7 ms·

Slow Exits Are Fucking Up the Valley

85 points by RKoutnik 10y ago

joeblau 10y ago
> number of people from GitHub who are in a financial position to become true angels. How much money does one need to make to become a "true angel"?
- holman 10y ago
  To be an SEC accredited investor, you have to be making 200-300k in the last two years, or a net worth of > $1M. I initially wrote that as "angel", but then changed it to "true angel" to distinguish those who might make a small investment once or twice to friends or family from those who can handle their investments a little more seriously. Or, put another way: as a founder, I feel less bad taking their money because it's not a major component of their net worth (at that point they shouldn't be investing in the first place, but yeah).
- maxxxxx 10y ago
  What are the conditions for angel investments? I remember reading that some Sun guy saw a Google demo and immediately cut them a check for 100k. Does anybody know what the conditions were?
  - ohazi 10y ago
    "some Sun guy" being founder Andy Bechtolsheim, who was already a hundred-millionaire at the time.
    - maxxxxx 10y ago
      I wonder how big his share of the company was. I suppose he didn't do it out of sheer goodness.
      - cpr 10y ago
        Of Google? Apparently enough to make O($billion). (I knew Andy back when he was a grad student designing SUN-1 (Stanford University Network) boards, pre-Sun, etc., when we were sharing his design for the Imagen image processor (TeX project spin-off.) An extraordinary fellow even back then.)
        maxxxxx 10y ago
        Yes, of Google. Let's say you have the super bright idea and somebody like him gives you 100k what percentage does he want?
- arohner 10y ago
  Quick back of the envelope: let's define angel as someone who can write 10, $25k checks a year. Let's say they have a yearly lifestyle expense of $250k, so they need to make $500k/year off their wealth. Then, assume they make between 4-8%/year on their investments. so that's $6-12M in the bank.
  - ThrustVectoring 10y ago
    I usually just multiply the yearly income stream by 20 rather than futzing with rate-of-return calculations. It's way easier for napkin math and gives about the same answer ($10M in this case).
    - arohner 10y ago
      Agreed, I was just showing my work.
arohner 10y ago
Most of the blame for this can be placed on Sarbox (https://en.wikipedia.org/wiki/Sarbanes%E2%80%93Oxley_Act https://en.wikipedia.org/wiki/Sarbanes%E2%80%93Oxley_Act), and other regulations imposed by the SEC. Believe me, if you're a founder, you want to exit as well. The problem is, the cost for being a public company has gone up dramatically, due to increased regulatory compliance costs.
- aanm1988 10y ago
  We are talking about companies worth billions. They can't manage to exist in a more regulated environment? Or is it that they don't want to, in which case the obvious question is why?
  - sokoloff 10y ago
    Why? Sarbox 404 compliance costs hundreds of thousands per year on the low end and low millions in the typical case. It adds basically nothing productive to a non-fraudulent company itself. (Maybe it makes you write down some policies and management controls and audit your compliance to them. Great. At what expense? At what RoI on that expense?) "You're worth billions; you can afford to casually light a couple million on fire every year for an epic Sarbanes-Oxley auditor-led bonfire." That isn't obviously a good thing (or even a true statement) to me.
    - aanm1988 10y ago
      I don't know, I just consider a rather nasty move to hand your employees piles of options with no intention of ever going public and making them worth something.
      - sokoloff 10y ago
        Selling to an existing public company makes the shares liquid just as well, without incurring (much) more Sarbox waste. Look at AppDynamics, Oculus, Supercell, Dollar Shave, and many others.
    - deleted 10y ago
Analemma_ 10y ago
I think this is part of a trend that is occurring everywhere, not just the Valley: the gradual phasing-out of the public corporation [0][1] Companies in every sector, not just technology, are switching to private financing. And why wouldn't they? There's less regulation, and less having to answer to Wall Street and the occasional corporate raider. Since there's more wealth accumulating at the top it's easier than ever to find wealthy individuals to finance you without having to tap the markets. I don't think this is a positive development for society, but under the current circumstances it's probably an unavoidable one. [0]: http://appcgg.co.uk/siteContent/downloads/Causes%20and%20Consequences%20of%20the%20Decline%20of%20the%20Public%20Corporation.pdf http://appcgg.co.uk/siteContent/downloads/Causes%20and%20Con... [1]: https://www.bloomberg.com/view/articles/2015-06-24/where-have-all-the-publicly-traded-companies-gone- https://www.bloomberg.com/view/articles/2015-06-24/where-hav...
- hawkice 10y ago
  If I own a huge amount of a successful company, getting that asset liquid makes a lot of sense. Aside from being to sell at any time, being public means more bidders = probably a better price. I don't see it as a progression so much as two motivations in balance. Sarbox &c make being public less appealing for a company. So, when one force gets stronger, the equilibrium moves.
segmondy 10y ago
How about, the Valley is fucked up and is revealing so by slow exists?
- RickS 10y ago
  That implies an inversion of cause and effect - that the inability to exit is doing damage, and that companies want to go public but are unable. That's a different argument entirely, and doesn't feel reflective of the current fundraising climate, which other comments to the OP discuss in depth.
  - NotSammyHagar 10y ago
    so this article is not about the roads? /s
draw_down 10y ago
I work at a venture-backed company, started by people who already have enough money of their own. VCs don't make up enough share of the board to force them to do anything. Given that the founders already have money, what is their incentive to exit? And if I don't like it as an employee, sure, I could take a job somewhere else. Somewhere else that also likely has its own reasons for taking as long as possible to go public. What if the way it used to be was the anomaly, and now is normal?
huslage 10y ago
VCs aren't playing with their own money. They're playing with funds from many investors. The exits (and writedowns, etc) are controlled upstream of the VC. Right now VC funds are a hedge and the investors don't need a payoff. At some point those investors need action and will require their VC folks to remove them from those investments (see dotcom bust). This isn't unusual and has nothing to do with what Zach mentions in his article.
- bogomipz 10y ago
  >"Right now VC funds are a hedge and the investors don't need a payoff" What are they a hedge against?
sjg007 10y ago
Blaming Sarbox is a complete red herring. The reason we see less IPOs is because the unicorns are overvalued compared to revenues.

85 points by RKoutnik 10y ago

> number of people from GitHub who are in a financial position to become true angels. How much money does one need to make to become a "true angel"?

holman 10y ago
To be an SEC accredited investor, you have to be making 200-300k in the last two years, or a net worth of > $1M. I initially wrote that as "angel", but then changed it to "true angel" to distinguish those who might make a small investment once or twice to friends or family from those who can handle their investments a little more seriously. Or, put another way: as a founder, I feel less bad taking their money because it's not a major component of their net worth (at that point they shouldn't be investing in the first place, but yeah).
maxxxxx 10y ago
What are the conditions for angel investments? I remember reading that some Sun guy saw a Google demo and immediately cut them a check for 100k. Does anybody know what the conditions were?
- ohazi 10y ago
  "some Sun guy" being founder Andy Bechtolsheim, who was already a hundred-millionaire at the time.
  - maxxxxx 10y ago
    I wonder how big his share of the company was. I suppose he didn't do it out of sheer goodness.
    - cpr 10y ago
      Of Google? Apparently enough to make O($billion). (I knew Andy back when he was a grad student designing SUN-1 (Stanford University Network) boards, pre-Sun, etc., when we were sharing his design for the Imagen image processor (TeX project spin-off.) An extraordinary fellow even back then.)
      - maxxxxx 10y ago
        Yes, of Google. Let's say you have the super bright idea and somebody like him gives you 100k what percentage does he want?
arohner 10y ago
Quick back of the envelope: let's define angel as someone who can write 10, $25k checks a year. Let's say they have a yearly lifestyle expense of $250k, so they need to make $500k/year off their wealth. Then, assume they make between 4-8%/year on their investments. so that's $6-12M in the bank.
- ThrustVectoring 10y ago
  I usually just multiply the yearly income stream by 20 rather than futzing with rate-of-return calculations. It's way easier for napkin math and gives about the same answer ($10M in this case).
  - arohner 10y ago
    Agreed, I was just showing my work.

arohner 10y ago

Most of the blame for this can be placed on Sarbox (https://en.wikipedia.org/wiki/Sarbanes%E2%80%93Oxley_Act https://en.wikipedia.org/wiki/Sarbanes%E2%80%93Oxley_Act), and other regulations imposed by the SEC. Believe me, if you're a founder, you want to exit as well. The problem is, the cost for being a public company has gone up dramatically, due to increased regulatory compliance costs.

aanm1988 10y ago
We are talking about companies worth billions. They can't manage to exist in a more regulated environment? Or is it that they don't want to, in which case the obvious question is why?
- sokoloff 10y ago
  Why? Sarbox 404 compliance costs hundreds of thousands per year on the low end and low millions in the typical case. It adds basically nothing productive to a non-fraudulent company itself. (Maybe it makes you write down some policies and management controls and audit your compliance to them. Great. At what expense? At what RoI on that expense?) "You're worth billions; you can afford to casually light a couple million on fire every year for an epic Sarbanes-Oxley auditor-led bonfire." That isn't obviously a good thing (or even a true statement) to me.
  - aanm1988 10y ago
    I don't know, I just consider a rather nasty move to hand your employees piles of options with no intention of ever going public and making them worth something.
    - sokoloff 10y ago
      Selling to an existing public company makes the shares liquid just as well, without incurring (much) more Sarbox waste. Look at AppDynamics, Oculus, Supercell, Dollar Shave, and many others.
  - deleted 10y ago

Analemma_ 10y ago

I think this is part of a trend that is occurring everywhere, not just the Valley: the gradual phasing-out of the public corporation [0][1] Companies in every sector, not just technology, are switching to private financing. And why wouldn't they? There's less regulation, and less having to answer to Wall Street and the occasional corporate raider. Since there's more wealth accumulating at the top it's easier than ever to find wealthy individuals to finance you without having to tap the markets. I don't think this is a positive development for society, but under the current circumstances it's probably an unavoidable one. [0]: http://appcgg.co.uk/siteContent/downloads/Causes%20and%20Consequences%20of%20the%20Decline%20of%20the%20Public%20Corporation.pdf http://appcgg.co.uk/siteContent/downloads/Causes%20and%20Con... [1]: https://www.bloomberg.com/view/articles/2015-06-24/where-have-all-the-publicly-traded-companies-gone- https://www.bloomberg.com/view/articles/2015-06-24/where-hav...

hawkice 10y ago
If I own a huge amount of a successful company, getting that asset liquid makes a lot of sense. Aside from being to sell at any time, being public means more bidders = probably a better price. I don't see it as a progression so much as two motivations in balance. Sarbox &c make being public less appealing for a company. So, when one force gets stronger, the equilibrium moves.

segmondy 10y ago

How about, the Valley is fucked up and is revealing so by slow exists?

RickS 10y ago
That implies an inversion of cause and effect - that the inability to exit is doing damage, and that companies want to go public but are unable. That's a different argument entirely, and doesn't feel reflective of the current fundraising climate, which other comments to the OP discuss in depth.
- NotSammyHagar 10y ago
  so this article is not about the roads? /s

draw_down 10y ago

I work at a venture-backed company, started by people who already have enough money of their own. VCs don't make up enough share of the board to force them to do anything. Given that the founders already have money, what is their incentive to exit? And if I don't like it as an employee, sure, I could take a job somewhere else. Somewhere else that also likely has its own reasons for taking as long as possible to go public. What if the way it used to be was the anomaly, and now is normal?

huslage 10y ago

VCs aren't playing with their own money. They're playing with funds from many investors. The exits (and writedowns, etc) are controlled upstream of the VC. Right now VC funds are a hedge and the investors don't need a payoff. At some point those investors need action and will require their VC folks to remove them from those investments (see dotcom bust). This isn't unusual and has nothing to do with what Zach mentions in his article.

bogomipz 10y ago
>"Right now VC funds are a hedge and the investors don't need a payoff" What are they a hedge against?

sjg007 10y ago

Blaming Sarbox is a complete red herring. The reason we see less IPOs is because the unicorns are overvalued compared to revenues.