by goronbjorn on 4/13/14, 4:41 AM with 49 comments
by bruce511 on 4/13/14, 6:44 AM
This is true in many other situations as well, and indeed I personally have been in the same situation. Often the nuances of some business are best understood by those competing for that business. And let's be honest, for most of us the nuances of the VC world are poorly understood outside of actual VC companies. Sure, the basics are understood, but as with any business the specialists know more than the generalist.
So let's hypothesize that Marc understands this nuance, and wants to alert people to the issue. Clearly the warning benefits him at the same time as benefiting those being warned. Does he then speak out, or keep quiet?
To frame the question in a general sense, in situations where you have a credibility problem, do you go ahead anyway, or keep quiet and let others take the fall? What would you do? As far as i can tell it's a no-win situation.
I was in a similar position last year, and chose to write the warning anyway. I disclosed the conflict of interest - even though, like in this case the connection was obvious. To those being warned. Predictably I got a fair bit of negative response, but I like to think, if nothing else, it helped people at least take a bit more time to evaluate the situation.(I got some positive responses as well.)
So hats off to Marc. He'll get pilloried here, and elsewhere, but maybe one day if I go looking for VC funding, this is one more tidbit of knowledge that I'll have, which I probably wouldn't get anywhere else unless I learned it the hard way.
Full disclosure: I have no connection to Marc or any other VC. I don't know what his motive is, suffice to say that it could be either, and assuming the worst is not necessarily valid.
by jroseattle on 4/13/14, 12:32 PM
"People in SV generally consider this unethical and abusive."
But this comment stood out to me. In my interpretation, this translates to Marc saying the civility and integrity of the benevolent overlords of Sili Valley are the true standard bearers of how to operate in the technology capital business. Further, anyone who doesn't follow that protocol is out of bounds.
Marc even calls out how the market will take care of this problem and that tech companies will need to do their own due diligence on investors. The implication: tech companies are obviously not smart enough to do that on their own, so I better let them know. Really...if any company taking on significant investment doesn't execute their own due diligence on their investors, well you get what you get.
by abalone on 4/13/14, 7:22 AM
If his claim is true that non-Silicon-Valley investors are applying unethical leverage, why are the valuations still sky high?
This claim would make more sense if there were a bunch of companies taking non-SV investments at strangely low valuations. Or are there hidden unfavorable terms that Andreessen is hinting at? Is there any evidence of that? Exempt evidence I would assume the default position that this is advice calculated to reduce competition with Silicon Valley VCs.
by jval on 4/13/14, 5:26 AM
by amirmc on 4/13/14, 9:43 AM
What he's getting at in (imho) a rather roundabout way is that deals with these other firms are likely to be 'non-standard' as compared to those with 'SV' firms. You don't have to go very far back to see that people can get caught by surprise in such arrangements. Just look at the Skype options scandal of a few years ago, which was a Private Equity deal (they just have a different view of 'normal' regarding options). I've no idea what hedge funds are doing by investing in companies but I'd be wary of the terms.
http://www.businessinsider.com/skype-scandal-silver-lake-201...
by dmk23 on 4/13/14, 5:37 AM
by blazespin on 4/13/14, 4:21 PM
by higherpurpose on 4/13/14, 9:23 AM
by 7Figures2Commas on 4/13/14, 7:31 AM
by mathattack on 4/14/14, 1:42 PM
If the endgame is great company, or a high long term valuation, going with the wrong short term financing just to get a higher sounding valuation is foolish.
by trhway on 4/13/14, 5:47 AM
by ams6110 on 4/13/14, 5:18 PM
by kyleblarson on 4/13/14, 3:04 PM
by foobarqux on 4/13/14, 3:47 PM
by perlpimp on 4/13/14, 4:44 PM
my 2c
by adamhooper on 4/13/14, 6:13 PM
However, what has happened over the last several years to the credit of PG/YC [1], Naval/Nivi @AngelList/Venture Hacks et al is to create a much more transparent and founder friendly fundraising environment here in SV. With transparency comes accountability and reputations can quickly spread both for the good and bad.
The "culture" of fundraising in SV is one with more open communication of how investors behave. Word spreads quickly in the valley and kudos to Marc for raising the flag on what have most likely been firsthand experiences with such issues. Not many individual founders/companies are in positions to see broad market behavior over a broad data set like a16z portfolio companies.
So what's the downside of taking a "sky-high valuation" and then getting re-traded after you've told other, potentially better firms w/lower valuations, that you're going into exclusive negotiations? I see the options as follows: 1) non-SV investor holds their word, does confirmatory DD and company ends up executing a great deal at terms better than other firms or; 2) said investor comes back and re-trades any number of terms (valuation, control, preferences, board seats etc) and company feels stuck thereby having to take the now worse deal or; 3) investor re-trades and company walks. Result #1 is potentially great, #2 could be a pretty bad deal but in the end company has the capital, and #3 could be a killer - company is now damaged goods and has to come back to other firms, tail between the legs asking for another shot.
This happens all the time in the investment real estate world where I came from and I see a ton of parallels here. Oftentimes there is a full marketing process that ends in a best and final bidding process. A buyer is selected based on the terms/price/timing of their offer and they begin their DD process. Buyers that behave and honor the terms with only material changes coming due to material issues uncovered in DD earn great reputations and their offers are usually considered first from the seller's perspective. Buyers that go into contract and come back with ridiculous re-trades very quickly reach the bottom of the pack going forward on all future deals. So as a seller, you either take the now far inferior deal, or walk from the lesser deal and chance going back out to market as damaged goods. Not a good situation.
Again, sure there are some self-serving motives in Marc bringing this issue up, but as a founder of a company leading our fundraising, I certainly appreciate being aware of all the issues currently in the market. As fickle and at times irrational fundraising can be for startups, the more knowledge we can arm ourselves with the better.
by bedhead on 4/13/14, 8:44 PM