The Entrepreneur Thesis

Posted on Mar 1, 2010 | 147 comments


aaron w car

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I was going to save this post for a while but the “Patzer Problem” meme has forced my hand.  I, for one, am with Rob Hayes of First Round Capital on this one.

“If we are doing things right and our company founders are successful, then over the long run we should be successful. If we get to the point where our founders are successful but we can’t be, we should be rethinking our business.”

I have a philosophy.  A thesis.  An entrepreneur thesis.  I’m not talk about the age old debate amongst investors whether you back entrepreneurs, markets or products (or as many people like to hedge – product / market fit).  I’m unequivocal on that topic.  It’s entrepreneurs I back.  I’m on the record as saying I’m 70% management, 30% market.  We’ll have that debate another day, I promise.

Today’s post is about my investment thesis.  It’s what I call the “entrepreneur thesis.”  My investment philosophy is to back the best possible entrepreneurs I can and to stick by them through the growth (or sale) of the company.  I’ve outlined already what I believe makes a great entrepreneur and I’ve stated unequivocally that this is a subjective view of what it takes.  But when I’m looking to invest the dollars that my Limited Partners have entrusted my firm with I’m going with my view.

So what is this “entrepreneur thesis?”  It’s the view that I back great entrepreneurs and help them pursue their dreams no matter what.  Sometimes this will mean we collectively double down and try to build a bigger business and sometimes it may mean selling earlier than I had thought we would.  I know this sounds Polly Anna-ish.  I’m not just writing that “I love entrepreneurs” to curry favor with startup CEO’s.  Anyone who has ever worked with me knows that I’m no pushover and I’m certainly not a wallflower.  I’ll argue my point vociferously.  But I don’t believe in betting against founders.

Let me explain.

A few years ago I was having dinner with a friend of mine who works for one of the biggest known Silicon Valley firms.  He was telling me about a deal he had done.  He invested $8 million in a company in the computer networking space.  They had an offer to be acquired for $80 million, which would have dramatically changed the lives of the founders forever.  My friend blocked the deal.  It was “only” a 2.5x for him.

His logic was, “when I invested the management team knew that I wanted a multi-hundred million dollar exit so they shouldn’t be surprised.  This return won’t be enough for me to justify to my partners.”  I literally said to my friend, “You’re a dick.  Do you not see the consequences you’ve weaved?  You’ve now got a management team that hates you.  They hate you for life.  They will tell every other entrepreneur in town not to work for you.  Presumably they are talented if they created a company worth $80 million.  They’ll never work with you again.  Nor will any of their friends or colleagues.  Are you that short sighted?”

I kid you not when I use quotes there.  My wife was really uncomfortable because she was there and so was his wife.  I’ve known this guy and his wife for a LONG time.  My wife was actually mad at me for being so blunt.  But she knows it’s a character flaw of mine so she forgives me (I hope).

To this day I still don’t understand what he was thinking.

I’ve had the conversation of what will happen upon an exit with founders so many times I feel like a broken record.  Before I outline my views let me give you one more story.

In 2006, Steven Dietz, a partner at my firm, GRP Partners, had given me $500,000 in a seed in convertible debt when I started my second company, Koral.  GRP Partners had also funded my first company.  I had an offer to sell my company to Salesforce.com in 2007.  Steven knew that from a fund perspective he wasn’t going to earn the amount of money that a typical VC might look for since we were selling early.  But he also knew that it would change my life forever.  He was grateful since I stuck with my first company, BuildOnline, well beyond when others would have (since I had taken great dilution during the dot com bust.).  He decided to let me earn.  I will never forget that.

So it was kind of obvious when Steven and Yves Sisteron (the partner on my first deal) offered me a role as a partner in their firm that I would work here.  I knew that we were aligned intellectually and ethically.  I had initially called them wondering if they’d fund my third venture.  I never imagined I would switch sides of the table.

So, to my thesis:

1. Work with the best at early stages: I’d like to get involved with capital efficient companies early in their lifecycle.  I want to back entrepreneurs that I believe have similar ethical values, are fun to work with, trust me, have big aspirations, are willing to work hard, are smart and want to have an impact on the world.  I want to see small amounts of money go in and I often tell these entrepreneurs, “I don’t have a goal for you to come back and quickly ask for more money.  Go slowly if you need.  Spend wisely – you need to “grow into your valuation.”  And by investing smaller amounts at early stages I am impacted if a quicker-than-anticipated sale happens.  I view this as The Patzer Opportunity.

2. Go in planning for a big outcome: I tell each person that I am going to work with the same story.  I hope to build a billion dollar company with them.   GRP Partners has created more than a dozen of these so as a firm we know something about creating big companies.  I don’t go into deals with a plan to sell for $20 million.  $100 million at least.

3. Keep options on the table: I believe in my bones that entrepreneurs shouldn’t “over raise” capital.  They should right size their capital raises.  That doesn’t mean being cheap.  That doesn’t mean raising the least amount possible.  But it means not over raising money.  I know I’m being vague.  Each situation warrants different amounts.  But let me give you an example.  If you can raise $2 million or $10 million up front (maybe you’re a hot entrepreneur in a hot space) I know that my vote would be with the $2 million (again depending on the situation).  If you raise $2 million you preserve your options.  Somebody may come along and offer you $25 million to buy your company.  You might like to accept that.  It might just change your life (for example if you personally own 33% of the company).  Or if you didn’t sell and the next round comes along.  You raise $5 million at a $20 million post money.  That by definition means you were hot.  You should still be able to sell for $50 million.  At each step you preserve your options.  If you go to quickly to take down a $50 million round from late stage funds you have one option – go big or go home.

4. Don’t block founders from selling: OK, so if you raise $2 million at a $10 million post money (e.g. maybe I own 20% of the company) or $5 million at a $20 million post (I own 25%) shouldn’t I block that sale of a company a cheap price?  This is the “Patzer Problem.”  Some people assert that the later stage investors didn’t make a high enough return.  My view: If you’re absolutely convinced that it is the right thing to sell I need to support you.  My bet: if you sell and I helped you earn and was a key contributor to your company then you’ll tell everybody you know to work with me.  Over time I should see great deals as a result.  When you go to do your next company (most entrepreneurs do) you’ll call me first in the way that I called GRP Partners for both my second company and my third (which never materialized).

5. Persuade you and align you to swing for the fences with me: But of course there is more to my views.  I’m hoping that when your $25 million or $50 million exit comes along I can convince you (if I believe it) that we should swing for the fences and create a larger company.  If I really believe it I ought to let you earn now by taking money off of the table.  I have already written about this.  I believe our incentives need to be aligned at this point in time.  You need to have your “feed the family” money so that you want to swing for the fences.  You also need to believe that the higher outcome is possible.  If I’m not willing to let you take money off of the table and if I’m not willing to put more money into the company to help you achieve your goals then how convinced am I really about the upside?

I’m not trying to be nice to entrepreneurs so you’ll read my blog or take my money.  It is simply the thesis that I believe in.  It’s the “entrepreneur thesis.”  Let me outline the contra viewpoint, which is seldom expressed openly, but it what I believe gives our industry a bad reputation.

Large early stage rounds – Too many investors whose funds are too large feel that they need to put “a lot of capital to work” in order to justify being involved with your company.  So much so, that when I was raising capital in 2006 and asked for $2 million several funds told me that they wouldn’t give me money unless I’d take $5 million.  And they actually hinted that I could get a better valuation.  Tempting.  The problem is that it takes options off of the table.   And the same logic that forced them to put $5 million to work also forces them to block your sale at prices that might just change your life.

Change management teams – A lot of well known, historical VCs have a belief that management teams are expendable.  You simply bring in a more talented team after your $10 million investors and the founders become senior members of the team but don’t run things.  I accept that this may sometimes happen.  But it’s the absolute last course of action for me.  I believe that a motivated founder trumps a well-hired mercenary CEO any day of the week.

Outsized returns through sharp elbows – OK, here is what it boils down to.  I really believe that some firms have the strategy of edging out the entrepreneurs, bringing in a new management team, recapitalizing the company, minimizing the founders’ share and taking maximum ownership for the VCs.  This is dreadful behavior but I truly believe that some firms go into investments with this mindset.  I’ve heard very similar stories in the VC corridors.  “Well, we’ll just do their next round and take 50% of the company.  They’re struggling to raise funds anyways.”  Look – it does happen.  And sometimes it is warranted.  I just don’t believe that any VC should go in with this strategy.  It’s why I always tell entrepreneurs to reference check their VCs.

Listen, who you work with matters.  Brand isn’t everything.  And firms that get outsized returns on occasion to so at the expense of the founders.  My thesis is that I should align myself with my customers (the CEOs) as it is the most likely path to great financial returns for my investors.  And if I’m in this business for a long time I’m betting this will pay off.  You?  Taking VC money is more difficult than marriage.  At least if you fall out of love you can legally get divorced in America.  Not so venture capital.  Raise wisely.

Update: After reading the comments I want to make one thing clear.  I don’t believe this strategy has any sacrifices – I believe it will mathematically pay off bigger over time. Why?

– getting invited to be in the handful of deals each year in the US that really matter vs. getting mediocre deals

– getting the best entrepreneurs to work with you multiple times

– finding the right balance where sometimes the “early sale” doesn’t happen because you allowed some founder liquidity (on a case-by-case basis) that enabled you to swing for the fences where other entrepreneurs may have pushed for an early exit when incentives weren’t aligned

*photo taken from the Mint.com blog

  • Laurent Boncenne

    about blogging, it's the first time I notice that you are the only one who does not have ads.
    I've deliberately left aside seed stage investors who blogs and angel investors, still-
    it's nice to see it like that.

  • Laurent Boncenne

    isn't that VCs like Mark and Fred and Brad Feld (and pretty much everyone on the investing side) who blog, are building some sort of “righteous-system” and creating an ethics charter where transparency reigns ?

  • http://arnoldwaldstein.com awaldstein

    Yes most certainly. I agree.

    They are change agents but they are not the majority by any means. That is one of the points I think David is making.

  • http://twitter.com/entrep_thinking Norris Krueger

    Reputational capital – mensch-ness? – and how can you not like the word “whuffie”? (On YouTube, you can even hear the “Makin' Whuffie” song, LOL)

    You & Brad got a lot of it… while others seems to be losing it. Whuffie points for you from your last 2 posts!

    p.s. oops! sorry – farhanlalji beat me to it.

  • Laurent Boncenne

    You forgot to tell us if that 8M$ funded company got sold or not (especially if they did for 200M$ or so :D )

    I'm not sure though if I understand what you say about selling early to a decent outcome. If I have you as my VC, and knowing the policy you have to yourself (I can't remember the proper word, be it in french or english…. my bad), that agreement you have towards the entrepreneur, wouldn't it be normal that instead of being furious that you blocked a deal, I'd be grateful that you let me get a better exit, or make it up to it ?

  • http://bothsidesofthetable.com msuster

    Now, if he could only win a freakin' Superbowl! ;-)

  • http://bothsidesofthetable.com msuster

    I don't know what happened with the company. I moved from Silicon Valley to Los Angeles and lost touch.

    re: blocking a sale – you'd only be happy with me if you made more money in the end. See one of the earlier comments where in the end the founders made nothing. This does happen.

  • http://bothsidesofthetable.com msuster

    My gut instinct is that what drove my friend was that he was a Principal and not a Partner. He didn't have the clout and he needed to show a better return to justify making partner some day. I'll never know for sure – but that is what I theorize.

  • http://bothsidesofthetable.com msuster

    That's one version of my philosophy. But I hold out that the first deal might be a great concept worthy of a larger exit.

  • http://bothsidesofthetable.com msuster

    Oh, the irony of your comments, Jim.

  • http://bothsidesofthetable.com msuster

    Thanks, Matt. I appreciate the kind words. Especially after the last commenter ;-)

  • http://www.homethinking.com nikiscevak

    I wonder if your friend was a dick only because he didn't offer another option. That is, if he said “no but here is $5m for x% of your stake if it relieves tension” rather than just “no”, would that have been a better option?

    Secondly, it seems inevitable that these “DST” type deals become more and more common. When a company has revenue between $10-$50m there is no market for public investors. But on the other hand you have huge amounts of unspent capital in the hands of ballooning VC funds and mid-market P/E providers.

    To me at least, it's better that those type of people provide the first stages of liquidity rather than the Doctors and Dentists being called upon by the Raging Herd in a pre-mature IPO. The 'Growth Equity' guys have to become more like public investors and they seem like the best link in the chain to be valuing businesses at this stage. It's a delicate balance as to how much of the founder's/executive's equity should be left to not screw with incentives but at the same time there seems an inevitable trend toward figuring that problem out rather than being religious of not going down the path in the first place.

  • thealzel

    Excellent post! I'm a huge believer in aligning the interests of the entrepreneur founders and the investors to give the best possible outcome for the company. Whether that means an early exit or hanging in a bit longer because the founding entrepreneur is convinced a home run is within grasp, the exit strategy will get support so long as the interests of all the stakeholders are aligned. Lesson? Choose stakeholders carefully!

  • http://twitter.com/jarradp jarradp

    Nice post i enjoy reading your comments.

    I like 4#.

    My take :-
    If someone has the Entrepreneur DNA and gets a payout for a sale, most would then start looking for the next big thing, main difference being that now they know what they need to do to get it. And if they have the financial wherewithal to really go for it. So the next time they don't necessarily need to jump so soon.

    Also, if the founder thinks it is the right time to get out (to maximise their value) , then unless they are missing some information that you can provide, it probably is. They live , eat and breathe that venture. They would be up to date with industry social trends etc. If they think that this the best point for the company to make money, it probably is.

  • http://avc.com fredwilson

    well said Mark.

    love the “you're a dick” part.

    unfortunately VCs play the “dick” role so well and so often

  • Roko

    1- Second time entrepreneurs who had success with their first startup, have a better chance at succeeding the second time around.

    2- Venture investing is usually a 7-8 year timeframe.

    Knowing 1 and 2, it appears to me that a good model would be to get an entrepreneur a quick exit (2 years in)with his first company at sub 20 mil. He earns, he loves you, he owes you for making him rich, but you, you just break even. Now he is ready (experience) for the second company around, he does worry about money, and you guys are both ready to swing for the fences.

  • http://www.rre.com jdrive

    Couldn't agree more – nice post, Mark.

  • JimThompson

    Dude, you sound proud that you insulted your friend in front of family and friends. Did that make you feel important? Don't you understand you can disagree with a friend without being rude?

    Jeez, read a Dale Carnegie book, for chrissakes and learn a little about human relationships and tact. Your wife was right to be mad at you.

    I don't care how many millions you have/made/won/lost/invested, if you can't behave with human decency towards another person, especially a friend, you're missing out on a whole side of life. Shape up, dude!

  • mattweeks

    Mark, thanks for a great post, and thanks @bfeld for shouting it out again. I missed it the first time around. You exemplify a pay-it-forward good-karma-points kind of guy we'd love to have on our exec team as much as we'd like you in the Partner's meeting arguing for our cause.

    So I understand your conflict in “joining the dark side” in switching sides of the table. But we need more people like you at those General Partner Monday Meetings to advocate for us.

    Entrepreneurs are a bit crazy to do what we do, and there is a kind of “band of brothers (and sisters)” ethos that depends on “great investors” to support and encourage them.

    I wish there were more like you, Brad, Rob and the other class-acts you mention.

    Keep up the great work and I look forward to working together one day.

    We “feel the force.”
    :)
    Cheers,
    Matt

  • Sammy

    +1 to that, Mark.
    Had the same scenario happen to me when a “consulting CEO” was brought in just as had gone from 0 to $2mm in revenues in a year.
    Equity crammed down from 20% to 3%.
    No rights. No say in something that I had spent 3 years on.
    Just because the VCs had over 50% control.

    You can bet that I would never work with those people again.
    Have bootstrapped my 2 ventures since then.
    Even if it has meant lower revenues etc, I know I am not going to get screwed again.

    It's not about the money, it's about being shown respect.

  • http://twitter.com/entrep_thinking Norris Krueger

    Reputational capital – mensch-ness? – and how can you not like the word “whuffie”? (On YouTube, you can even hear the “Makin' Whuffie” song, LOL)

    You & Brad got a lot of it… while others seems to be losing it. Whuffie points for you from your last 2 posts!

    p.s. oops! sorry – farhanlalji beat me to it.

  • http://bothsidesofthetable.com msuster

    Now, if he could only win a freakin' Superbowl! ;-)

  • http://bothsidesofthetable.com msuster

    I don't know what happened with the company. I moved from Silicon Valley to Los Angeles and lost touch.

    re: blocking a sale – you'd only be happy with me if you made more money in the end. See one of the earlier comments where in the end the founders made nothing. This does happen.

  • http://bothsidesofthetable.com msuster

    My gut instinct is that what drove my friend was that he was a Principal and not a Partner. He didn't have the clout and he needed to show a better return to justify making partner some day. I'll never know for sure – but that is what I theorize.

  • http://bothsidesofthetable.com msuster

    That's one version of my philosophy. But I hold out that the first deal might be a great concept worthy of a larger exit.

  • http://bothsidesofthetable.com msuster

    Oh, the irony of your comments, Jim.

  • http://bothsidesofthetable.com msuster

    Thanks, Matt. I appreciate the kind words. Especially after the last commenter ;-)

  • jenkins

    Man you are so right Mark. As the founder of two companies, one that exited for “several hundred million” dollars, I can tell you that these founders absolutely hate this person and will tell everyone that, too. Not only will they tell people that your friend overplayed his hand but that he also put the other investors and employees at risk — because we all know that this company could very well fail now.

  • JimThompson

    Sad that you don't get it, friend. Maybe someday…

  • http://www.participate.com Alan Warms

    Great great great post Mark. This is exactly what I tell my angel investments when I am investing — which is don't turn a variable outcome into a binary outcome. You also hit on the largest point that I always harp on that most VCs don't really raise – the protective provision around blocking the sale of the company.

    The other thing that happens to the first time CEO – and it absolutely happened to me — is you make the mistake of taking the larger round as you are intoxicated by the attention and large potential outcome ( I did my first round of VC funding for my first business September 99, while I was growing at 400% in a hot space).

    I am always trying to help my investments learn from that mistake – and on the flip side I need to ensure for my own companies that I am not too much a prisoner of my past experience -

    really well articulated!

  • http://avc.com fredwilson

    well said Mark.

    love the “you're a dick” part.

    unfortunately VCs play the “dick” role so well and so often

  • http://www.blogcastfm.com/ Srinivas Rao

    Mark,

    I came across your blog yesterday after reading the post you wrote at Mashable. I'm might not be in the business of building an empire (maybe it will turn into that), but I really enjoy the content you have here at your blog. I think that what you are talking about here can not only be applied to venture capital but to life in general. I don't know what ended up happening to that networking company that could have been sold, but I would imagine it didn't do much for the reputation for your friend or his relationships.

    Today more than ever we live in a world where word can spread like wildfire and that kind of reputation could cause some serious damage to a VC overnight. All you'd have to do is be relatively influential on Twitter or write a Blog Post titled “This VC screwed me” and with enough buzz you can kill somebody's reputation over night.

    On a somewhat unrelated not, part of why I think your blog is a must read for bloggers and people who want to start companies is that blogs have to evolve into real businesses if people ever want to make a living from them. Your advice here is geared towards entrepreneurs and I think that it can help many of us evolve from just bloggers into real entrepreneurs. At some point when you're available I'd love to have an opportunity to interview your for BlogcastFM, a podcast that I run for bloggers. I think you'd bring a much needed perspective to the world that bloggers live in. I look forward to reading more of your content.

  • jenkins

    Man you are so right Mark. As the founder of two companies, one that exited for “several hundred million” dollars, I can tell you that these founders absolutely hate this person and will tell everyone that, too. Not only will they tell people that your friend overplayed his hand but that he also put the other investors and employees at risk — because we all know that this company could very well fail now.

  • JimThompson

    Sad that you don't get it, friend. Maybe someday…

  • http://www.vumedi.com Roman Giverts

    I wasn't going to say anything because I knew this was just going to be a rant, but here goes:

    I think everyone has completely misinterpreted the “patzer problem.” The problem is not that the VCs didn't get a large enough return, the problem is that Patzer 100% sold out, flipped early, made a decision motivated entirely by the cash. Whatever happened to entrepreneurs trying to change the world?

    Mint had potential to be a truly legendary company, it could have changed the way everyone manages their finances. Instead, it was a company that got really fast traction among early adopters and then sold out extremely early. As a fellow entrepreneur, here are the problems I have with the decision:

    1. He sold out far before Mint had any real mainstream adoption. He never changed the world!! And what's so frustrating is that out of all the shitty products out there that have no chance, this one actually had a chance. Perhaps Intuit will help develop the concept (i doubt it, more on that in a sec), but either way, it's not something he can take ownership for anymore. He's just another VP at intuit.

    2. He sold to probably the worst acquirer out there. Anyone who knows anything about tech, knows Intuit is one of the worst technology companies in the industry in many respects, especially for any engineer to work at. Mint is slowly going to be integrated into Intuit's products. The Mint brand will die, and while perhaps his vision will become reality, it will take 10-15 years at intuit. (I personally have nothing against intuit, but you dont have to talk to many people to find out its reputation).

    This is very different than say YouTube selling to Google or PayPal selling to eBay. Those companies were already mainstream, and they were able to keep their brand and relative autonomy. I believe that's why they are truly legendary, not because of the great returns they created for their VCs.

    That's The Patzer problem. He started a company that could have been great, instead in 5 years Mint will be forgotten. All that will be left will be his payday.

    That may be great for some, but shit, that's not an inspiring story that should be appluaded. Mark Zuckerburg turning down a billion and then growing facebook to be 10x that size…. now that's fucking inspiring. Zuckerberg would never give up on his vision for cash the way Patzer did. That's the story I talk about in my company because that's what building great companies is about; not patzer flipping in 2 years to a terrible acquirer. That's lame, boring, and nothing I want to be a part of.

  • http://www.participate.com Alan Warms

    Great great great post Mark. This is exactly what I tell my angel investments when I am investing — which is don't turn a variable outcome into a binary outcome. You also hit on the largest point that I always harp on that most VCs don't really raise – the protective provision around blocking the sale of the company.

    The other thing that happens to the first time CEO – and it absolutely happened to me — is you make the mistake of taking the larger round as you are intoxicated by the attention and large potential outcome ( I did my first round of VC funding for my first business September 99, while I was growing at 400% in a hot space).

    I am always trying to help my investments learn from that mistake – and on the flip side I need to ensure for my own companies that I am not too much a prisoner of my past experience -

    really well articulated!

  • http://www.blogcastfm.com/ Srinivas Rao

    Mark,

    I came across your blog yesterday after reading the post you wrote at Mashable. I'm might not be in the business of building an empire (maybe it will turn into that), but I really enjoy the content you have here at your blog. I think that what you are talking about here can not only be applied to venture capital but to life in general. I don't know what ended up happening to that networking company that could have been sold, but I would imagine it didn't do much for the reputation for your friend or his relationships.

    Today more than ever we live in a world where word can spread like wildfire and that kind of reputation could cause some serious damage to a VC overnight. All you'd have to do is be relatively influential on Twitter or write a Blog Post titled “This VC screwed me” and with enough buzz you can kill somebody's reputation over night.

    On a somewhat unrelated not, part of why I think your blog is a must read for bloggers and people who want to start companies is that blogs have to evolve into real businesses if people ever want to make a living from them. Your advice here is geared towards entrepreneurs and I think that it can help many of us evolve from just bloggers into real entrepreneurs. At some point when you're available I'd love to have an opportunity to interview your for BlogcastFM, a podcast that I run for bloggers. I think you'd bring a much needed perspective to the world that bloggers live in. I look forward to reading more of your content.

  • Roman Giverts

    I wasn't going to say anything because I knew this was just going to be a rant, but here goes:

    I think everyone has completely misinterpreted the “patzer problem.” The problem is not that the VCs didn't get a large enough return, the problem is that Patzer 100% sold out, flipped early, made a decision motivated entirely by the cash. Whatever happened to entrepreneurs trying to change the world?

    Mint had potential to be a truly legendary company, it could have changed the way everyone manages their finances. Instead, it was a company that got really fast traction among early adopters and then sold out extremely early. As a fellow entrepreneur, here are the problems I have with the decision:

    1. He sold out far before Mint had any real mainstream adoption. He never changed the world!! And what's so frustrating is that out of all the shitty products out there that have no chance, this one actually had a chance. Perhaps Intuit will help develop the concept (i doubt it, more on that in a sec), but either way, it's not something he can take ownership for anymore. He's just another VP at intuit.

    2. He sold to probably the worst acquirer out there. Anyone who knows anything about tech, knows Intuit is one of the worst technology companies in the industry in many respects, especially for any engineer to work at. Mint is slowly going to be integrated into Intuit's products. The Mint brand will die, and while perhaps his vision will become reality, it will take 10-15 years at intuit. (I personally have nothing against intuit, but you dont have to talk to many people to find out its reputation).

    This is very different than say YouTube selling to Google or PayPal selling to eBay. Those companies were already mainstream, and they were able to keep their brand and relative autonomy. I believe that's why they are truly legendary, not because of the great returns they created for their VCs.

    That's The Patzer problem. He started a company that could have been great, instead in 5 years Mint will be forgotten. All that will be left will be his payday.

    That may be great for some, but shit, that's not an inspiring story that should be appluaded. Mark Zuckerburg turning down a billion and then growing facebook to be 10x that size…. now that's fucking inspiring. Zuckerberg would never give up on his vision for cash the way Patzer did. That's the story I talk about in my company because that's what building great companies is about; not patzer flipping in 2 years to a terrible acquirer. That's lame, boring, and nothing I want to be a part of.

  • http://www.twitter.com/biggiesu Mike Su

    LOL!!! Depending on Jim's intent, that's either the most clever comment ever on this blog, or the complete opposite.

  • http://www.twitter.com/biggiesu Mike Su

    LOL!!! Depending on Jim's intent, that's either the most clever comment ever on this blog, or the complete opposite.

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  • dongooding

    As someone who made the transition the other way (VC to entrepreneur), I both applaud your perspective and shake my head about how the more things change, the more things stay the same. I spent a decade with a pro-entrepreneur firm (Accel Partners), whose founding partners had been in the business a long time and so they shared the long view that you bring to the table. When I left (in 1997), I funded my own business, which has its pluses and minuses; it wasn't VC appropriate, so my own aversion to bringing in venture backers is moot. When my best friend started looking for VC for his business in '98, I helped guide him to entrepreneur-friendly backers when he also had interest from “replace the founders first” VCs. He grew into the job of CEO and earned backers a decent return on the far side of “telecom winter.” The lead VC, true to form, made sure that preferences were modified in the acquisition to ensure that the full entrepreneurial team would be motivated and fairly compensated, rather than screwing entrepreneurs to maximize gain on that deal.

    Roman Giverts' comment on Mint being acquired early by Intuit brings up an important subtlety that my friend's company also shows: it's not just “the founder” who is affected by the acquisition, it's the entire company. Sometimes founders may not have their interests aligned with the rest of the team, especially if it's obvious the founder won't continue post-acquisition. Taking the long view includes thinking about the entire company, since it's quite possible that future entrepreneurs are learning the ropes as junior management. Alignment of interests is not simple.

  • dongooding

    As someone who made the transition the other way (VC to entrepreneur), I both applaud your perspective and shake my head about how the more things change, the more things stay the same. I spent a decade with a pro-entrepreneur firm (Accel Partners), whose founding partners had been in the business a long time and so they shared the long view that you bring to the table. When I left (in 1997), I funded my own business, which has its pluses and minuses; it wasn't VC appropriate, so my own aversion to bringing in venture backers is moot. When my best friend started looking for VC for his business in '98, I helped guide him to entrepreneur-friendly backers when he also had interest from “replace the founders first” VCs. He grew into the job of CEO and earned backers a decent return on the far side of “telecom winter.” The lead VC, true to form, made sure that preferences were modified in the acquisition to ensure that the full entrepreneurial team would be motivated and fairly compensated, rather than screwing entrepreneurs to maximize gain on that deal.

    Roman Giverts' comment on Mint being acquired early by Intuit brings up an important subtlety that my friend's company also shows: it's not just “the founder” who is affected by the acquisition, it's the entire company. Sometimes founders may not have their interests aligned with the rest of the team, especially if it's obvious the founder won't continue post-acquisition. Taking the long view includes thinking about the entire company, since it's quite possible that future entrepreneurs are learning the ropes as junior management. Alignment of interests is not simple.

  • http://www.appwhirl.com Richard Jordan

    Mark, I don't know if you're still looking in to this older post, but you mention the problem of bigger VC firms not wanting to plump in “just” 2-3 million but pushing for a bigger round. How does one answer this question? If it's a firm I like, that will, I believe, be of great help to us? What do I say back to them?

  • http://www.appwhirl.com Richard Jordan

    Mark, I don't know if you're still looking in to this older post, but you mention the problem of bigger VC firms not wanting to plump in “just” 2-3 million but pushing for a bigger round. How does one answer this question? If it's a firm I like, that will, I believe, be of great help to us? What do I say back to them?

  • anonymous

    i've seen many cases where VC will tell me that i need to raise 5-10times more money. that i need to create THE market leader and a multi hundred million company, that with the technology we have it is possible.

    The problem is for them it is a swing against the fence, they have a portfolio of investment so the strategy pay for them. But for me i believe a 20-30million company can be created but not a 100million $. after working 5 years without paying myself a salary and having spent all my savings, if at the end of the day i don't see a potential exit and reward for my works, i wouldn't feel motivated to work hard, and would just leave and start something else.

  • anonymous

    i've seen many cases where VC will tell me that i need to raise 5-10times more money. that i need to create THE market leader and a multi hundred million company, that with the technology we have it is possible.

    The problem is for them it is a swing against the fence, they have a portfolio of investment so the strategy pay for them. But for me i believe a 20-30million company can be created but not a 100million $. after working 5 years without paying myself a salary and having spent all my savings, if at the end of the day i don't see a potential exit and reward for my works, i wouldn't feel motivated to work hard, and would just leave and start something else.

  • anonymous

    i've seen many cases where VC will tell me that i need to raise 5-10times more money. that i need to create THE market leader and a multi hundred million company, that with the technology we have it is possible.

    The problem is for them it is a swing against the fence, they have a portfolio of investment so the strategy pay for them. But for me i believe a 20-30million company can be created but not a 100million $. after working 5 years without paying myself a salary and having spent all my savings, if at the end of the day i don't see a potential exit and reward for my works, i wouldn't feel motivated to work hard, and would just leave and start something else.

  • http://www.parendipity.com/ sabina

    Mark, thank you for a great article and for being blunt. Many of us founder often worry about a luck of alignment with investors as you describe and those that are aligned are not always easy to find, but we try!

  • http://ohheyworld.com/ Drew Meyers

    3 years old…a still very very relevant today. Good read.

    I’m curious, how does a VC such as yourself figure out early on whether an entrepreneur is going after the home run opportunity vs a short term flip/acquihire? Obviously any entrepreneur can say they are going for the big hit, but very few seem to be motivated based on it – at least from my own experience.