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When Founders And Investors Split Over An Acquisition Offer

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Editor’s note: Tomio Geron is head of content at startup Exitround. This is part of a series of posts on the tech M&A market. Follow him on Twitter @tomiogeron.

For one founder who recently sold his startup, it was the culmination of a long journey. At the same time, the founder, who spoke to me on the condition of anonymity, had problems during the acquisition process, feeling bullied by a venture investor.

The investor argued against a sale of the startup, and then after agreeing to the sale, proceeded to call the buyer and yell about terms of the deal. The investor also pushed for certain terms that the founder felt were unfair and benefited the investor.

The founder was pleased with the outcome but felt powerless to stop this investor from essentially steamrolling the process.

“They didn’t want to sell because, for them, the deal was too small,” the founder says. “Eventually our investors inserted themselves into the negotiations. They actually screwed things up for us because they demanded more and actually offended the buyers.”

This type of story rarely gets publicly told in Silicon Valley, since founders and investors don’t want to reveal how the sausage is made in negotiations — and more importantly don’t want to criticize each other in public and break Silicon Valley’s unspoken rule of positivity. But because of how venture capital is structured (more on this below), and because of the many startups that will need to sell without being able to raise more funding in the current environment, these types of situations are bound to come up.

Negotiating with a buyer is a challenge for founders in an acquisition. But negotiating with one’s own side — the investors — can be just as difficult, if not more so. These disagreements typically arise when startups get an offer to sell and the founders and venture investors disagree about what to do. These offers, even if relatively small in Silicon Valley terms — say $10 million or $20 million — can be “life-changing” for founders. But for venture investors, particularly with big funds ($300 million, $400 million or even $1 billion), smaller exits are not appealing. To explain why, we need to look at how traditional venture funds are structured.

Fund Economics

VCs typically want a good venture fund to make 3-5x their money. In other words, a fund with $250 million invested would have to return $750 million to $1.25 billion from the fund’s companies that are acquired, IPO, or are otherwise sold off in some form. A 4x return would net about a 2.5x distribution to the fund’s limited partners after fees to the general partners. So VCs depend on massive “home run” exits. For a $250 million fund, VCs would require at least three to four exits of $1 billion or 10 exits of $400 million. (This assumes a VC fund would get 20 percent of the exit price.)

As a result, smaller sub-$100 million exits aren’t that attractive to most large VCs, particularly if they have made a large investment. Many would rather not sell, and instead they roll the dice and hope for a larger outcome. “VCs often look at return on their money as opposed to IRR (as a metric). The fact that they made 4x (return) on $5 million over nine months on a $500 million fund: who cares?” says Villi Iltchev, EVP of corporate development at LifeLock.

To be clear, I’m not saying that all VCs are mistreating startups or behaving badly. I’m not even arguing that the investors’ actions described above are necessarily wrong. (Though it does explain why some founders privately complain about VCs.) And of course, unlike the investor described above, many investors do let their founders make the call on acquisition offers without pressuring them at all.

Aligning Interests

So while many VCs don’t like to talk about it, their immediate economic interests can diverge from their startups, particularly in smaller acquisitions, Iltchev says. “For founders, especially those who are not independently wealthy, their tolerance for risk is usually lower. VCs are in the business of managing risk on a portfolio basis. For founders an exit can be a once in a lifetime chance to change their life for their family. For investors the same transactions may be immaterial.”

This isn’t to say VCs (or founders) are necessarily at fault. The different economic interests are inherently part of the venture model. Other structures may evolve but this is now the dominant model. That certain investors don’t adhere to these fund economics and let founders make their own decisions is a credit to them and their long-term thinking to try to keep founders coming back to them for future investments.

There are also things that venture firms have done to better align interests of founders and investors. Founders Fund created Series FF stock, which gives founders more flexibility to sell shares. And many venture firms now allow founders to take a small percentage of “money off the table” in a secondary transaction to reduce the financial need for founders to sell early.

Different Investors

Of course, not all investors have the same interests. The larger a VC fund, and the more of their money they have invested in a company, the less likely they are to like a smaller exit. Smaller seed investors or micro-VC funds, which are proliferating, don’t need billion-dollar exits to return their funds, so they are happier with smaller exits — what Dave McClure calls a “Moneyball” model. This makes sense, since about 88 percent of tech acquisitions in the last five years with announced prices were less than $100 million, according to Capital IQ. Also, sites like AngelList and FundersClub enable more individuals to invest, and these individuals typically don’t push for massive exits.

Despite the potential conflict of interest I’ve described (i.e. founders want to sell but investors don’t), some venture investors will help negotiate a deal. Particularly for younger, less experienced founders, investors will get actively involved. And some smaller angels or micro-VC investors have less incentive to oppose smaller acquisitions so there can be less of a conflict. For example, seed stage investor Manu Kumar, founder of K9 Ventures, has negotiated acquisitions for a number of his startups.


For founders it can be difficult to disagree with an investor on a sale. In particular, first-time founders often feel indebted to investors for taking a chance on them. So to turn around and say, “No we don’t agree with you,” can be hard to do.

Many VCs have rights they can use to try to block an acquisition. But most rarely use them, particularly if a founder makes a good case for a deal as the best possible outcome for a company. VCs do not want to be known as  “not founder friendly,” even if they hate a deal and feel it is unfair. But they’ll complain privately. Like the anonymous founder mentioned above, Iltchev has received calls and been yelled at by investors who are unhappy with a deal.

Buyer View

For buyers, of course, it’s complicated when sellers and investors aren’t on the same page. Buyers don’t want to negotiate with multiple parties in the same company. On the other hand, if a VC is calling a buyer, that can mean the founder has already decided to take the deal. “If the investor is calling me to negotiate terms, it is probably because they have already lost the battle with the founder and they are just trying to beat me up,” Iltchev says.

At top Silicon Valley buyers, it is standard to treat investors well, even if they don’t technically have to. For example in an acqui-hire – where a buyer just wants the team but not the product or IP — a buyer could just hire a startup team and not pay the investors anything. But most big Silicon Valley buyers want to stay on good terms with investors — who, after all, send them companies to buy — so they will try to make investors happy by paying back their original investment, if not more. (Non-Silicon Valley buyers do not necessarily play by these rules.)

I will be extremely cautious before ever accepting VC investment again and would only do it on my terms.

Founder Choices

The anonymous founder mentioned above, reflecting on the experience, says, “My advice would be to make sure you have someone who will stick with you not just when things are going well, but during the inevitable struggle that all startups face. It’s fine to have a strong investor who pushes you and fights for what they think is best for the company, but hopefully it’s not just what’s best for them. That said, I will be extremely cautious before ever accepting VC investment again and would only do it on my terms.”

For founders the best way to avoid these problems is to choose the right investor. Vet your investors and have honest conversations before they invest. Ask them what their return profile is and what kind of exit they’re expecting for your company, says Ursheet Parikh, former CEO of StorSimple, which was acquired by Microsoft, and a new partner at Mayfield Fund.

“Some investors may not appreciate you talking to any large companies early because they are concerned that these strategic buyers may either be a distraction or try to buy you early on the cheap,” he says.

That’ll give you an idea of what you are expected to deliver and whether you’re ready to accept that money and the strings attached. And have an honest conversation with the investor about what would happen if you disagreed with him or her on an acquisition offer. The more honest and transparent they are with you the better. Ultimately the more you prepare while choosing your investor, the better position you’ll be in when acquisition offers come in.

Image by Shutterstock


How VCs Spend Their Time. Err, How This VC Spends His Time.

Lost time is never found again – Benjamin Franklin

“A Venture Capitalist? What exactly is that?” If you’re in the technology industry you can probably answer but as I discovered this holiday season, most of my extended family and childhood friends were a bit fuzzier on the concept. Turns out the best way to explain was to share how I spend my days at Homebrew, the seed fund Satya and I founded in 2013.

Why is my calendar the window into my soul? Because it’s the balance sheet for the most important resource I have: my time. As an investor you’d think I’d be obsessed about capital, and certainly without investable dollars there is no Homebrew. But as I build our business, it’s time that I’m thinking about. How do I spend it? Managing short-term tactical outcomes with longer term relationship cultivation. Doing what excites me and gives energy. Meeting new founders while collaborating, recruiting, analyzing, doing whatever it takes, to help our current founders build strong companies.

So when someone asks me “what exactly do you do all day?” here’s what I tell them: As a VC there’s really only four buckets of activity.

1) Evaluate New Opportunities. At any given time Homebrew usually has about 20-35 deals we’d consider “active.” That means the founders are currently fundraising and we are at some stage of mutually getting to know each other. Satya and I use a simple three stage system.

Stage 1: Either Satya or I are meeting the founders, usually solo, giving them an overview of Homebrew and learning about their startup through direct conversations, using the product (whatever stage it’s at) and doing some background on their industry (if it’s an area new to us).

Stage 2: Here both of us are engaged. The Stage 1 partner escalates an opportunity to Stage 2 when we’ve been able to create a hypothesis as to why this might be a good investment. That partner also generates a set of questions for the other partner to push on in their discussions and data requests. We prefer this approach to having the company go through the same pitch again because (a) we want each interaction to build on the last one, (b) we want to make good use of founder time and (c) we want the founders to experience what it’s like to work with us collaboratively, not just pitch us, since that’s what the longterm relationship will feel like, not one multiyear Keynote session.

Stage 3: Let’s make a deal! At this point we’re doing reference checks and providing names of other founders to the entrepreneurs so they can diligence us (in reality we’ve likely all been asking about each other along the way too). We’re also being more specific about what our term sheet would look like from a size and valuation perspective, potentially even proactively generating something to show the entrepreneur we’re serious. Although we definitely don’t expect all Stage 3 discussions to turn into investments, we’re actively trying to get something done. Homebrew doesn’t wait to see if other investors are also interested. If we have conviction, we’ll be first in the boat with you.

The time it takes to move through all three stages is quite variable – mostly influenced by how well we know the founders, their industry and their own deal cadence. When we didn’t know the founders already, fastest we’ve gotten from Stage 1 -> 3 is 10 days (remember, we look to lead/co-lead rounds), and probably < 1 day when we’ve known the team for a while (boom!).

2) Work With Existing Investments. Once Homebrew invests we don’t sit back and wait for the occasional “hey can you intro us to the head of Android” email. Satya and I really dig in to understand at any given time, what are the highest priority items where our help would be useful and what are some things we can do to clear the path ahead of you. Sometimes these come from spending time with the founders/team via 1:1s, Board meetings, whiteboard sessions, lunches, etc but often it’s operating independently and bringing back what they need. Oh, your top priority right now is a marketing hire? Let me go get five great candidates for you! We want our operating background to give us insight and empathy into the founder journey but what Homebrew does is in support of the entrepreneurs building the company which matches THEIR vision, not ours.

3) General Relationship Building. I think networking is a terrible word. To me it means “time with people you don’t like because you think there might be a way to get value from them later.” I try to spend zero percent of my life networking. But I love getting excited and passionate about people. I love learning and challenging new ideas. I love if a 15 minute chat can help you solve a problem you’re wrestling with for days. And I love talking about Homebrew’s values and investments. So I’m always trying to stay current with the people in our industry that I care about and find new voices – via social media, via our founders, via friends – to engage. Note that I’d also put “brand building” here – attending/speaking at conferences, press stuff etc. I’ve found that in Homebrew Year One, a large part of this for me was starting to tell our story and why I decided to leave Google/YouTube. Hey, want to grab a coffee?

4) Fund Operations. raising capital, building LP relationships, infrastructure and platform investments, recruiting for firm, budget/audit, evaluating overall firm strategy and performance. Some investors roll their eyes on #4, but for me it’s actually fun. Maybe because Homebrew is our startup, just one which writes checks instead of code. Satya, Kristen and I get to be intentional about all these decisions and build the type of firm we imagine: one that we would have wanted to take money from if starting a company ourselves.

So brass tacks – how is my time allocated between these four categories. Like you dear reader, I wish I had many more hours in a day:

50% Evaluate New Opportunities

35% Work With Existing Investments

10% General Relationship Building

5% Fund Operations

That allocation. It’s fluid. Likely to change. Why? First, there’s a fund lifecycle. As we do more investments, time shifts from New to Existing. And when we go to raise our next fund, Fund Operations time will increase for a while. Second, I’m still developing my VC muscle memory. I know what it feels like to build a great team, build a big time product, build an enduring startup. I know what it feels like to write a $25k check, to see a company succeed and exit, to see one struggle and close its doors. Now I get to experience these moments not as an entrepreneur, technology executive or angel, but as a professional investor. That’s new and so I’m pretty interested in tuning how I, and Homebrew, spends its time to maximize results and joy by serving founders more effectively.

As William Penn said, “Time is what we want most, but what we use worst.”

Follow me @hunterwalk and @homebrew

Photo: Sergey Novikov/Shutterstock.com

High baud rate founders. 4 key drivers of “broadband” communications for startups.

Speed of iteration is crucial to the success of any early stage company. What enables that speed to exist, however, is not always clear. So-called “life hackers” will promote their own techniques to get the most out of a 24 hour period. Agile software development practices can also push the envelope on speed. Simply working longer hours than others over a sustained period of time can be incrementally helpful, if you can keep it going without burning out.

Yet, the root cause of reductions in cycle time for startups always comes down to one thing: the rate of information transfer between actual people. We see this over and over again; the early startup teams who communicate most effectively with one and other tend to get the most done in a given period of time.

I call the people who start these companies “high baud rate founders.” They transfer information between one and other at an astoundingly high rate. (Strictly speaking, I should call them “high bit rate founders,” but baud sounds better to me. If you’re a stickler, read more here on the difference.)

A number of factors drive a high baud rate, and I have attempted to list the most important ones here:

1. Raw intelligence

It should not come as too much of a shock that some peoples’ gears turn faster than others’. This is a relative thing, but when I meet founders, I usually ask myself the question, “Is this guy or gal smarter than me?” I can get a sense for this by engaging that person in an intellectual conversation, in an area where I should be on equal footing. Basic math, science, or engineering usually do the trick.

If the whole team exhibits the same elevated pace of thought relative to me, that’s usually a sign of a high raw intelligence factor. It is essential that each founder possess this quality, since the overall processing speed of the group is governed by a min() function.

2. Efficient communication techniques

A processor can run as fast as it wants, but if it throws away cycles on useless tasks it is underperforming. Along those lines, high baud rate founders tend to send short, punchy emails with only the necessary detail. They tend to say a lot with a little. They tend to cluster similar tasks to avoid the penalty of “context switching.” In short, they maximize the amount of signal in their frequent interactions.

As an outsider, it can be hard to observe how founders economize their communication. I often get signals from forwarded email traffic, as well as the configuration of an office. There’s no substitute, however, for spending time at a company and casually observing this phenomenon directly.

3. Unspoken bonds

To deliver a message, the only thing better than an economy of words is none at all. I am always impressed by founding teams that have a bias for action, knowing full well how their colleagues will react, with no need to communicate in a confirmatory fashion. This can only be possible if the company has (A) a clear plan and (B) a strong culture. The former is necessary for the “what,” while the latter is necessary for the “why.” If both of these are solid, then each individual can usually figure out the “how” on his or her own.

I often ask founders about their product plan and what they will do in different contingent situations. Finding consistency in multiple founders’ independent responses is a really good sign.

4. Empathy for each other’s role

It is hard to have a high baud rate interaction with a peer without knowing his role and priorities. The quantity of empathy between founders is therefore strongly correlated with their collective baud rate. Founders with cross functional backgrounds (e.g. eng + product, sales + marketing) tend to be the best at this, but even a little bit of time spent out of one’s core functional area can improve the collective baud rate significantly.

This empathy can often be gleaned just by looking at the team’s background. A stronger signal, however, is the manner in which each founder speaks of the other and his respective contributions to the company. I view a “throwing it over the wall” attitude in an early stage company, for example, as a sign of trouble on this front.

In short, going faster should not be the goal. The goal should be higher throughput of all communications on the team. Getting this right will enable speed, and so much more.

Written by

Partner at Highland Capital. Investing at the bleeding edge of software. @ataussig

Featured Startup on Azure – Listiamo


Blog.Technet – Today we interview Riccardo Zanussi, founder of listiamo, a social network for lists. But the team’s aim is much higher than social lists. According to Zanussi, the team wants to change the daily deals landscape. Listiamo originates from Barcelona. The four founders started their project to accurately curate the lists in social platforms on May 6, 2012 and boostrapped the company for fewer than 100.000 euros. According to Zanussi, “We all have daytime jobs, so we used nights and weekends to make our dream a reality. We want to go faster and faster to be in all the countries of the world.”