
In Venture Capital Deals, Not Every Founder Will Be a Zuckerberg - npalli
http://dealbook.nytimes.com/2013/04/30/in-venture-capital-deals-not-every-founder-will-be-a-zuckerberg/
======
npalli
Slightly disappointing to see the anti-founder sentiment expressed here. To
recap --

1\. The founders started from zero with their own equity and worked for six
years on the startup. They took funding during '99 and '00 when it was a very
easy time to get funding. Completely unremarkable investment (risk-wise) for
the investors.

2\. The dot-com crash and 9/11 meant that many many businesses collapsed post
2000. So, it wasn't just founder incompetence. There are many startups that
almost went under but slowly managed to get out and have exits during the late
'00s.

3\. Apparently the investors thought the company was good enough to continue
investing under the same name with new management. If the idea was so useless
why didn't they shut it down in 2000?

4\. Most of the value of startups is created after the first several years.
Many lessons are learned that give direction to future opportunities. Many of
the startups that almost went under and came up, learned to pivot (same
management).

The lesson to learn here is that the founder were not diligent about control
over their company. It is not like the investors did some calculation of value
demonstrated to come up with the numbers. They automatically started adding 8%
of company shares every year based on the 2000 agreement.

To give a counter example to make things clear, Microsoft started in 1975 with
Bill Gates and Paul Allen. Allen was diagnosed with Cancer and pretty much
stopped working at Microsoft after 1982. After six years. How much audit-able
value did Microsoft created post Paul Allen?. I would say about 99%. Does that
mean he should be zeroed out? No. He kept his stake (worth tens of billions).
That's how it should be.

Most of the value in a startup is latent during the early stages. Even things
that don't work out teach you things. If you go by audit-able value, that
pretty much guarantees early founders (who don't stay) will get wiped out. For
people who are cheering on the investors, how many of you have bootstrapped a
startup for six years?

~~~
adventured
A few things.

1) I'd argue it is fair to say that Microsoft - in all its ultimate scale -
wouldn't have existed without Paul Allen. The 99% post value creation doesn't
mean much if it wouldn't have existed to begin with. I know you weren't
arguing otherwise, but I think this is worth pointing out.

2) Gates and Ballmer discussed wiping out Paul Allen's holdings in Microsoft,
in a move that would have perhaps been similar to what was done to Eduardo
Saverin in Facebook. Not to say that's morally right, but rather that the
story you refer to isn't so cut & dry.

------
ChuckMcM
My first startup I made enough money to buy a car, the second, a car radio.
Not an uncommon outcome. But I did well on Sun, NetApp, and Google shares as
an employee.

When a startup goes years and years and years the likelyhood of a "big" payout
goes down. Especially if there has been a number of rounds because later
rounds often restructure the terms if the company is in a 'do or die' sort of
situation. No matter what you sign you may be out of the money even with a big
initial grant.

There was this quote: _" Bloodhound also paid a $15 million bonus to its
current management team."_ which is probably the retention incentive/earnout
bonus. Basically you don't want the folks who know how to run the engine to
bail as soon as the check clears the bank, so you put some sort of constraint
on that.

As for the original founders, hey they went on to do other things and suddenly
from their past a check dropped in their lap, that is something at least.

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yangez
> When the Internet bubble burst, the company underwent rocky times. By 2000,
> [the founder] was gone from the company, as were four other members of his
> founding team.

> For the next decade, Bloodhound recovered and slowly grew, raising seven
> more rounds of financing. In April 2011, the company was sold for $82.5
> million.

11 years is a long time. How much do they think they deserved?

~~~
cabinguy
My thinking is a little different than most of those who have
commented...probably because I'm a bootstrapper.

After reading all of these comments - my thought process goes like this: If
the founders output from 11 years ago is worthless, why isn't the investors'
money from 11 years ago equally worthless?

If the founders' sweat equity didn't create value, the early VC money didn't
either. Should the early VC's lose their investment, or just the founders?

I'm not naive, I understand that these deals are structured this way...I'm
just saying that the structure is bullshit (imo).

~~~
saumil07
That's not quite right. It's unclear how much total the VCs put in, at least
from the article. But it _sounds_ like they continued to fund the company
while the founders' involvement ceased over 10 years ago.

"For the next decade, Bloodhound recovered and slowly grew, raising seven more
rounds of financing." <\-- if the insiders participated in follow-on rounds
they stayed involved all the way through. Once again, that's what seems to be
indicated but it isn't spelled out.

------
ig1
1) Always get an experienced lawyer to review paperwork you sign.

2) It's pretty normal for people who give you money (be it a loan or an equity
investment) to get their money back before you do in event of a sale.

Imagine the situation where you raised $5m for 20% of your company and then
the next day you sold the entire company for $5m. You'd get $4m and the
investor would get $1m, you'd be very happy and your investor very unhappy.

Hence no rational investor would give you money without a clause that ensured
that in the case of an exit that they had priority upto the amount they
invested.

~~~
YokoZar
Unless those people giving you money are employees vesting their stock
options. Perhaps I've been misled, but I don't think it's common for employees
to be given preferred stock.

~~~
james_alonso
Right, employees are getting common stock so they don't get to jump to the
front of the line when a company is sold. But they are also paying the common
stock price, which is a fraction of the price paid by the preferred stock, so
it makes sense that each share they own has less rights associated with it vs.
the shares the investor pays a premium for.

~~~
comrade_ogilvy
Exactly. The preferred stock is paid for with real money. The common shares I
bought as an employee was at single digit pennies a share. While I am not
exactly happy how I got wiped out, I did less badly than many VCs did.

------
joshmlewis
The title is somewhat misleading (wow I hear that a lot around here.)
Basically the founders raised a bunch of money (almost $2M in '99 and $3M in
2000) right before the dot com bust.

The article gives no indication how well they did, how they were able to raise
so much money, what happened with it, etc. So really it's hard to judge if the
founders were really put on the street like the title suggests. Like someone
else mentioned, it seems as though a lot of the value was created after they
were gone. Who knows if they blew the money, sucked at managing and scaling
the company, etc. WE DON'T KNOW without doing more research.

It kind of sucks the article was so vague on their actual business value. That
would've given more insight. If it said they put all their blood, sweat, and
tears and created value for years before it was ripped out of their hands and
given to the big bad VCs, then I would've had more sympathy.

------
argumentum
I don't feel too bad for these founders, regarding the _outcome_. It looks
like the majority of value was created after they were at the company (by
people other than them).

~~~
enjo
Does the initial market exploration and proving that they did count for
nothing? They built the groundwork for a successful company, and (at least in
spirit) I think they deserve to share in that.

It's pretty hard to tie down when the "majority" of the value was created. The
majority of the "success" may have happened after they left. I have no idea of
the specifics.

In these cases there are often two types of "right". Contractually "right" and
morally "right". These founders probably deserve a lot more than they got.
That's just the breaks when you get yourself involved with the wrong venture
capitalists.

~~~
argumentum
It depends, but 8 years is a very long time. The founders were present for
about 1/3rd of the company's existence, according to the article.

I was going off the fact that the company raised VC money _7 times_ after the
founders were gone (following 2 raises with the founders present).

Anyway, I agree there's not enough information.

As the article references Facebook quite a bit, it's ironic that in that case
2/4 co-founders got a _lot more_ than they deserved .. they didn't even leave
Harvard, but they reaped billions for a few months of part-time work.

------
mattmaroon
Really? I thought every startup went just like Facebook!

------
tthomas48
I think this goes back to the fact that start-ups are not get rich quick
schemes. I was at a successful start-up that was acquired by a fortune 500
company. I got north of $500. From talking to many other software engineers,
that is a pretty fantastic payout. Most people will never be in a start-up
that yields much of value. You've got to do it because you love it.

------
arbuge
I believe VC terms are a bit more founder friendly these days than they were
in 1999. Founders have become more educated and double or triple dipping isn't
as common as it used to be, in my experience.

That, and VCs are less likely to fire the founder as a matter of course to
replace him/her with professional management, ever since The Social Network
came out.

~~~
adventured
I think the improvement has more to do with the cost of starting up these
days.

You can get a lot further down the road now vs 1996/99, before VC is
necessary. By the time you take VC, properly, you can command a lot more and
give up a lot less.

If the costs today still demanded giving up your soul to get started, then
despite the improved access to information, I'd say that founders would still
be giving up vast chunks of equity early to pursue their startup.

There's a story, that in the process of creating Excite, the founders needed
to buy a hard drive that cost $10,000 to store 10gb just to test their
indexing at scale. Well, Vinod Khosla gave his blessing and they went ahead.
Obviously today you can test a massive data set for 1% of that cost.

[http://bnoopy.typepad.com/bnoopy/2004/09/persistence_pay.htm...](http://bnoopy.typepad.com/bnoopy/2004/09/persistence_pay.html)

Vinod: "Can the technology scale? can you search a large database?"

...

Team: "We don't know, we can't afford a hard drive big enough to test."

"Then, an amazing thing happened. Ten minutes into this meeting, his first
introduction to the company and us, he [Vinod] pulls out his his cell phone,
dials his assistant and buys us a $10,000, 10Gb hard drive."

------
redschell
>The rule of thumb among venture capitalists is that some 20 percent to 30
percent of companies fail, returning nothing to any investor, including the
venture capitalists.

Earlier in the article, it mentions the statistic that I'm familiar with,
which is that roughly 75% of venture-backed companies fail.

What gives?

~~~
tempestn
"An unpublished study by Shikhar Ghosh at the Harvard Business School found
that three out of four companies backed by venture capital did not return the
investment. Again, it is in these cases where the founders and employees
typically are entitled to receive no payment."

In 75% of cases, the _founders and employees_ receive nothing. In 20-30% of
cases, the VCs also receive nothing.

~~~
redschell
Ah, I see. Thanks for the clarification.

------
bruceb
While one would have to know a lot more details but the basic take away is
control, control, control.

------
mani04
I was reading the comments under original article, and came across this book -
"Venture Deals".

With a bootstrapping mindset, I probably may not need it. But posting the info
here for anyone who might be interested in VCs... Search for it in amazon or
your favorite bookstore.

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larrys
"The rule of thumb among venture capitalists is that some 20 percent to 30
percent of companies fail, returning nothing to any investor, including the
venture capitalists."

I believe that number is the mirror. It should say "20 to 30 percent" succeed.

~~~
winterchil
The number that return <1x is significant too. Out of 10 investments typically
you'll have 1 big hit, 2-3 decent returns (2-5x on investment) and a bunch of
"failures" which would be anything less than 1x.

Depending on the VC it's possible anything less than 3x is considered a
failure because of the opportunity cost and their inability to re-invest
proceeds.

------
pocketstar
At first I read: "In Venture Capital Deals, Not Every Founder Will Be a
Zoidberg"

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founder4fun
No doubt Zuckerberg is a smart guy, but he hit the start-up lottery jackpot.

------
contextual
Zuckerberg must be a traffic-drawing keyword for them to put it in the
headline. It's such an obvious statement for an otherwise informative article.

