Gordon Gekko 2.0: Flipping is GOOD. (aka Memo to Jason Fried: Sorry, You're Fucking Wrong.)

[clarification: i was a private angel investor in Mint's A round back in early 2007, when i was also doing some marketing consulting for the company. i was not directly involved in the Founders Fund investment in Mint's C round a few months ago. the comments below are primarily drawn from my personal experience with the company before i joined Founders Fund]

[disclosure: the views expressed below are my own, and do not in any way represent the official position or perspective of either Mint.com or Founders Fund.]

Dear Jason Fried:

Sorry, You're Fucking Wrong.

    Flipping is GOOD.

Let me explain...

In a poorly-researched post titled "The Next Generation Bends Over" (cute) penned a few weeks ago by Jason Fried, founder/CEO of 37 Signals, the author attempts to make the case that:

1) VCs behind Mint.com forced founder/CEO Aaron Patzer into $170M acquisition by Intuit

2) it's a growing trend "indicative of VC-induced cancer that’s infecting our industry and killing off the next generation"

3) young entrepreneurs should be more bold, audacious, go all-in on their vision, in order to "kick the ass" of the collective incumbents / dominant players

In order, these assertions are:

1) Fucking Wrong, and Irresponsible Conjecture & Hyperbole

2) Completely Wrong, and in fact Exactly the Opposite trend is going on, and finally

3) Wrong in most cases & crap advice for young entrepreneurs.

I'll now address each point specifically, and explain why Jason Fried -- although in his own right, an accomplished entrepreneur, whose products i use and respect -- is full of shit in this particular instance.

The VCs behind Mint.com Did NOT Force a Sale. Do Your Damn Homework Before You Speak.

First & foremost, while i respect Jason's opinion and right to post whatever the fuck he feels like, his article was -- by his own admission -- not based on any fact-checking.  At the beginning of his post, Jason states "i don't know the full back story, but i bet this sale was encouraged by a Mint investor."  IMHO, this is just incredibly irresponsible: you're a *very* visible figure ripping other folks on mere conjecture.

Perhaps you might want to contact one of these investors -- who, like me, are all publicly listed in Mint's entry on Crunchbase -- and ASK one of them, before you blow such a wild assertion out of your ass? You probably know several of them, and certainly through your connections it would be fairly easy to reach one of them to confirm or deny your suspicion. While i don't expect folks who aren't breaking-news bloggers to follow basic journalistic principles, making such an accusation without the tiniest shred of evidence is lazy at best, and borderline slanderous at worst.

Or, if you're simply too damn lazy to do some basic research, maybe you could just ask any experienced entrepreneur or venture investor why in the hell would it make any fucking sense for Series B investor Benchmark to encourage a sale that's likely only 4-5x its investment, or Series C investors who just put money in 30 days ago?  or do you somehow think the seed or A round investors were controlling Aaron's actions with a car battery attached to his balls? if you had any knowledge of Aaron whatsoever, you would know that he is one confident sonuvabitch who RARELY lets anyone force him into doing anything.

In short, your logic here is not only faulty, it's piss-poor and reveals your absolute ignorance of what goes on in the venture world.  Sure, you're absolutely correct there are some VCs that might force an entrepreneur's hand -- however, in most cases IT'S IN EXACTLY THE OPPOSITE SCENARIO of what you suggest. They usually want the entrepreneur to stay in the game, NOT sell, and aim for a larger / later win -- typically by FORGOING an acquisition and instead taking a round of capital -- which, in fact, was exactly what Twitter did when you were hypocritically whining about them last week.

Although there may indeed be examples of VCs forcing an entrepreneur to sell to get liquidity to investors, it's not at all typical and usually the opposite of institutional investor motivations.

The "Growing Trend" in Internet deals is towards More & Smaller Acquisitions.  But it's not because of VCs, or the Financial Crisis, or Sarbanes-Oxley.  It's because the Web is Maturing, and Internet Platform Giants are outsourcing / buying Innovation.

The second point that Fried asserts is that this is somehow a growing trend, and that VCs are changing the industry, "killing off the next generation" of entrepreneurs by forcing premature acquisitions. Again, nothing could be further from the truth... and in fact, the EXACT opposite is the notable trend going on in the industry right now.

First it should be noted that M&A have always outnumbered IPOs, but regardless IPOs basically shut down in tech after 2001 due to the dot-com blowup.  Subsequently, many armchair analysts have stated that Sarbanes-Oxley legislation has made it more expensive to go public. Others have noted the financial crisis ending as a reason for more acquisitions.  Still other conspiracy-theorists like Jason think VCs seeking liquidity for investments are at fault.

While any of these may be contributing factors, the more basic trend is this: there are now tens, if not hundreds, of large online platform companies with millions of users and positive cashflow.  In addition to Google, Yahoo, & Microsoft, there are also eBay, Apple, Amazon, News Corp, Facebook, AOL, CBS Interactive, ComCast, IAC, etc, etc, etc. There are tens of companies that can pull the trigger on a <$500M deal, and 100s that can do a <$100M deal.

What's fundamentally different in the last ten years is that most big companies didn't have a need or facility for acquiring web startups.  They didn't understand them, and couldn't figure out how to integrate them into their business.  However, as the Internet has matured, ALMOST EVERY company is now a web company, and the Internet is both a primary and low-cost distribution channel.  It is now very easy to integrate a web-based acquisition [at least from a technical standpoint... might be more challenging re: politics & fiefdoms].  And since most innovation doesn't happen at big companies, it's almost guaranteed that we'll see more acquisitions of small startups to help grow larger company platform strategies. 

In fact, as more platform companies compete for deals, you'll likely see deal size go down as they try and acquire products & talent ever earlier in the startup lifecycle.  There's no need to wait for companies to become $1billion-dollar powerhouses -- it's much more capital efficient to acquire them after they've proven out basic technology & gotten a little elbow in their customer adoption.  Why buy it for $500M a few years later, if you can buy it for $50M now?  I'm sure this was part of Intuit's thinking about Mint... as soon as they saw the Series C deal go down, they realized if they waited another 2-3 years, the pricetag might go up even further.  So they cut a deal now.

This particular trend is what is scaring the shit out of big VCs right now.  Both lower capital costs for startups and lower average exits for acquisitions are screwing up large VC firm strategy.  Fred Wilson and others have written about this, & experienced investors like Alan Patricof have downsized funds to under $100M to make them more manageable in this "small-ball" environment.

While this trend may negatively affect some VCs, it's actually a very positive trend for angel investors and smaller VC funds, and it's an especially GOOD trend for entrepreneurs.  This creates a great market environment for small investment / small exit deals that are exactly what Web 2.0 entrepreneurs are serving up. In other words: the Future is Bright, Time to Buy Sunglasses.

Why Flipping is GOOD, & Why Young Entrepreneurs Should Probably Sell Their Startup Sooner than Later.

Finally, i'll make an intentionally controversial stmt:

 Young Entrepreneurs Should Sell Out Early (and not Late or Never)

Why?  For the same reason Why Dogs Lick Their Balls -- BECAUSE THEY CAN.

Look, i'm not trying to get anyone to sell their grand vision short.  If you've got a great business to build, by all means give it your all and run it forever.  However, for most entrepreneurs it's not going to be the only business they do in their lives.  And for the young entrepreneur -- particularly those under 30 who've never done it before -- the single best thing you can do to ensure your future success is TO GET A DEAL DONE. It's heroic and glamorous to "go all in", but realize that many times that means you may come away with NOTHING.  Playing well sometimes means you take a single or a double instead of getting thrown out trying to steal home.  And sometimes it means just taking 4 balls and getting on base.  However you play the game, swinging for the fences every damn time may work for Babe Ruth and Albert Pujols, but i'm personally more a fan of Ichiro Suzuki and Billy Beane. Small-ball and MoneyBall can be just as beautiful as a homerun.

it almost doesn't matter how large or small it is (altho firesale acquisitions don't count), the ability for an entrepreneur to have future success is typically judged by historical metrics.  and since most startups FAIL, the fact that you can take a startup to ANY size exit proves you can beat the odds, and that you may have the ability to do it again.  Once you have a deal under your belt -- whether it's a $3M deal, a $30M deal, or a $300M deal, you are bankable.  People will bet on you again. Investors, Partners, Employees, Reporters, etc will all believe you can do it (sometimes to their detriment, because again the odds are most startups fail -- even those by previously-successful entrepreneurs).

In addition, contrary to all these haterz who paint acquisitions as a bad deal or a sell-out, i actually think it's a great thing -- imagine being able to take 3-5 years to build a product, develop it to some level of usefulness, grow customers, build revenue, and then sell to a larger organization that decides it could use that innovation to help their business where it sees new opportunities.  Isn't that awesome?  Isn't that a vision fulfilled?  How about the fact that you can perhaps after a few years go back out & do that again?  Why is it that no one seems to think switching jobs every 3-5 years is a bad thing, but somehow think that selling your business to someone who really wants it and will grow it isn't terrific?

More Transactions Grow The Market. Startup Ecosystem Efficiency Raises All Boats.

Lastly, here's the thing i really want to stress, more than peeing all over Jason's post: more transactions of any kind or size help improve overall startup ecosystem health.

Fact is, startups operate in a financial system that is inefficient, illiquid, and challenging to manage.

Venture Capital exists because startups are generally deemed too risky for debt capital, or for traditional financing. This item is often overlooked by entrepreneurs (and investors) who view the VC field as glamorous and confident, when it fact it is mostly ignorant and risk-averse.  VCs like to maintain asymmetric information advantages over their competitors, and sometimes even over entrepreneurs.  Keeping competing VCs, and even sometimes their own LPs & entrepreneurs in the dark about value and pricing is sometimes in their best interest -- it KEEPS PRICES DOWN.  However, infrequent financing round / transactions and lack of objective pricing actually don't serve the interests of entrepreneurs.  As with most markets, liquidity and transparency provide the enabling mechanisms to grow the market larger and to reward market participants more richly.

This is a non-obvious point. 

More & smaller transactions in the market actually improve ecosystem efficiency, and provide better pricing transparency.  In the long-run, it benefits all system participants for small transactions to occur, because it makes the overall market more knowledgeable -- this in turn, reduces risk and encourages greater investment... which also encourages greater [overall] returns.

In summary, the benefits of selling startups early -- or simply when a transaction is available -- may be a smart strategy for both entrepreneurs and VCs to help improve the market, and reward themselves at the same time.  It may not be the best strategy for Bill Gates, Steve Jobs, Mark Zuckerberg, or other titans of industry, but it might be a reasonable strategy for 1st-time entrepreneurs under 30 looking to establish their careers & ensure that future endeavors are more likely.

And Jason: now that i've ripped you a new one, i'd like to apologize for all the harsh commentary and say that altho i disagree with you on this issue, i still think you're an amazing entrepreneur, and i still use your products. Happy to buy you a beer and shoot the shit anytime.

Hit it Gordon:

Comments

[Michael Murdock]

Wow, all those red letters and cursing really drive a point home. I started to laugh and then simply felt sad.

The Mint.com buyout was good for Intuit, bad for MINT and good for their VC's. They got their money. Now whether or not the public has a benefit in this is derived from Intuit and it's basically squashing out a website that was much better and more informative/intuitive than its website which it's built over many years.

Serving the greater good of the buying public and providing up to date financial information as well as alerts was a good thing that Mint provided.

Intuit has yet to update a flagship product of its for a platform that it started on in more than 2 years. Responsibility to its buying public it does not feel.

Gordon Gecko was a movie character and while the movie was good, one of the real life basis for that character ended up behind bars and LOST MILLIONS, so perhaps greed is good, but yet it's also a pain in the backside when your cellmate decides you took advantage of his relatives savings.

Nuff said.

Michael Murdock, CEO
DocMurdock.com
ceo@docmurdock.com

p.s. anyone can talk and rant like a sailor, but simply sharing ideas is much more powerful than the waaaaaa atmosphere of your blog posting. Just a tip from someone who's been doing this much longer than you have.

[Dave McClure]

thanks michael, but i disagree & i think you may have mis-read (or not read?) my post.

the image / allegory to Gordon Gekko was used for emphasis, however the point i was making was actually about selling small, not big.

and for the record: i don't know if you're much older than my 43 years, but started programming ~30 years ago, have worked in Silicon Valley for over 20, founded & sold my own business in the 90's, worked at PayPal in the early days before IPO, ran marketing for a few years at Simply Hired, and -- as noted above -- was an investor in Mint.com, as well as over 50 companies in the past 5 years.

i may swear like a sailor and i may be an blithering idiot, but i've been around the block.

kisses,

- dmc

[www.facebook.com/profile.php?id=625466084]

Thanks for providing a counter-balanced argument; that way startup founders can weigh both sides and decide for themselves which is in their best interest and is more aligned with their goal.

If I may add, it would probably tip in your favor.

Cheers.

Jay Liew
@jaysern

[Indus Khaitan]

The single reason every event at the local Plug n Play or SF Tech Meet is full house is due to the sheer power of the "exitable equity".

Exits like Mint keeps the innovation cycle on the roll.

[Wil Schroter]

Fuck yeah Dave.

I like the spirit of what Jason is saying - he's sticking up for entrepreneurs, and that's good (and I know you'd agree). But you can't make big statements on a big stage like that without knowing your stuff.

The whole premise of his post is based on a forced sale, which really, you have to have a hell of a lot of knowledge about in order to create that strong of a statement.

And yes, as a serial flipper myself, I can tell you that the only people that complain about exits are the people that haven't had them.

[doc bobbin]

Well I must say this is rather timely

[Giancarlo Gonzalez]

So Amazon's acquisition of Zappos was at what time? curious to know your thoughts there...

best,

giancarlo

[www.facebook.com/profile.php?id=589275504]

Thanks, this needed to be said.

Disagree with "Keeping competing VCs, and even sometimes their own LPs & entrepreneurs in the dark about value and pricing is sometimes in their best interest": I think some old school VCs think that being intransparent can be in their interest. It's not. Liquidity and transparency are good for everyone except the guys still playing at old boys' club.

Max

[Tim]

Thanks again for using bright colors and for including pictures of fish and dogs. Makes it one of the few blogs my 2-year old finds entertaining, too! ;-)

[Mark Miller]

Wow someone is drunk on the cool-aid (that may explain the juvenile writing style.)

Mint was a small flip in comparison to Zappos and Omniture. Both companies have been strong armed to sell out for billions. This is not conjecture or rumor as Tony and Josh the respective CEO's have both been vocal and public about it.

The point you overlook (or avoid) is that any company traveling down the VC path looses control of the exit. It simply is not their own, or the VCs but the VC overlords; LP, Pension Funds, Investment Banks, Insurance companies and others who control the money. The VC will simply bow to them and their demands for quick returns. Forced exits are now the norm.

The one in a million company that is able to start, grow and thrive without tapping the capital market is exceedingly rare. Yet its the benchmark for most entrepreneurs and VC alike.

This process simply sets up the entrepreneur and VCs for failure due to lack of resources time and support. And those companies that do not fail along this path due to hard work, smarts and luck are forced into an early exit. And that is the root of the debate - who should control the exit and when.

[Mario Aquino]

Me thinks the lady doth protest too much.

[Anoynmous]

I am pained by a writing style of a person that I look upto. I always forward the blog posts/slides of Dave to all my friends. But, today, I am ashamed of this blog post.

Yes, it is possible that Jason Fried is incorrect in his analysis. But, insulting him in public by such an influential and respectful person (Dave McClure) is beyond professional courtesy.

[John]

I found the cursing/swearing to detract from the overall argument.

[Hillel Cooperman]

The main problem with many of these observations is that they make it seem like there's only one path.

I generally believe that building things to last is what really grows our economy and moves us forward as a society is the creation of institutions that last. I think that people tend to create amazing things when they take the long term view, and I believe that really amazing advances and innovations come from people who have a long term view.

That said, I don't think that a company selling out is necessarily a bad thing. I may lament what they could have accomplished on their own, or what might become of them as part of a larger organization.

Ultimately, it doesn't really affect what I do either way. If a company's goal is to sell, or if the situation presents itself and seems like the right thing, then more power to them.

[Jan Schultink]

How did you manage to set that bit.ly URL?

[Tom]

All I heard was immature language...what was your point?

[Justin]

This post might be bearable to read if you hadn't spent most of it blowing Jason's post out of proportion and attacking him personally. A simple "The Mint sale was not forced by investors, and here's why" post would have been way more useful.

[www.facebook.com/profile.php?id=500065899]

Boo-yah McClure

[qthrul]

I'm glad I got to meet you (briefly) during TC50 over drinks. Having a voice and demeanor to read this with is a real treat.

As for the potty mouth complaints... right. "Bend over" as a title and visual truly raised the dialog.

Transactions are far more interesting than the alternative. Kudos for amplifying that point.

[Steve Gillmor]

I found the language highly objectionable and why I stuck with it until the point settled in. Good fucking job.

[Jeff Pester]

Great job, appreciated the breadth and depth of your counter-argument to Jason's original post. I too have a lot of respect for what he's done with 37 signals but sometimes his perspective is overly myopic and self-serving.

Side note; I find it interesting/humorous that the people complaining about Dave's use of "colorful" language do so either anonymously or without a link identifying themselves.

This is who Dave is, deal with it :)

BTW Dave, would be great if you could install Disqus as your commenting solution.

[Kieran ONeill]

Enjoyed the post, thanks Dave. Don't listen to these guys - the swearing and colours kept it fresh :)

[Mike]

@docmurdock really dude? for someone who's been doing this a long time, I don't think you really followed the post much.

a) Not all the VCs made out, esp the ones that got in a few months ago at $140mm only to see it sold for $170mm. They likely could have done better if they put the money in AAPL or GOOG over the same period of time.

b) You know who made a lot of money? The CEO. Most of the time the problem goes the other way. The entrepreneur only has this one shot at $$, while the VC has an entire portfolio. So the VC tries to force every single investment to shoot for the moon, and if a few (or most) go bust along the way, so be it. The entrepreneur has one shot only, so most of the time they would prefer to cash out early and bank the money, esp if they're young.

c) Given that Dave is an investor, either he's going REALLY far out of his way to lie and cover up, or he's telling the truth. He should know what went down.

BTW Doc, half the links on your site are broken.

And finally, @dmc:
dog ball licking FTW! http://i284.photobucket.com/albums/ll13/NotEinstein/Humor/dogballs.jpg

[jd]

The problem with the rant is that Fried doesn't even mention the word "forced" and barely even implies it. A VC who _allows_ a sale is encouraging more than discouraging. The bulk of Fried's post was noting that it's unfortunate that an innovative upstart with a bright future sold out early to the less innovative old guard. Seems reasonable.

[twitter.com/walkercorplaw]

Interesting post, David. I just wanted to make a few quick observations from the perspective of a practicing corporate attorney who has no “skin in the game” whatsoever. (The numbers below correspond to your numbers.)

1) Jason Fried did not use the term “forced” in his post. Indeed, I think it is irresponsible of you to use such term in quotes -- thereby implying that Jason used such term. To be sure, Jason merely provided in relevant part that: “I’d bet this sale was encouraged by a Mint investor” -- which seems like a reasonable speculation. Moreover, your vitriolic personal attack on Jason undermines your argument.

2) You are correct that “the ‘growing trend’ in internet deals is towards more and smaller acquisitions”; however, again, Jason did not use the term “growing trend” in his post nor is the thrust of his argument that VCs are “forcing premature acquisitions.” Instead, he’s calling out to entrepreneurs (on an inspirational level) to stay in the game and to realize their vision. Moreover, it is self-evident that VC firms are under extraordinary pressure from certain limited partners to liquefy their investments. Stanford’s recent attempt to unload $1B in illiquid assets is but one example (see http://bit.ly/303wyz).

3) Your advice to first-time entrepreneurs – i.e., “to get a deal done” – is spot on. Indeed, I work with a lot of first-time entrepreneurs, and it is extremely difficult in the current environment for them to raise capital. As you aptly point (and I cannot emphasize this enough), “[o]nce you have a deal under your belt . . . you are bankable.” I don’t think this is necessarily inconsistent with Jason’s post; again, he is speaking on a broader level.

Many thanks,
Scott Edward Walker