A VC - Latest Comments in The 'We Need To Own' Baloney

Re: The 'We Need To Own' Baloney

Sarah — Wed, 11 Nov 2009 12:10:13 -0000

It´s true that th need of possesion took over the business world and it is not always the most profitable way to do business. Even so, if more peple start thinking this way maybe things can change after all. Check out the 4500 investors from www.vcgate.com , not all of them will want to own as much as possible.

Re: The 'We Need To Own' Baloney

fredwilson — Fri, 30 Oct 2009 14:52:11 -0000

Exactly

Re: The 'We Need To Own' Baloney

Thanasis Delistathis — Tue, 27 Oct 2009 13:01:07 -0000

I agree with you. We also had one of our biggest hits in our last fund with an investment where we owned a small %.

I don't think this talk is about ego or screwing the entrpreneur. I think it is simply altering the math to make the hurdle for the LPs. In the early stage market, with a 15-20% owenership, in our experience, a fund will lose all its money on 40% of its deals, marginally return money on most of the others and really make money on a few big hits that may return the fund. Under certain assumptions around these parameters, a reasonably sized fund can get to return 3 times its size to the investors, which over 7-10 years is something like 20% net to the LPs, which should be an expected return for the risk.

When the fund gets bigger, the math is not as easy. Disproportionately larger exits are not easy to come by. Something has to give. Either high hit ratio (fewer losses), or you have to own a bigger chunk of each company..... So i hear the same thing again and again as you do: we need to own XX%, and I think it is partially driven by this math.

Re: The 'We Need To Own' Baloney

thehighwaygirl — Wed, 21 Oct 2009 14:41:55 -0000

Right on.

As a startup it's hard to know your worth and oftentimes we're at the mercy of the VC's valuation. This leads to a larger percentage of ownership for them, since they probably value us low until the deal is done. You're right though. It doesn't serve them or us in the end.

Re: The 'We Need To Own' Baloney

paramendra — Sun, 18 Oct 2009 22:32:13 -0000

"But please don't use the words 'we need to own' around me. I am calling bullshit on it and will do it to your face."

I like the attitude.

Too many VCs want to kill the hen for the golden eggs.

Re: The 'We Need To Own' Baloney

ShanaC — Sun, 18 Oct 2009 11:31:38 -0000

Better that I learned that here than somewhere else :)

Re: The 'We Need To Own' Baloney

fredwilson — Sat, 17 Oct 2009 15:31:34 -0000

or as bram cohen says somewhere else in this thread, it means you cannot
even bring reason into the discussion

Re: The 'We Need To Own' Baloney

bfeld — Sat, 17 Oct 2009 15:26:31 -0000

I just caught up on a week of blogs and completely agree with this. The right word is "want", not "need". When a VC says "I need" at the starting point of a discussion, they are lying. Or, they have created what in my mind is an illogical construct, especially if they are an early stage investor.

Re: The 'We Need To Own' Baloney

sammysez — Sat, 17 Oct 2009 14:55:11 -0000

And that attitude of yours goes back to why you are so well-respected.

They were fine with me running the show at the time of the deal. And I did run it for another 1.5 years. But it was a back-o-the-pocket card for them, and they used it when they felt it was needed. To both change the mgmt (which I was fine with, btw, if the right person was found) and to force the sale since they could convert and become the common-share majority as well.

Re: The 'We Need To Own' Baloney

Dave Pinsen — Sat, 17 Oct 2009 12:24:24 -0000

Great comment, and great analogy, about the blog as a never ending book where the readers interact. I know you've made this analogy before, but it's still a great one.

Re: The 'We Need To Own' Baloney

fredwilson — Sat, 17 Oct 2009 09:25:06 -0000

Wow. Why didn't they just tell you they wanted control and to pick their own CEO?

That's what I do if that's how I feel. Most entrepreneurs say no thanks. And we part friends most of the time

Re: The 'We Need To Own' Baloney

fredwilson — Sat, 17 Oct 2009 09:09:48 -0000

Wow. That second to last paragraph is a brilliant articulation of what makes a great VC

Re: The 'We Need To Own' Baloney

fredwilson — Sat, 17 Oct 2009 09:00:58 -0000

I don't want to write a book for two reasons

1) It has an ending
2) It doesn't have a comment thread

Re: The 'We Need To Own' Baloney

fredwilson — Sat, 17 Oct 2009 09:00:44 -0000

Yeah but bosses of your choosing, hopefully

Re: The 'We Need To Own' Baloney

fredwilson — Sat, 17 Oct 2009 08:55:32 -0000

Save that last thought. Its a hugely important one

Re: The 'We Need To Own' Baloney

OMA — Sat, 17 Oct 2009 03:49:07 -0000

There's a trend now (and for the past 3 years) to try and start tech startups without VCs.
This is partially because VCs "need" to have 20-30-40-50% of the company, which leaves the other side feeling they are left with nothing.

However, if you follow that trend, I think you decrease the chance of your company to succeed while increasing your stake in the company.

For me, it seems that the focus should be on increasing the chance to succeed.
You do that by taking more good people which (sometimes) costs more money (available from VCs)
You do that by not allowing some pompous assholes (like some VCs are) into the company, and most important you do that by hunting down risks.

Re: The 'We Need To Own' Baloney

Dave Pinsen — Sat, 17 Oct 2009 01:55:59 -0000

Shana,

I know your comment was in response to the Kid, but I just want to point out that there's a difference between the OTC Bulletin Board and the Pink Sheets. OTC companies have to file (though some file the shorter "SB" forms). If they don't file on time, they get an extra letter tagged to their ticker indicating they're late, and then if the still don't file, they get booted to the Pink Sheets. There are also a handful of legit companies on the Pink Sheets that are there because they just don't feel like dealing with the requirements of other markets, but the companies I alluded to above are both on the OTC BB, and not on the Pink Sheets.

BTW, on Yahoo! Finance (my favorite at-a-glance stock site), Pink Sheet stocks are denoted by a ".PK" at the end of their symbols and OTC BB stocks are denoted by a ".OB" at the end of their symbols.

Re: The 'We Need To Own' Baloney

sammysez — Sat, 17 Oct 2009 01:32:54 -0000

It's not said openly, but it is one of the hidden reasons, especially for subsequent rounds.

I had this happen with my company. The B round "marquee" VC was adamant at owning 23%, but willing to move on the actual $ and/or valuation. And in my naivete as a first timer, I didn't get it...but the reason was that this 23%, added to the earlier A round stake of the earlier VC (smaller, hence easily dominated) , gave the preferred 51% control.

And yes, they used that in the end to install their own "consulting" CEO (who ended up sucking the company dry with his fees) and forcing a sale.

And it's not uncommon to see this in other places as the "secret" agenda. As a start-up consultant, I am constantly warning my clients to keep an eye on this "little" detail.

Re: The 'We Need To Own' Baloney

dst907 — Fri, 16 Oct 2009 15:44:13 -0000

Thats a great point by the expert from that view.
http://www.ordertheflowerso...
http://www.reygani.com/mama...

Re: The 'We Need To Own' Baloney

ShanaC — Fri, 16 Oct 2009 14:10:16 -0000

I never said he was going for funding at any point. (nor are his partners). If he can do a good product at a low enough price and sell it, he might be able to squeeze by. Might. I also don't know what the business plan long term, say five years out is. I haven't looked at the books, and probably never will. This is from walking around on Saturday afternoons in the summer, (because it is Shabbos and that's what people I know do when the weather is good), and me teasing him (because I can get away with it, since I've known him since high school). My impression is that he is trying to avoid funding at all costs and in instead trying to be completely self sufficient. It is totally possible that right now he isn't even drawing a salary, I don't know. Without having him and his partners letting me have a much closer look see, I can't even tell you what is or isn't possible for this idea. I just happen to know what the idea is, happen to able to listen to him complain while he is working on it, and happen to be a decent companion if you are going to go for a walk in a suburban neighborhood like the one I grew up in.

I'm sure he's familiar with the math (or at least I hope he is)- I know at one point he was a hedge fund summer intern geek, and I know in high school he spent far too much time in a Chemistry Lab in order to boost his application for college. I'm sort of curious what will happen to him, since we both remember each other in our more dorky phases of high school life. I'll pass it on to him though.

(and this is how you become, that Girl.)

Re: The 'We Need To Own' Baloney

ShanaC — Fri, 16 Oct 2009 13:50:41 -0000

It was aggregate data. It was an older version of this presentation, by Steven Kaplan of the Booth Business School, University of Chicago (note you are opening a pdf):

http://faculty.chicagogsb.e...

Although My version is simplified- page 65 in a historical note as the debt drive for LBOs seems to also be linked to slide 19- where employment is mentioned (they cite the study, these charts about the drive for and the returns). I just get the feeling looking at the Late 2007 spike and slight dropoff that companies that were taken private should be public, since the way they were given the boost they were given was through an LBO.
Reality is that it should have been through organic growth or just change in the market (M&A) that drive buying/selling in an effort to adapt, rather than financial engineering changes. Up to a point, there is not much you can do. Having such a huge debt market is like having too much of a credit card, it is not a good thing, and will cost you more later on (ie, eventually you will need those workers to do something later on to drive growth somewhere).

Re: The 'We Need To Own' Baloney

Aristotle — Fri, 16 Oct 2009 12:02:12 -0000

You do pass that test Fred, maybe not in the "letter of the law" so to speak, but definitely in its spirit. The fact that you're conscious of how many boards you're on and trying hard not to get over 10 proves that. (These were not meant to be a test by the way, more indicators that you might be talking to the wrong VC.)

I thought of a better way to articulate what I'm saying. Investors that are present in each moment with no cognitive or emotional bias, and understand and value what's important (personal relationships, team building, company creation, real value creation for users) in and of themselves for the pure joy of doing those things tend to have good outcomes. Those that view these things as something to managed and manipulated for personal greed or gain tend to have bad outcomes. It's pretty simple stuff but so hard to get right for so many people given the individualistic and ego-driven nature of our world today.

I know I'm sounding a bit like Jerry Maguire over here. Maybe someone should write the VC version of The Things We Think But Do Not Say.

Re: The 'We Need To Own' Baloney

Peter Cranstone — Fri, 16 Oct 2009 11:17:25 -0000

Finally, someone who calls it as it should be. It's NOT about the percentage. VC's don't make money on the exit by owning a percentage. They make money based on the difference between what they paid for the shares and what they are selling them for. The delta is the "value" they all collectively created. Every meeting I'm in that I hear a VC say that I head for the door. They are not the partners I want.

Peter

Re: The 'We Need To Own' Baloney

JLM — Fri, 16 Oct 2009 10:53:28 -0000

The curse --- lying in bed at 2:00 AM thinking about your business

The blessing --- lying in bed at 2:00 AM plotting to change the world and to shoplift its riches

The reward --- the confidence of having eaten only what you have personally killed, the sentiment of a truly free man

The burden --- recognize "it", preserve it, pass it on --- keep the flame burning

Re: The 'We Need To Own' Baloney

Pascal-Emmanuel Gobry — Fri, 16 Oct 2009 10:26:36 -0000

...Aaaaand that's why I'm bootstrapping.