Blake Borgeson, in blog form

suspected facts. validated opinions.

fred wilson’s outstanding “new path to liquidity” discussion

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There’s an incredibly educational discussion in the comments of a blog post a couple of weeks ago over at Fred Wilson’s avc. I’m a little late to the party, I know, but that’s because it took some thinking and reading on it for the idea to sink in and resonate with me, which is often the case with ideas that really get in there and change how I think about something.

The main point is that some things about the startup/vc world are pretty broken, and a secondary market for shares in private companies is an interesting approach to fixing them that Fred brings up for discussion. Right now, vcs operate with some stringent constraints on how they can invest and what returns they need to see in what timeframe–see Marc Andreessen’s first post about vcs here for a good rundown. The paths to generating a sufficient return to the investors in new companies within the first few years are 1) to grow the company large enough to sell off part of the company in an IPO, which is hard and uncommon, especially when the public markets are taking a beating, like now, and which also legally requires the company to jump through all kinds of crazy hoops to guarantee regular citizens have the information they need to make an informed decision to invest in the company; or 2) to sell the entire company to an acquirer, usually private equity or a big company like Google or Microsoft in the tech world. So really, the main way right now for the initial investors and founders to not only get money but also retain ownership is IPO, which is operationally challenging, and next to impossible when the market for it is like it is right now. So what ends up happening instead is that the company gets bought, the founders and investors get paid, and the acquiring company usually doesn’t care quite as much about the bright future the company had as it does about integrating the technology, the users, and the technical team into its operations.

So it seems like one way to solve this quandary is to let new investors come in and buy a chunk of the company. The original vcs get paid a good chunk, so their investors are happy. The founders get paid a good chunk, and also retain ownership in the company, keeping them very vested in its future. The new investor gets the chance to buy stock, basically, in an incredibly awesome startup before anyone else, because it really understands the market and is willing to do its homework to make sure it’s a smart investment. Rather than getting rolled up into a big company, the startup remains independent and has the chance to continue to pursue the market-changing or world-changing long-term vision its founders had when they started it in the first place (at least I’d wager they had a pretty good vision, if the company did as well as we’re talking here).

So here’s Fred’s blog post again where all the discussions take place, and that discussion in and of itself is extremely educational. If you want to see how a really great vc, both performance-wise and mentality-wise, thinks about his job, scan down the page and read Fred’s comments and the surrounding discussions.

And here’s a link to the short version: a video interview Fred gave a couple days after the blog post briefly outlining the idea.

Written by blakeweb

April 25, 2008 at 1:33 pm

Posted in startups

Tagged with , , ,

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