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We Spent $3.3M Buying Out Investors: Why and How We Did It (buffer.com)
443 points by Sujan 5 months ago | hide | past | web | favorite | 172 comments

There's a lot of negativity here.

I give Buffer a lot of credit. They seem to deeply internalize the idea of "realistic expectations" and it sounds like the buy-out was a win-win solution where everyone got (mostly) what they wanted.

As he says, the investors might not have been happy about it, but at least he has the backbone to resist trying to squeeze growth out of a market where there's none to be had (in the short term). Most CEOs wouldn't be as courageous, preferring to try to spend like crazy in the search for growth, which just torches investor capital even as it adds little long-term value to the business's equity.

In short, a bold move by a very honest guy who's in it for the long term.

I think it is a bold move. In their situation it seems like the right move.

I am seeing a lot of sentiment on HN that feels sorry for VCs. VC already get paid above 200k/year; no need to feel sorry for them.

People should feel sorry for the founders & the employees who did all the work. Now if they get liquidation, then that is good.

Big VC funds pay like that.

Entrepreneurs turned VC often don’t have the dry powder to pay themselves well when they use their own cash to start fund 1.

Not all Vc’s are equal.

If you have cash to start a VC fund, are you really worried about how much you can pay yourself from your own money?

What kind of money are you taking about here? I have a cognitive dissonance after reading your post

If you have the money for a VC fund nobody needs to feel sorry for your wallet.

It's not just a return for the VCs, but all the contributors that gave their money to the VCs to invest, like your university's endowment fund, retirement and pension funds, etc.

The interesting question, if the intention was to stick it out in the long term, is whether raising VC money in the first place was a good idea. Bootstrapping the business would have probably been closer in line with the vision and allowed him to retain control without eventually souring relationships

It's easy to have 20/20 hindsight. The situation was different when Buffer was formed. There weren't as many examples of successful bootstrapped companies and Joel (the founder) was much less experienced.

I don't want to say getting VC was a mistake for Buffer because I can see it might have had an upside of connections and advice for what was an inexperienced team, and I think at that time the management team was more bought into the VC model. Buffer has definitely transitioned away from the VC model, though, and buying out the investors now is the right decision IMO.

A lot of comments in this thread are quite harsh. I applaud Joel for having the courage to honestly share his experiences so others can learn from them.

It's not clear to me why a VC would invest in a business that did not want commit to a liquidity event. Maybe the VC didn't have a better deal to invest in at that time?

Wasn't a significant amount of the VC money for Buffer allocated to founder liquidity?

$2.5M out of $3.5M raised.

Oooooooooh. That’s interesting... So the founders got theirs already. Nicely de-risked.

Fair play to them. I'd take this any day over "This is an exciting move for customers as we limit what we give them for more money" or the other corporate bollocks that gets spewed on the regular.

I don't think this sounds like a win-win, the founder moved the goalposts and bought the Series A out for the minimum possible (9%) so he could start paying himself.

I read the fluff around core values, but my first thought is that Joel would rather not risk his personal fortune by growing the company further. Better to ride the 25% margin as long as possible, giving himself enough liquidity to retire wealthy, than take a chance on growth.

Maybe I'm too cynical, but I admit I'd be tempted to do the same thing.

As an operator or employee of a company that doesn't plan to raise further money from a VC, you want them to pay the minimum possible. Every dollar that goes to the VC is a dollar that can't go to the team.

Meanwhile, if the investor didn't want to sell at the number they came up with, they could presumably just say "no".

You are, yes, probably being too cynical here.

"...they could presumably just say "no"."

I wouldn't imagine that's the case. Especially if the investor came up with the number and agreed to it in a legally binding contract. It'd be an uphill battle in court to get around that. (yeah, you still need the funds to defend your company...)

Also, my anecdata says that most corporations have in their corporate bylaws (or whatever the right document is) the provision that they can forcibly recall shares at any time (presumably for current fair market value/409A valuation.)

Huh? No, the investor agreed to an annual 9% interest rate, not a lump sump their equity could be purchased for.

It would be pretty funny if the legal norm among startups was that they can acquire their own equity back from investors based on their 409A valuation.

"...at the number they came up with..."

Maybe I've misread you here. Is this not a number the investors came up with?

As for the 9% interest rate, that starts sounding more like debt than ownership.

Yes. That is the idea. As downside protection, Collaborative Fund's investment was to begin behaving as if it were debt (issuing interest, that is) after 5 years. I assume the expectation was that if Buffer maintained hypergrowth and reached the inevitable Series B, part of the series B negotiation would eliminate that downside protection clause. But they didn't; they charted a course that didn't involve an imminent second round, and so that protection clause was problematic.

Again: it would be really weird if companies could simply demand their equity back. The whole point of investing in a startup is that their equity will end up wildly more valuable --- not 40% more, but 10x more --- than the money put in.

Once the interest (aka "downside protection") kicks in, the shares effectively converted to debt, meaning the company was simply repaying a liability.

Did I miss the part where they said that? The post suggests their counsel said it was a unique clause.

At any rate: they bought out their investors years before interest became due. It was a negotiated sale.

40% is still far more than most of their startups ever did or will get them. Or a conflicted / disaligned relationship with the founders would have.

I bet you can name 20+ big name startups off the top of your head that made their product substantially worse and/or completely folded due chasing growth at any cost.

I guarantee you this has annoyed you more than a few times as a user of their products.

In a market where VC style multi billion dollar exists just isn't going to happen, trying to force it is just going to ruin everything good about your product and company.

And VCs would rather see you ruin it, with a tiny chance of succeeding, than see you have a successful small/medium sized company.

This is a completely legitimate way to run a company. Heck, I wish more did this.

Agreed, but the question is if that is how he sold the company to investors and to employees? Employees at this point all know, or should know that stock grants are lottery tickets. But that said there is a very clear distinction between working for a company for that lottery ticket and working for the same company where management is actively negating the value of that ticket. Not to mention he slashed salaries 8 months ago. The part about getting liquidity for early investors and employees sounds nice but he had definitely better stick the landing on that one if he doesn't want to see a mass exodus. This act while possibly perfectly legit should be a clear indication to employees and potential employees that he has no interest in building the type of company that can turn equity into life changing money.

Cutting pay and firing people isn't great, but would it really be better for them to burn their capital and become another failed venture? That was the path laid out ahead of them, B2B sales isn't just something you can throw money at and get customers from endlessly, its a slow slog to acquire customers as their associates start using your application and start raving about how much better it has made their business.

Buffer is a nice app, not a world changing invention with any kind of technical or business moat. No one went in hoping to become a Buffer Billionaire.

> Agreed, but the question is if that is how he sold the company to investors and to employees?

Employees obviously I can't know but the article includes him telling investors there might not be an exit.

>> Maybe I'm too cynical

Every time I've told myself that, I later found out that I wasn't.

Under capitalism, the world always presents itself as better than it is.

As opposed to the world that freely admits, “yeah, this sucks.”

So the same company that gave paycuts to their entire staff (except the CEO and Director of People) 8 months ago, has enough money to buy out their investors? Interesting.

Paycut Discussion


Sounds a lot like the CEO gauging the company growth and employee pay in order to build up enough cash to push out investors, get a majority so he could "provide liquidity" for himself.

I can't say if this is close to the mark, but if so it makes perfect sense why the other founders left. Being at the head of a ship with a captain trying to slow down so he can line his own pocket is a special kind of hell.

1) I believe most employees were paid more in that discussion from 8 months ago.

2) If any employees own equity it's also in their best interests to buyback shares since they'll own more of the company. It also means the founder(s) see a bigger potential pay out in the future and will continue putting all of their energy into the business.

The Buffer team's idea of success became different from the VC's who initially invested -- it's smart to capitalize on this and buy back your cap table if the price is right, you can afford it, and you think the company will succeed.

I actually had the same thoughts. I'm surprised he's being so transparent about this. I feel for the employees at this company -- just because a company is profitable, doesn't mean that employees are being paid fairly/market rate.

I wouldn't be surprised if the founder tries to sell the company in the new few years a discount of the current valuation. With 45% ownership, that's a very large chunk of change.

Buffer is most transparent and open startup I know, they've posted their salaries here:

- https://open.buffer.com/transparent-salaries/

With a calculator here:

- https://buffer.com/salary/

And are open about their sales, subscribers, revenue, churn, etc

- https://buffer.baremetrics.com/

buffer's salaries are posted here fyi https://docs.google.com/spreadsheets/d/1l3bXAv8JE5RB9siMq36-...

make of it what you will but doesnt seem low

This is out of date, as Joel now lives in Boulder, CO.

This definitely could be the case, but alternatively there may really not have been a huge amount of increasing month over month growth left in the B2B segment. Sure, you can work your employees harder to get more leads and customers, but that really starts to show through after a few weeks or months, with diminishing results as time goes on.

Most of the staff got a pay increase. A minority were given a pay cut[1]. The Hacker News discussion was based on an incorrect reading of the data posted.

[1] http://disq.us/p/13b30h1

I haven't seen anything concrete about paycuts in that thread. Any what kind of numbers we're talking about? Also surely not everyone got a paycut, right? (Even excluding execs)

Seems like Joel is quite stubborn regarding his values and vision for Buffer, which i believe is a good thing but i can see how it can lead to differences with co-founders and investors once the vision does not align anymore. Felt like it was all over for him when they asked him to eventually step down and from that point he planned to remove them.

In the end it also means that their investors most likely lost their confidence in buffer, otherwise no investor would get out in a deal like that.

It seems to me that the nature of venture funding is such that it would be unusual for the investor and the CEO to be aligned with respect to the company's financial performance. This is true in public companies where activist investors push management to extract more value out of the business even when the CEO feels this will compromise employee morale and customer value.

I have seen companies in the same position described by Joel in this post where they fired the CEO, installed a "seasoned team" to get the numbers up, and then sold the carcass to BigCorp as an acquihire bailout.

So with that experience of one of the other ways this story could play out, I found Joel's story one of "success" in terms of sticking with the plan as opposed to selling out. I certainly respect that and wish him continued success.

Came to the comments to say the exact same thing: this is basically just a vote of no confidence in management.

I can't imagine any employee joining this company from this point forward without demanding all-cash compensation. Management and the investors have effectively set the value of restricted shares at zero.

Personally, I think you should treat all stock options/common stock as a lottery ticket with near zero value anyway when joining a startup. In 99% of situations, cash is all you're going to get.

This is practically reasonable but at most companies everyone's in the same boat (including founders / management) that the big upside is going to be a potential future large liquidity event. In this case, the company seems to have transitioned to being content to operate with low growth and high margins. The right thing for an employee to ask for would actually be profit-sharing. I've heard, for instance, this is how The Mathworks (which makes MATLAB) works; employees get no equity but they don't care because the company is quite profitable and the employee profit sharing is generous.

While founders and investors may seem to be in the same boat, they rarely are.

Investors are coming from a position of boom or bust to maximize that liquidity event because their success does not hinge solely on your company. If you are a founder, you are all in on it, and unless you are already independently wealthy, or come from money, you would/should most likely optimize for less risk with a healthy upside.

For most founders, making 5-10 million on a liquidity event is a life changing event. For most series a and beyond VCs, that's chump change and they will push to put it all on black and let it ride.

Buffer is apparently generating $300k in profit monthly (and growing), they can likely offer future stock buybacks using their yearly profits.

How did you get there from here? This appears to be an A-round startup that just paid $3MM to gain the flexibility to award liquid equity to (among other people) it's employees. Doesn't that make it better than the average equity-issuing startup?

How are you going to cash that out? Do you want to hold onto a lifestyle company shares when there's no potential liquidity event in discussion?

I'm not going to exercise my options in that situation and you'd be crazy to pay taxes on this year after year.

Close-held profitable companies make their shares liquid by buying them back or by distributing dividends (as "profit sharing").

Remember: to a first approximation virtually all startup equity from all startups is illiquid.

>> Close-held profitable companies make their shares liquid by buying them back or by distributing dividends (as "profit sharing").

Yes, this is exactly what we do with our equity and our employees.

It is ridiculous around Hacker News that this idea has been completely lost and almost everyone focuses on RSUs and unicorn valuations and longshots, rather than simply... I don't know, making a business that very calmly makes a few million dollars per year with double digit growth rather than insanity.

It’s as if the idea of working for a company that’s profitable, pays market rates, and may pay a bonus to it’s employees out of its profits is blasphemous....

How do stock buybacks work (especially in a private company)? Do I as a shareholder access to all the information that the company does?

Not trying to sound smart but wouldn't a market with only one buyer mean they will pay the least possible amount?

I'm not trying to trash talk buffer. Just wanted to see if there's another angle to this.

One way it can be done:

We issue equity internally, not options. We hold right of first refusal and have independent appraisals of value of the business done, so when you leave, we have the right to purchase the equity back at the last appraised value of the company. Additionally, we also pay dividends (impacted by equity) and profit sharing (not impacted by equity but rather a percentage of salary) to our employees.

These things are what "lifestyle businesses" do, or what basically everyone outside of SV and indoctrinated MBA programs call... businesses.

You should talk to someone who works at Bloomberg. Bloomberg is a gigantic private tech company with an internal exchange where vested equity can be bought and sold among employees and the company.

Buffer's current salaries:


Personally, I think the salaries are more than reasonable. A senior engineer with a $175k compensation seems fair enough.

When VCs (companies that make their money by betting on long shots) and two cofounders walk away, that is a really bad sign for a company. As I mentioned in another comment, if he hadn't had 45% of voting shares, the CEO would be gone.

It sounds like he just wants to turn it into a lifestyle business. Which is cool, they just need to be upfront about bonuses or profit sharing, and ditch equity.

Quick edit: I just re-read my previous comment and realized "cash only" wasn't the correct phrase to use. I meant it to include the other stuff I mentioned here (give employee some amount of cash) not just base salary.

No. All things being equal, the VC and cofounders leaving is a bad sign. But all things aren't equal: Buffer is so profitable that it can buy out its investors without impacting operations. That's an extraordinarily good sign, one few startups ever find themselves in a position to do.

The Buffer post is extraordinarily clear (almost numbingly so) about the mechanics of their Series A and why they needed to buy their way out of it. They had two structural problems:

(1) the terms of their A round included a strong incentive to liquidate the whole company early, in the form of a perpetual 9% annual interest payment due to the A round investors after 5 years.

(2) the terms of their A round forbade them from extending liquidity to other shareholders, including employee equity holders, without the approval of the A-round lead investor.

Unsurprisingly, Buffer's A-round investors needed to be talked into accepting the buyout, which they took at a substantial premium to their investment in the company.

I do not think the logic you're employing to value these shares is sound. Early exits are usually bad for employees (the lower the exit valuation, the less money is likely to trickle down to employees). Profitability gives Buffer lots of options to maximize returns to long-term shareholders, which is what employees are. To my eyes, Buffer's employee equity is more valuable given this information, not less.

It's also tax efficient. Taking out $2.5m would first incur corporate tax, then dividend tax.

They initially sold equity of the business, only incurring capital gains tax in their personal name. Now they buy back shares and destroy those shares, so their stake increases again. They bought back shares with taxed capital within the company, but without incurring dividend taxes.

Thanks for taking the time to explain to this guy the big obvious perspective he is missing here. So frustrating reading one-sided comments like that.

Can we please stop using “lifestyle business” as a pejorative for everything but hyper-growth companies? Outside our bubble that’s pretty much just what everyone else calls a business.

There are way too many commenting as if a profitable business is actually a negative thing.

It's because we are growing up with VCs teaching us that you have to burn money for 10 years before you can be profitable.

Honestly, I'd sign with my blood if I could get my business to make £5M a year in profit and own nothing to VCs or banks.

Out of curiosity, can you lay out yearly (or monthly) revenue and profit ranges for what you consider a "lifestyle business"?

To me it sounds like he's trying to establish Buffer as a business, and not a startup. Let's make that distinction, and drop the "lifestyle" part.

> When VCs [...] walk away, that is a really bad sign for a company.

VCs eventually need to post cash-on-cash returns to their LPs if they want to raise their next fund. It doesn't matter if they think the company can do another 10x or another 100x, eventually they just need to exit their positions and mark the book. Now granted maybe it's a sign that they don't think the business will do 10x in the next year, but that doesn't have much to do with the scale on which the business will ultimately succeed.

Always ask for cash compensation. Stock options vest super slow, you can get fired before they vest, and if you're super lucky and stay there for years and years, you have to be DOUBLE lucky for them to be worth anything.

Buy this lottery ticket and you'll know if it's a winner in 6 years.


Just ask for cash!

What? This is a vote of no-confidence in chasing unicorn-type results. That's fine. Lots of people want to work for a company that produces slow and steady gains.

I honestly can't understand why an employee would insist on anything other than straight cash. Stock options are a joke. I'll take the cash.

From looking at the salary spreadsheet, it looks like they are paid about average. To think that anyone should accept a much lower salary than thier market value on the tiny hope of striking it rich is crazy. Every employee of a non public company should always consider only the cash compensation.

Well, if they actually start paying dividends, that could be interesting, I guess.

Why is he stubborn? Isn't he just running his company his way?

You are permitted to run the company your way when you are wildly successful and can raise money at obscene valuations (see Facebook). Otherwise it is a delicate dance with the investors.

You can run your company however you please until you no longer have 51% voting control.

And don't think for a second that your investors won't do whatever the heck they please once they have controlling interest, up to and including kicking you out of your own company if it serves them better.

> including kicking you out of your own company

kicking you out of their company

After the share buyback, has he undiluted his ownership from 45% to above 50%?

Not by my calculation.

Here is how I figured that. He had 45% of a company that was valued at $80 million in the buyback. That's $36 million. He paid back $3.3 million. That reduces the value of the company by $3.3 million and leaves his value untouched. So he now has 36/(80-3.3) = 0.46936... of the company, for around 47% < 50%.

> $2.5m of $3.5m was for founders and early team [of Series A money]


> Series A class of shares included a protective provision which meant that Buffer was unable to offer liquidity for other shareholders

> a return of 9 percent annual interest on their investment at any point

So... the founders raised a series A mostly to give themselves liquidity, at the expense of a high interest loan that also threw their early investors under the bus? Well, they definitely achieved their vision of putting together an atypical round.

Given their lack of interest in going down the VC-startup path (high growth at all costs, keep raising, aim for IPO, etc), it's unclear what their motivations were to raise a VC round in the first place.

How exactly does offering an immediate return to those early investors throw them under the bus? Buffer put together a deal and their investors took it. For them to "buy" their equity, it had to be "for sale", and it turns out it was.

The normal story of what happens when a company takes an investment planning for hypergrowth and that doesn't pan out is that the company "pivots" to some usually-less-promising hypergrowth opportunity and repeats until it dies. The outcome here seems far better for investors, which is presumably why they took advantage of it.

Ah, to clarify: Buffer threw the seed investors under the bus when they inked a deal with the Series A investors.

However, kudos to the founders for fixing this mistake later on. While their intentions at Series A were questionable (raising to pay themselves), they made things right later on, though they did pay the price of a co-founder and CTO departure. Everyone makes mistakes, but true character can be seen when you deal with them.

> Our seed investors had been supporting the company for almost six years, and several were starting to ask when they may get a return

> The Series A class of shares included a protective provision which meant that Buffer was unable to offer liquidity for other shareholders (seed or common) without approval from a majority of the Series A.

Seed investors offered a deal. They weren't spring chickens.

Who feels bad for VCs though? 1. they didn't have to sign the sheet 2. It's really refreshing to see founders and people with vision be in control for once, instead of the opposite

Stories are legion of VCs throwing their founders under the bus the moment it suits them.

Not everybody is perfect. Sometimes goals change and you realize what you wanted before isn't what you want today. Plus, he did mention his cofounders left, so maybe his ex-cofounders wanted the VC route.

Right on, mentality likely shifted along the way.

And yes, everyone makes mistakes, but author shows great character in making things right later on.

One of the under-appreciated facets of SaaS economics is that you have to grow your growth constantly, regardless of whether you're bootstrapped or VC funded.

If you're steadily adding 100 customers/month you might think thats great because of the accumulating nature of subscription revenue - but actually that's a death sentence.

Your churn will grow as your customer base grows.

If you've got a 5% monthly churn rate then at 1000 customers you'll lose 50 customers/month. At 2000 customers you'll be losing 100 customers/month - and all of a sudden your 100 new customers a month will net out to zero. After that point you'll start losing customers.

From a quick look at Buffer's baremetrics board that's what happened here.

You either have to have net negative dollar churn (which is very very hard if you're selling to SMEs) or you have to have an exponential growth rate that means you can escape the churn effect and that almost always require external capital to fuel the growth.

> If you've got a 5% monthly churn rate then at 1000 customers you'll lose 50 customers/month. At 2000 customers you'll be losing 100 customers/month - and all of a sudden your 100 new customers a month will net out to zero. After that point you'll start losing customers.

Actually, in this scenario the number of users will asymptotically grow towards growth/churn = 100/0.05 = 2000 in perpetuity. So it's not a "death sentence" but will lead to growth stagnation.


Plenty of SaaS businesses (both bootstrapped and VC financed) end up flatlining. How sustainable this is depends on what space you're in, generally if you're revenue flat you become much more vulnerable to external factors (competitors coming into market, CAC increasing, recession, etc).

This is just a weird concept. Sure, not growing is risky in the existential, everything is risky sense. Profitability makes that far less scary.

The biggest cost for most SAAS business is salaries. If times get tough, letting people go is always an option, and if a company makes a 30% margin - which $1.5M and 500K profit is almost exactly - that means the non-salary costs likely need to grow by a few thousand percent before there is a profit pinch.

I'd take $500K profit and control over loss making and hope. But that's just my personal risk profile.

Revenue can collapse fast in SaaS if you don't have churn under control. Let's say there's a downturn (for economic or competition) reasons and new user acquisition falls to 80/month and churn goes upto 7%.

You're now losing 60 customers/month. In three months you'll be down 10% on revenue and your costs will likely be the same.

This isn't a VC funded vs bootstrapped issue, it's a fundamental dynamic of the subscription mode - I've seen plenty of VC funded startups struggle with the same challenges.

Living on the edge where your best efforts only net out churn is hard. Everything becomes harder from recruiting to sales. It's super demotivational to a sales and marketing team when their best effort essentially nets out to zero.

The idea is to manage your company so that you generate profits at 2000 customers. At that point you have several options:

- Be happy with cash piling up in the bank, and redistribute it to employee/investors/founders.

- Lower the churn.

- Increase your ARPU.

- Use the profits to create anew product/offering that generates new growth.

This is an excellent piece and kudos for being transparent. This is possibly a story of virtually every startup that doesn't quite make it to 10X: You get funding and expand team rapidly but then revenues are not keeping up so you cut down and then wonder where you go from here. For many startups there is a path of being sustainable profitable business that perhaps will never become unicorn but then investors aren't happy with that. I think buying out investors is an excellent idea in this situation and every founder should always think about this possibility when signing the term sheets.

So investors put $2.3M into the company and got back $3.3M. They essentially have a ROI of 1M over a span of four years. Am I crazy to think that this is a pretty good deal for the investors?! If someone gives me a ~40% return on a crapshoot investments (like how most start ups are), I would be pretty happy!

You are thinking from the perspective of an individual investor. For VCs, this kind of return is abysmal since it won't cover the 7/10 companies that went completely bust. In order to VCs to take high risks on early stage companies, they need the winners to return 100x so the fund even makes financial sense. It's one of the main reasons why VCs constantly push startups for hyper growth.

This is certainly better than losing the investment completely but I can't imagine the investors being too thrilled about this outcome.

Who cares if it's bad for VCs. They already get paid over 200k+ in carry every year for over 10 years. They are also not investing their own personal money.

The point is that if all startups behave like that, thr VC business model doesn't work out, will vanish, we will all have to stop playing the startup game since there is no one providing that kind of funding anymore.

No it won't. One case in either direction means anything.

The game is that VCs will adjust, then founders. Then VCs. Then founders ad nauseam forever. This is just one small piece of a giant play being performed by many in different ways every day.

It means the three that have a liquidity event only need to cover 5/10 instead of 7/10.

Is that not a helpful result?

Ha, venture math is pretty hilarious. VCs basically need to give back their investors a 300% return in 10 years to make up for the risk they handle. Eg. For a $40M fund that's trying to grow to $120M, $1M here and there doesn't really move the needle.

The public NASDAQ has grown to 4x over the last 10 years. VC should do better or go home.

Not quite. People invest in VC funds exactly because these returns are not correlated to the market (well, they sort of still are).

It's diversification; people investing in these funds are generally NOT looking for similar returns to the public market.

>> For VCs, this kind of return is abysmal since it won't cover the 7/10 companies that went completely bust.

Only very myopic VCs would think this way globally. If every business did this, it would be terrible. But each business is its own opportunity/set of circumstances, and forcing everyone to 10X+ is as equally stupid as cashing out $1MM on a four year term sheet on $2.5MM invested.

You must evaluate each opportunity individually to maximize profit and growth. The intentions can always be to shoot for hypergrowth, but if the probability drops below the profitability point, you shouldn't be forcing the issue. Terrible investors do this, and it happens fairly regularly, though it's slowing down as founders become a bit more intelligent with their options.

> Only very myopic VCs would think this way globally.

Might this be a (converse version of a) No True Scotsman fallacy?

Elsewhere in the thread, a comment [1] referenced an article [2] that details the return imperatives that VCs face. In particular, it details how small returns "don't move the needle".

OTOH, the article asserts that only 5% of VCs (misleading, if a percentage of number of firms instead of AUM) succeed in meeting this imperative, so I wonder how the other 95% still attract enough LP money.

[1] https://news.ycombinator.com/item?id=17872045

[2] https://news.ycombinator.com/item?id=17874278 https://techcrunch.com/2017/06/01/the-meeting-that-showed-me...

>> In particular, it details how small returns "don't move the needle".

You never want small returns. But when you can choose a small return over basically a near-zero chance of losing all your money, it isn't that difficult of a choice - or it shouldn't be.

The point is that, to a VC, a small return is indistinguishable from losing all the (not "your", since they rarely have much, if any of their own money in it) money.

Given their economics, VCs have a very strong incentive (or an imperative, according to that article) for "forcing everyone to 10X+" (and I would argue it's more like 20x+), no matter how small the likelihood of that outcome. Without at least one outsized exit, they're a failure.

Put another way, their LPs aren't paying them to, in any way, play it safe. Near-zero chance isn't the same as zero.

So, yes, the choice for a typical VC isn't difficult. It's just the opposite of what you're proposing.


> they are pretty bad at math

You've been couching your assertions in hyperbolic judgmental-sound terms, which I fear detracts from your point, but this seems to be the crux of it.

You have not, however, demonstrated the "math" in your viewpoint. Specifically, how does it work out, being sure to include risk (or probability) as a factor?

> otherwise it wouldn't be so hard to get funding for $1-2MM

That doesn't follow, as any difficulty can be adequately explained by (perceived) likelihood of an outsized return (100X+).

Are you sure you're not confusing VCs with lower (e.g. average) risk investors?

VCs must aim high, but a medium-size win isn't the same as going bust. It's still better to get a return with strong linear growth than to get nothing.

Didn't the investors have the choice to take the cash-out? I am actually surprised they agreed. It seems logical Buffer is not going anywhere, and growing, and an acquisition is still very much possible which would represent much larger returns.

If those investors had put their money into the S&P500 instead, they would have had a better return on their investment.

True, and the risk here would probably make this a "bad investment" in reality.

There’s no reason on earth why anyone would consider having their money returned plus a mil a “bad investment,” even if they are a VC looking for 100x unicorn returns.

I would. The whole point of a risky investment like that would be to get a better return. 10% per year is something I can get almost risk free, if I'm starting with $2MM.

Tell me about this 10% per year risk free investment? Owning S&P historically has returned 8% annual, by no means is risk free.

Real estate. There are plenty of multi-unit dwellings in the country with a 10% IRR. If you have a few million cash to buy one, you'll get 10% a year on the rent fairly risk free, depending on the market.

Family for 30 years in rental property business.

Anything which involves rent is by far not risk free. Very cycle driven, heavy on litigation and management has to be perfect to make returns.

I’ve been doing real estate for about 25 years and haven’t seen much risk at all. Biggest risks have been vacancy and maintenance. Vacancy is solved by setting the right rent and maintenance is a 10% reserve fund.

Also I said “almost risk free”. :)

I don’t know what country you are talking about, but in many places there was a huge decline in real estate prices one decade ago. That would seem a big risk...

Real estate is also illiquid. Would you prefer 10% IRR in property, or 8% IRR in the public market? I would personally pick the second.

Use some moderate leverage I guess, i.e. 130% of capital.

Risk-adjusted return

The reason is called opportunity cost.

there's also opportunity cost which you're missing. Average VC can invest limited number of startups. Instead of buffer They could invest some other startup which eventually exit with 100x

Only in this specific timeline. On average over a longer timeframe that is more representative of the market, they definitely would not have.

The average yearly S&P returns is 9.8%, to reach 40% in 4 years you'd need 8.7% yearly returns.

Yes, you are slightly crazy. The whole idea of VCs is that while most startups are indeed crapshoot investments, some will make returns in the 100x.

1.5x is sometimes "good enough" but it won't keep a VC afloat if all of its investments go like that. Even 2x means that you only get to invest twice and fail once. And forget about profits or a living wage.

see - https://techcrunch.com/2017/06/01/the-meeting-that-showed-me...

the math is pretty crazy... even $50m and $100m exits would doom a fund.

I wouldn't. That's a ~10% yearly return. You can do better with index funds, never mind growth stocks. This is hardly a home run for a VC.

I think when they invested, they expected more less like a triple-triple-double-double growth from 2014 to 2018.

In 2014 their ARR was $4.6M so investors probably expected their revenue to follow the $4.6M -> $13.8M -> $41.4M -> $82.8M -> $165.6M trajectory. Buffer's current ARR is $15M, which although is pretty good, is not enough for it to work well with the VC model.

Yes, you are crazy to think this. :-)

Buffer seems like a fairly successful startup relative to the average. A roughly 8% return per annum is not a good return for a VC given that many of their investments in a given round will go to zero.

There may be reasons for this going the way it did, but I doubt VCs would be all that happy with this.

It's fine for the VCs if they can recycle and re-invest that. Otherwise it's a 0.

Can you please elaborate what you mean? The money is only useful to the VC if they can re-invest it elsewhere?

If the VC has another investment on its radar that it can't make due to capital being locked up in a stable but not explosive company like buffer, it would be fine taking the money back with some interest.

If it doesn't have that, then taking buffer's money doesn't move the needle much.


The way this company operates is inspiring, but as a recent churned customer, the resulting product is lacking. The web UI mixes up order of operations when dragging posts around and when I looked at implementing an API client for their service, I quickly realized why the UI had out-of-order problems. The API doesn't respects any sort of contract, changes types of responses in inconsistent ways and is basically impossible to implement in a typesafe way. The API used by the UI seems to rely on ordering of events received on their backend, but these events don't seem to be commutative, and each UI update seems to be its own API call...

All this to say, I appreciate the goals of Joel in building a strong culture and strongly support this, but the product itself isn't that great to use as a customer, which is probably why growth isn't what VCs want. And I'm just hypothesizing that a hard look at the tech stack could maybe help.

This is the oft-cited dream of founders that think they’ll just pay back the VC’s if the relationship isn’t working out. The reality is that no investor in their right mind would take that deal if they had any confidence in a more successful outcome down the line.

Any reasonable investor would gladly take that money from Buffer if they believed the money would give them better chances of more return elsewhere. That does not mean Buffer is worthless. It's not black and white.

It's reality if you structure the leverage like the CEO did heading into investment rounds. Not everyone can do this and not everyone will prioritize it either.

"Whereas in the past we’d “had it all” and achieved growth alongside creating a unique culture with a fully remote team and high levels of transparency, it now started to feel like we had to choose between those things. It was suggested that some of the fundamentals that I had come to value could be removed to create a productivity environment that would increase the growth rate. I refused to compromise on the transparency and remote work aspects of our culture, so we started to explore slower growth goals, and what that would mean for the future of Buffer."

I respect the commitment of Joel to all remote and transparency, he's an inspiration. Personally I think that high growth can be compatible with all remote and transparency. For example both us at GitLab and InVision are all remote with high growth rates.

> creating a unique culture with a fully remote team and high levels of transparency, it now started to feel like we had to choose between those things. It was suggested that some of the fundamentals that I had come to value could be removed to create a productivity environment that would increase the growth rate. I refused to compromise on the transparency and remote work aspects of our culture, so we started to explore slower growth goals

In what way did "remote culture" specifically negatively affect productivity? How was this measured against the more traditional way of working? Or was this just a perception/bias issue, like "oh hmm the team is remote, so I guess that can be blamed on slow growth"

When you give someone a pile of money you will always wonder if you get that money back, let alone see a return.

Returning anything to investors should be seen as a positive. If you disagree, go give someone 6+ figures and have them lose it. You're opinion will change rather quick.

otoh me giving someone 6 figures and having them lose it is much more meaningful to me because:

1. It's my money, not money someone has given to me to invest

2. It's a pretty significant part of my net worth. If I was worth $100 million and gave someone $100k and they spent it all without any return, I doubt I'd lose much sleep over it. If I do that now it would be very hard to get over.

I'm not really disagreeing with you here, but the emotions at play are different I think.

> Collaborative Fund suggested that we account for these various paths within the structure of the Series A funding. We added downside protection for the Series A investors, in the form of a right to claim a return of 9 percent annual interest on their investment at any point starting five years after the initial investment. At the time, I didn’t appreciate how important this clause would become. Even our legal counsel commented that this was not something he saw too often.

The wording suggests that this was a decision he regrets / a feature of the agreement he didn't think was important at the time. Is that the case? Would it have been less onerous with a lower rate? In general, I'm curious if / how they would have redone this decision.

I'm not confused as to why he wants to buy back control of the company, but I'm confused why he wants to be so profitable. Does he say somewhere why he isn't reinvesting more of the profits in the company? Why not be a little closer to the line?

Article explains somewhat about the hows but not really the why, other than alluding to “differences in vision.” Maintaining transparency about these things is a bit tricky!

In any other situation it would be the CEO leaving. The investors clearly didn't have enough votes to boot him, and took a cashout to avoid it being a total loss.

Yep, the key figure in this piece is the CEO owning 45% of stock. Hard to beat in any vote.

Surely he now owns relatively more than 45% after "undiluting" his stock. He alludes to that being the case by saying the other minority stockholders have increased their percentage ownership for that reason.

I applaud Buffer for sharing these challenges and financial details, as they have done openly in the past (such as with salaries etc).

I’d love to have been a fly on the wall where it was accomplished that the VC’s were pushed out. ‘Cause that’s what happened.

This is great news - it sounds like Buffer is a great company to work for and own as an operator. I do think they're a cautionary tale for trying to build a VC backed (in mission and capitalization) company the way they did, but VC backed is not and should not be the norm so that's not a big deal.

He's trying to pass this off as a startup growth post, but it's pretty much a direct response to calm the VCs who made Buffer happen in the first place.

I don't understand. Who owns the shares now if they were bought with the company's own money?

No one. There are now fewer shares outstanding.

ie. before there were 10M shares outstanding which represents all the shares owned by employees founders investors etc, now (as an example, these are not real numbers) there are 8M shares outstanding because the Series A investors no longer have shares those shares are taken off the market by the cash.

Woah, this has got to be the most positive recruiting message ever. It is clear buffer prioritizes the right things and executes then achieves those goals. Impressive.

Does anyone even use buffer? I remember it gaining traction several years back but that's about it.

The data is open here:


As an anecdote, we are happy paying customers and have been for some time.

Interesting to see number of accounts decline, but revenue per account and total revenue increasing. Assuming social networks got better over time at providing account management features at the same time Buffer got better to selling to agencies and large companies.

This looks to me like a no brainer move! Way to go and congrats on the buyout!

Good, for them. Quality of life is overhead VCs will not pay for.

If I remember correctly, these guys were proud and very public about building Buffer as a lifestyle business as were the VCs that backed them. At the end the VCs would came out with a negative IRR which was not unexpected—a lesson into why VCs don’t invest in lifestyle businesses.

I find it strange that being this profitable is labeled a "lifestyle business." The hypergrowth/unicorn exit isn't a healthy outcome for many businesses.

Because you aren't building a business. You are creating an asset you can sell.

Businesses are great and I don't think most people are trying to talk down about them. But VCs are trying to build an asset they can sell. Because when you sell an company that has a high rate of projected growth you get all that money now as opposed to waiting 20 years. There are plenty of investments that pay out solid returns for 20+ years. VC type funds are attractive in no small part because they pay out in a shorter period of time.

It really has little to do with building a business outside of the fact that the asset happens to be a company.

That’s not the VC game. These are high risk companies that may never generate a profit. Because the failure rate is so high you need a few outsized winners. Value investing where 95% of your portfolio is generating a 10% IRR doesn’t work. Investor invest in VCs to make money. Investing in companies with VC risk profiles and lifestyle business return profiles doesn’t work.

I’m confused.

The article says Buffer is doing $4.6M in annual revenue.

But Buffers own dashboard says they are doing ~$15m


$4.6M annual revenue was when they raised the Series A in 2014. The baremetrics dashboard is current.

"At the time of the Series A, we felt on top of the world. We had around $4.6 million in ARR (annual recurring revenue) and were growing revenues around 150 percent per year."

I understood the $4.6 million figure to be for 2014, when they raised the Series A.

Look at the "Live Stream" on the lower right. It is all placeholder data. I think its just a demo page for whatever baremetrics is.

It’s real data, anonymized

Any other companies on this site ?

Baremetrics itself has its numbers publicly viewable at: https://demo.baremetrics.com/

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