reports (and terrible ones at that) are becoming VCs.

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CPLX
The suggestion that VC's deserve a do-over and the ability to back out of a
negotiated and executed purchase of stock from the founders is patently
ludicrous absent clear evidence of fraud or deception in the transaction. They
really have no shame do they.

~~~
mathattack
I agree. If the stock goes up 10X, it's the founder's loss. (I've seen this
happen to several folks)

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jefflinwood
One of the most interesting economics lessons from the Secret shutdown relates
to the $6 million of stock sold by the founders to investors.

Because the founders had taken some money off of the table, presumably now
sitting in the form of a money market account + a red Ferrari, they probably
didn't have to ride the Secret company all the way down to zero - they could
see that the app wasn't going to be the next Snapchat or WhatsApp, and now
that they had a few million dollars, their time was suddenly worth a lot more
- they could take some of that money, create a prototype, and shop it around
to get more funding.

Compare that to an app like Path, which has raised lots of money, but hasn't
gotten traction anywhere except Indonesia. Now they're using their late round
investment dollars to try to see if a GIF selfie app, a chat app, or a
concierge/customer support service will take them to the next level. Of
course, that's just what they've launched - presumably there are lots of
mobile app prototypes that haven't seen the light of day.

Will Path's investors get their money back? I don't know. Secret's investors
at least have their money back to fund more app ideas, after they've shown
some promise.

~~~
philipn
Yeah, I'm not sure there's really a whole lot we can glean from the purchase
of founders' stock here. To an outsider, it feels unfair, but I agree that
without it the founders would have likely spent that $25M down to zero.

~~~
toast0
$6M seems like a lot to take out of a $25M round, but if the investors were ok
with it, and the founders were ok with it, how is it not fair?

Earlier investors don't seem happy about it, but I'm not sure how much weight
that has; early investors often have to accept new terms during a fund raising
round; for better or worse.

~~~
pbiggar
Does it?

They sold $6/160 = 3.75% of the company, likely about 15% of their holdings.
Seems reasonable given the valuation.

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tsunamifury
What unprofessional, borderline cry-baby, nonsense for Mr. Maris. You're a VC,
you bellied up to the table, and if you wanted to dictate terms, then you
should have invested in a second round.

If not, then don't tut-tut founders who get a little share from a high quality
product that happened to not be astronomically successful. So they took a few
million off the table for their hard work -- well deserved.

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AndrewKemendo
_“They hadn’t done anything. They got some press. They hadn’t built anything
sustainable.”_

Yet Google Ventures put some portion of 8.6M into them well before any of that
- 2 months after launch.

I guess like everything the "traction and addressable market" pathway is only
for the rest of us peons not in the bubble.

[1][http://9to5mac.com/2014/03/14/secret-app-picks-up-8-6m-in-
fu...](http://9to5mac.com/2014/03/14/secret-app-picks-up-8-6m-in-funding-from-
google-ventures-other-notable-investors/)

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olivercameron
Bill Maris (The Google Ventures VC in this article) followed up with more
thoughts on Secret: [https://medium.com/gv-notes/a-few-thoughts-on-
secret-3cb50a3...](https://medium.com/gv-notes/a-few-thoughts-on-
secret-3cb50a338fae)

 _" I want to correct and amend a few things. I wanted to let you know how my
views had evolved since we spoke. I aspire to be someone that says when that’s
the case and it is here. I hadn’t spoken to David Byttow when you and I
chatted, and I should have done that. I’ve spoken to him now and have a better
understanding of things."_

------
bfstein
One thing I haven't seen anyone mention in these comments yet is that Evan
Spiegal and Bobby Murphy did the EXACT same thing after Snapchat's B round
[1]. They each took out $10 million. It didn't demotivate them, nor did it
misalign their incentives. That $10 million would now be worth upwards of $100
million in equity at their current valuation. Just like Secret, it's a deal
that both sides agreed to; sometimes it works out better for the founders,
sometimes for the VCs.

[1] [http://www.cnet.com/news/snapchat-founders-reportedly-
pocket...](http://www.cnet.com/news/snapchat-founders-reportedly-
pocket-20m-from-funding-deal/)

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pbiggar
I'm amazed anyone is asking for the founders' money to be returned. Can
someone who believes this explain the rationale?

~~~
tsunamifury
The writer, Gelles, is both financially illiterate and a poor reporter. No one
believes what he is trying to insinuate for the sake of dramA.

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leeleelee
I never used Secret, but I can't imagine how an app like that would ever make
revenue.

Maybe I'm just not creative when it comes to figuring out how to monetize
these silly social apps.

Can anybody explain what goes through the minds of investors and founders? How
do you eventually make revenue with something like Secret?

~~~
pbiggar
A lot of different social networks have tried different things (eg Facebook's
tryst with currency), but it always comes down to ads, specifically "native"
ads (ones which look like the content of the platform).

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jpatokal
> _In that round, the two founders each wanted to take $3 million off the
> table for themselves, a practice that is commonplace for more mature
> companies, but less so for very young start-ups._

> _“It’s like a bank heist,” Mr. Maris said. “That’s not how you do a start-
> up.”_

As they say in Finnish, it's not the fool who sells, it's the fool who buys.
My sympathy for VCs who signed this deal with the founders is pretty darn
limited.

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tlogan
What is point of this? Investment went south or that Byttow and Bader are
scum?

I do not know the whole story but it is not really cool for VCs to go to the
press and slam their founders they supported.

Do not take money from Google Ventures.

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zomgbbq
Are the founders legally obligated to return the $6MM they took off the table
or is it a moral obligation? (Or is there no obligation whatsoever) And if it
is a moral obligation, what would incentivize them to do so - is it to save
their reputation in the future?

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karangoeluw
Previous:
[https://news.ycombinator.com/item?id=9495606](https://news.ycombinator.com/item?id=9495606)

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aresant
the company was founded October '13

the series B was in March '14 where the founders took the infamous $6m

So they wouldn't have qualified for long term cap gains right?

~~~
adventured
In theory it should be straight up taxable income.

They likely owe ~$1.5 million in taxes on the $3m, between state and federal.

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LordHumungous
They shouldn't return a single dime. The investors who allowed them to take $3
million off the table should be punished for their stupidity.

