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We Spent $3.3M Buying Out Investors: Why and How We Did It

443 points by Sujan 8y ago

ig1 8y ago
One of the under-appreciated facets of SaaS economics is that you have to grow your growth constantly, regardless of whether you're bootstrapped or VC funded. If you're steadily adding 100 customers/month you might think thats great because of the accumulating nature of subscription revenue - but actually that's a death sentence. Your churn will grow as your customer base grows. If you've got a 5% monthly churn rate then at 1000 customers you'll lose 50 customers/month. At 2000 customers you'll be losing 100 customers/month - and all of a sudden your 100 new customers a month will net out to zero. After that point you'll start losing customers. From a quick look at Buffer's baremetrics board that's what happened here. You either have to have net negative dollar churn (which is very very hard if you're selling to SMEs) or you have to have an exponential growth rate that means you can escape the churn effect and that almost always require external capital to fuel the growth.
- svantana 8y ago
  > If you've got a 5% monthly churn rate then at 1000 customers you'll lose 50 customers/month. At 2000 customers you'll be losing 100 customers/month - and all of a sudden your 100 new customers a month will net out to zero. After that point you'll start losing customers. Actually, in this scenario the number of users will asymptotically grow towards growth/churn = 100/0.05 = 2000 in perpetuity. So it's not a "death sentence" but will lead to growth stagnation.
  - ig1 8y ago
    Yes. Plenty of SaaS businesses (both bootstrapped and VC financed) end up flatlining. How sustainable this is depends on what space you're in, generally if you're revenue flat you become much more vulnerable to external factors (competitors coming into market, CAC increasing, recession, etc).
    - T2_t2 8y ago
      This is just a weird concept. Sure, not growing is risky in the existential, everything is risky sense. Profitability makes that far less scary. The biggest cost for most SAAS business is salaries. If times get tough, letting people go is always an option, and if a company makes a 30% margin - which $1.5M and 500K profit is almost exactly - that means the non-salary costs likely need to grow by a few thousand percent before there is a profit pinch. I'd take $500K profit and control over loss making and hope. But that's just my personal risk profile.
      - ig1 8y ago
        Revenue can collapse fast in SaaS if you don't have churn under control. Let's say there's a downturn (for economic or competition) reasons and new user acquisition falls to 80/month and churn goes upto 7%. You're now losing 60 customers/month. In three months you'll be down 10% on revenue and your costs will likely be the same. This isn't a VC funded vs bootstrapped issue, it's a fundamental dynamic of the subscription mode - I've seen plenty of VC funded startups struggle with the same challenges. Living on the edge where your best efforts only net out churn is hard. Everything becomes harder from recruiting to sales. It's super demotivational to a sales and marketing team when their best effort essentially nets out to zero.
- IMTDb 8y ago
  The idea is to manage your company so that you generate profits at 2000 customers. At that point you have several options: - Be happy with cash piling up in the bank, and redistribute it to employee/investors/founders. - Lower the churn. - Increase your ARPU. - Use the profits to create anew product/offering that generates new growth.
Kiro 8y ago
I don't understand. Who owns the shares now if they were bought with the company's own money?
- owens99 8y ago
  No one. There are now fewer shares outstanding. ie. before there were 10M shares outstanding which represents all the shares owned by employees founders investors etc, now (as an example, these are not real numbers) there are 8M shares outstanding because the Series A investors no longer have shares those shares are taken off the market by the cash.
flanban 8y ago
Good, for them. Quality of life is overhead VCs will not pay for.
alberth 8y ago
I’m confused. The article says Buffer is doing $4.6M in annual revenue. But Buffers own dashboard says they are doing ~$15m https://buffer.baremetrics.com https://buffer.baremetrics.com
- vm 8y ago
  $4.6M annual revenue was when they raised the Series A in 2014. The baremetrics dashboard is current.
- mmastrac 8y ago
  "At the time of the Series A, we felt on top of the world. We had around $4.6 million in ARR (annual recurring revenue) and were growing revenues around 150 percent per year."
- guan 8y ago
  I understood the $4.6 million figure to be for 2014, when they raised the Series A.
- deleted 8y ago
  [deleted]
- dsl 8y ago
  Look at the "Live Stream" on the lower right. It is all placeholder data. I think its just a demo page for whatever baremetrics is.
  - tommoor 8y ago
    It’s real data, anonymized
    - person_of_color 8y ago
      Any other companies on this site ?
      - sah2ed 8y ago
samspenc 8y ago
I applaud Buffer for sharing these challenges and financial details, as they have done openly in the past (such as with salaries etc).
goseeastarwar 8y ago
This is the oft-cited dream of founders that think they’ll just pay back the VC’s if the relationship isn’t working out. The reality is that no investor in their right mind would take that deal if they had any confidence in a more successful outcome down the line.
- Ceredron 8y ago
  Any reasonable investor would gladly take that money from Buffer if they believed the money would give them better chances of more return elsewhere. That does not mean Buffer is worthless. It's not black and white.
- icelancer 8y ago
  It's reality if you structure the leverage like the CEO did heading into investment rounds. Not everyone can do this and not everyone will prioritize it either.
kayoone 8y ago
Seems like Joel is quite stubborn regarding his values and vision for Buffer, which i believe is a good thing but i can see how it can lead to differences with co-founders and investors once the vision does not align anymore. Felt like it was all over for him when they asked him to eventually step down and from that point he planned to remove them. In the end it also means that their investors most likely lost their confidence in buffer, otherwise no investor would get out in a deal like that.
- dsl 8y ago
  Came to the comments to say the exact same thing: this is basically just a vote of no confidence in management. I can't imagine any employee joining this company from this point forward without demanding all-cash compensation. Management and the investors have effectively set the value of restricted shares at zero.
  - imbusy111 8y ago
    Personally, I think you should treat all stock options/common stock as a lottery ticket with near zero value anyway when joining a startup. In 99% of situations, cash is all you're going to get.
    - dweekly 8y ago
      This is practically reasonable but at most companies everyone's in the same boat (including founders / management) that the big upside is going to be a potential future large liquidity event. In this case, the company seems to have transitioned to being content to operate with low growth and high margins. The right thing for an employee to ask for would actually be profit-sharing. I've heard, for instance, this is how The Mathworks (which makes MATLAB) works; employees get no equity but they don't care because the company is quite profitable and the employee profit sharing is generous.
      - jjeaff 8y ago
        While founders and investors may seem to be in the same boat, they rarely are. Investors are coming from a position of boom or bust to maximize that liquidity event because their success does not hinge solely on your company. If you are a founder, you are all in on it, and unless you are already independently wealthy, or come from money, you would/should most likely optimize for less risk with a healthy upside. For most founders, making 5-10 million on a liquidity event is a life changing event. For most series a and beyond VCs, that's chump change and they will push to put it all on black and let it ride.
rajacombinator 8y ago
Article explains somewhat about the hows but not really the why, other than alluding to “differences in vision.” Maintaining transparency about these things is a bit tricky!
- dsl 8y ago
  In any other situation it would be the CEO leaving. The investors clearly didn't have enough votes to boot him, and took a cashout to avoid it being a total loss.
  - devcpp 8y ago
    Yep, the key figure in this piece is the CEO owning 45% of stock. Hard to beat in any vote.
    - robocat 8y ago
      Surely he now owns relatively more than 45% after "undiluting" his stock. He alludes to that being the case by saying the other minority stockholders have increased their percentage ownership for that reason.
sytelus 8y ago
This is an excellent piece and kudos for being transparent. This is possibly a story of virtually every startup that doesn't quite make it to 10X: You get funding and expand team rapidly but then revenues are not keeping up so you cut down and then wonder where you go from here. For many startups there is a path of being sustainable profitable business that perhaps will never become unicorn but then investors aren't happy with that. I think buying out investors is an excellent idea in this situation and every founder should always think about this possibility when signing the term sheets.
sebleon 8y ago
> $2.5m of $3.5m was for founders and early team [of Series A money] Terms: > Series A class of shares included a protective provision which meant that Buffer was unable to offer liquidity for other shareholders > a return of 9 percent annual interest on their investment at any point So... the founders raised a series A mostly to give themselves liquidity, at the expense of a high interest loan that also threw their early investors under the bus? Well, they definitely achieved their vision of putting together an atypical round. Given their lack of interest in going down the VC-startup path (high growth at all costs, keep raising, aim for IPO, etc), it's unclear what their motivations were to raise a VC round in the first place.
- echan00 8y ago
  Not everybody is perfect. Sometimes goals change and you realize what you wanted before isn't what you want today. Plus, he did mention his cofounders left, so maybe his ex-cofounders wanted the VC route.
  - sebleon 8y ago
    Right on, mentality likely shifted along the way. And yes, everyone makes mistakes, but author shows great character in making things right later on.
- nichochar 8y ago
  Who feels bad for VCs though? 1. they didn't have to sign the sheet 2. It's really refreshing to see founders and people with vision be in control for once, instead of the opposite
  - jjeaff 8y ago
    Stories are legion of VCs throwing their founders under the bus the moment it suits them.
- tptacek 8y ago
  How exactly does offering an immediate return to those early investors throw them under the bus? Buffer put together a deal and their investors took it. For them to "buy" their equity, it had to be "for sale", and it turns out it was. The normal story of what happens when a company takes an investment planning for hypergrowth and that doesn't pan out is that the company "pivots" to some usually-less-promising hypergrowth opportunity and repeats until it dies. The outcome here seems far better for investors, which is presumably why they took advantage of it.
eldavido 8y ago
There's a lot of negativity here. I give Buffer a lot of credit. They seem to deeply internalize the idea of "realistic expectations" and it sounds like the buy-out was a win-win solution where everyone got (mostly) what they wanted. As he says, the investors might not have been happy about it, but at least he has the backbone to resist trying to squeeze growth out of a market where there's none to be had (in the short term). Most CEOs wouldn't be as courageous, preferring to try to spend like crazy in the search for growth, which just torches investor capital even as it adds little long-term value to the business's equity. In short, a bold move by a very honest guy who's in it for the long term.
- TAForObvReasons 8y ago
  The interesting question, if the intention was to stick it out in the long term, is whether raising VC money in the first place was a good idea. Bootstrapping the business would have probably been closer in line with the vision and allowed him to retain control without eventually souring relationships
  - noelwelsh 8y ago
    It's easy to have 20/20 hindsight. The situation was different when Buffer was formed. There weren't as many examples of successful bootstrapped companies and Joel (the founder) was much less experienced. I don't want to say getting VC was a mistake for Buffer because I can see it might have had an upside of connections and advice for what was an inexperienced team, and I think at that time the management team was more bought into the VC model. Buffer has definitely transitioned away from the VC model, though, and buying out the investors now is the right decision IMO. A lot of comments in this thread are quite harsh. I applaud Joel for having the courage to honestly share his experiences so others can learn from them.
    - PopeDotNinja 8y ago
      It's not clear to me why a VC would invest in a business that did not want commit to a liquidity event. Maybe the VC didn't have a better deal to invest in at that time?
syntaxing 8y ago
So investors put $2.3M into the company and got back $3.3M. They essentially have a ROI of 1M over a span of four years. Am I crazy to think that this is a pretty good deal for the investors?! If someone gives me a ~40% return on a crapshoot investments (like how most start ups are), I would be pretty happy!
- tomasien 8y ago
  It's fine for the VCs if they can recycle and re-invest that. Otherwise it's a 0.
  - syntaxing 8y ago
    Can you please elaborate what you mean? The money is only useful to the VC if they can re-invest it elsewhere?
    - maehwasu 8y ago
      If the VC has another investment on its radar that it can't make due to capital being locked up in a stable but not explosive company like buffer, it would be fine taking the money back with some interest. If it doesn't have that, then taking buffer's money doesn't move the needle much.
      - tomasien 8y ago
        accurate
- devcpp 8y ago
  Yes, you are slightly crazy. The whole idea of VCs is that while most startups are indeed crapshoot investments, some will make returns in the 100x. 1.5x is sometimes "good enough" but it won't keep a VC afloat if all of its investments go like that. Even 2x means that you only get to invest twice and fail once. And forget about profits or a living wage.
- glangdale 8y ago
tomasien 8y ago
This is great news - it sounds like Buffer is a great company to work for and own as an operator. I do think they're a cautionary tale for trying to build a VC backed (in mission and capitalization) company the way they did, but VC backed is not and should not be the norm so that's not a big deal.
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dyeje 8y ago
So the same company that gave paycuts to their entire staff (except the CEO and Director of People) 8 months ago, has enough money to buy out their investors? Interesting. Paycut Discussion https://news.ycombinator.com/item?id=15861043 https://news.ycombinator.com/item?id=15861043
- jVinc 8y ago
  Sounds a lot like the CEO gauging the company growth and employee pay in order to build up enough cash to push out investors, get a majority so he could "provide liquidity" for himself. I can't say if this is close to the mark, but if so it makes perfect sense why the other founders left. Being at the head of a ship with a captain trying to slow down so he can line his own pocket is a special kind of hell.
  - StudentStuff 8y ago
    This definitely could be the case, but alternatively there may really not have been a huge amount of increasing month over month growth left in the B2B segment. Sure, you can work your employees harder to get more leads and customers, but that really starts to show through after a few weeks or months, with diminishing results as time goes on.
  - rloomba 8y ago
    I actually had the same thoughts. I'm surprised he's being so transparent about this. I feel for the employees at this company -- just because a company is profitable, doesn't mean that employees are being paid fairly/market rate. I wouldn't be surprised if the founder tries to sell the company in the new few years a discount of the current valuation. With 45% ownership, that's a very large chunk of change.
    - swyx 8y ago
      buffer's salaries are posted here fyi https://docs.google.com/spreadsheets/d/1l3bXAv8JE5RB9siMq36-Ogngks2MT6yQ5gt8YXhUyAg/edit https://docs.google.com/spreadsheets/d/1l3bXAv8JE5RB9siMq36-... make of it what you will but doesnt seem low
richardlblair 8y ago
When you give someone a pile of money you will always wonder if you get that money back, let alone see a return. Returning anything to investors should be seen as a positive. If you disagree, go give someone 6+ figures and have them lose it. You're opinion will change rather quick.
- jgh 8y ago
  otoh me giving someone 6 figures and having them lose it is much more meaningful to me because: 1. It's my money, not money someone has given to me to invest 2. It's a pretty significant part of my net worth. If I was worth $100 million and gave someone $100k and they spent it all without any return, I doubt I'd lose much sleep over it. If I do that now it would be very hard to get over. I'm not really disagreeing with you here, but the emotions at play are different I think.
rdlecler1 8y ago
If I remember correctly, these guys were proud and very public about building Buffer as a lifestyle business as were the VCs that backed them. At the end the VCs would came out with a negative IRR which was not unexpected—a lesson into why VCs don’t invest in lifestyle businesses.
- wslack 8y ago
  I find it strange that being this profitable is labeled a "lifestyle business." The hypergrowth/unicorn exit isn't a healthy outcome for many businesses.
  - olllll 8y ago
    Because you aren't building a business. You are creating an asset you can sell. Businesses are great and I don't think most people are trying to talk down about them. But VCs are trying to build an asset they can sell. Because when you sell an company that has a high rate of projected growth you get all that money now as opposed to waiting 20 years. There are plenty of investments that pay out solid returns for 20+ years. VC type funds are attractive in no small part because they pay out in a shorter period of time. It really has little to do with building a business outside of the fact that the asset happens to be a company.
    - rdlecler1 8y ago
      That’s not the VC game. These are high risk companies that may never generate a profit. Because the failure rate is so high you need a few outsized winners. Value investing where 95% of your portfolio is generating a 10% IRR doesn’t work. Investor invest in VCs to make money. Investing in companies with VC risk profiles and lifestyle business return profiles doesn’t work.
aj7 8y ago
I’d love to have been a fly on the wall where it was accomplished that the VC’s were pushed out. ‘Cause that’s what happened.
jessep 8y ago
I'm not confused as to why he wants to buy back control of the company, but I'm confused why he wants to be so profitable. Does he say somewhere why he isn't reinvesting more of the profits in the company? Why not be a little closer to the line?
lxe 8y ago
> creating a unique culture with a fully remote team and high levels of transparency, it now started to feel like we had to choose between those things. It was suggested that some of the fundamentals that I had come to value could be removed to create a productivity environment that would increase the growth rate. I refused to compromise on the transparency and remote work aspects of our culture, so we started to explore slower growth goals In what way did "remote culture" specifically negatively affect productivity? How was this measured against the more traditional way of working? Or was this just a perception/bias issue, like "oh hmm the team is remote, so I guess that can be blamed on slow growth"
wgyn 8y ago
> Collaborative Fund suggested that we account for these various paths within the structure of the Series A funding. We added downside protection for the Series A investors, in the form of a right to claim a return of 9 percent annual interest on their investment at any point starting five years after the initial investment. At the time, I didn’t appreciate how important this clause would become. Even our legal counsel commented that this was not something he saw too often. The wording suggests that this was a decision he regrets / a feature of the agreement he didn't think was important at the time. Is that the case? Would it have been less onerous with a lower rate? In general, I'm curious if / how they would have redone this decision.
jaequery 8y ago
This looks to me like a no brainer move! Way to go and congrats on the buyout!
mrhappyunhappy 8y ago
Does anyone even use buffer? I remember it gaining traction several years back but that's about it.
- icelancer 8y ago
  The data is open here: https://buffer.baremetrics.com/ https://buffer.baremetrics.com/ As an anecdote, we are happy paying customers and have been for some time.
  - 1123581321 8y ago
    Interesting to see number of accounts decline, but revenue per account and total revenue increasing. Assuming social networks got better over time at providing account management features at the same time Buffer got better to selling to agencies and large companies.
Danieru 8y ago
Woah, this has got to be the most positive recruiting message ever. It is clear buffer prioritizes the right things and executes then achieves those goals. Impressive.
AYBABTME 8y ago
The way this company operates is inspiring, but as a recent churned customer, the resulting product is lacking. The web UI mixes up order of operations when dragging posts around and when I looked at implementing an API client for their service, I quickly realized why the UI had out-of-order problems. The API doesn't respects any sort of contract, changes types of responses in inconsistent ways and is basically impossible to implement in a typesafe way. The API used by the UI seems to rely on ordering of events received on their backend, but these events don't seem to be commutative, and each UI update seems to be its own API call... All this to say, I appreciate the goals of Joel in building a strong culture and strongly support this, but the product itself isn't that great to use as a customer, which is probably why growth isn't what VCs want. And I'm just hypothesizing that a hard look at the tech stack could maybe help.
nvrmor 8y ago
He's trying to pass this off as a startup growth post, but it's pretty much a direct response to calm the VCs who made Buffer happen in the first place.
sytse 8y ago
"Whereas in the past we’d “had it all” and achieved growth alongside creating a unique culture with a fully remote team and high levels of transparency, it now started to feel like we had to choose between those things. It was suggested that some of the fundamentals that I had come to value could be removed to create a productivity environment that would increase the growth rate. I refused to compromise on the transparency and remote work aspects of our culture, so we started to explore slower growth goals, and what that would mean for the future of Buffer." I respect the commitment of Joel to all remote and transparency, he's an inspiration. Personally I think that high growth can be compatible with all remote and transparency. For example both us at GitLab and InVision are all remote with high growth rates.

443 points by Sujan 8y ago

ig1 8y ago

One of the under-appreciated facets of SaaS economics is that you have to grow your growth constantly, regardless of whether you're bootstrapped or VC funded. If you're steadily adding 100 customers/month you might think thats great because of the accumulating nature of subscription revenue - but actually that's a death sentence. Your churn will grow as your customer base grows. If you've got a 5% monthly churn rate then at 1000 customers you'll lose 50 customers/month. At 2000 customers you'll be losing 100 customers/month - and all of a sudden your 100 new customers a month will net out to zero. After that point you'll start losing customers. From a quick look at Buffer's baremetrics board that's what happened here. You either have to have net negative dollar churn (which is very very hard if you're selling to SMEs) or you have to have an exponential growth rate that means you can escape the churn effect and that almost always require external capital to fuel the growth.

svantana 8y ago
> If you've got a 5% monthly churn rate then at 1000 customers you'll lose 50 customers/month. At 2000 customers you'll be losing 100 customers/month - and all of a sudden your 100 new customers a month will net out to zero. After that point you'll start losing customers. Actually, in this scenario the number of users will asymptotically grow towards growth/churn = 100/0.05 = 2000 in perpetuity. So it's not a "death sentence" but will lead to growth stagnation.
- ig1 8y ago
  Yes. Plenty of SaaS businesses (both bootstrapped and VC financed) end up flatlining. How sustainable this is depends on what space you're in, generally if you're revenue flat you become much more vulnerable to external factors (competitors coming into market, CAC increasing, recession, etc).
  - T2_t2 8y ago
    This is just a weird concept. Sure, not growing is risky in the existential, everything is risky sense. Profitability makes that far less scary. The biggest cost for most SAAS business is salaries. If times get tough, letting people go is always an option, and if a company makes a 30% margin - which $1.5M and 500K profit is almost exactly - that means the non-salary costs likely need to grow by a few thousand percent before there is a profit pinch. I'd take $500K profit and control over loss making and hope. But that's just my personal risk profile.
    - ig1 8y ago
      Revenue can collapse fast in SaaS if you don't have churn under control. Let's say there's a downturn (for economic or competition) reasons and new user acquisition falls to 80/month and churn goes upto 7%. You're now losing 60 customers/month. In three months you'll be down 10% on revenue and your costs will likely be the same. This isn't a VC funded vs bootstrapped issue, it's a fundamental dynamic of the subscription mode - I've seen plenty of VC funded startups struggle with the same challenges. Living on the edge where your best efforts only net out churn is hard. Everything becomes harder from recruiting to sales. It's super demotivational to a sales and marketing team when their best effort essentially nets out to zero.
IMTDb 8y ago
The idea is to manage your company so that you generate profits at 2000 customers. At that point you have several options: - Be happy with cash piling up in the bank, and redistribute it to employee/investors/founders. - Lower the churn. - Increase your ARPU. - Use the profits to create anew product/offering that generates new growth.

Kiro 8y ago

I don't understand. Who owns the shares now if they were bought with the company's own money?

owens99 8y ago
No one. There are now fewer shares outstanding. ie. before there were 10M shares outstanding which represents all the shares owned by employees founders investors etc, now (as an example, these are not real numbers) there are 8M shares outstanding because the Series A investors no longer have shares those shares are taken off the market by the cash.

flanban 8y ago

Good, for them. Quality of life is overhead VCs will not pay for.

alberth 8y ago

I’m confused. The article says Buffer is doing $4.6M in annual revenue. But Buffers own dashboard says they are doing ~$15m https://buffer.baremetrics.com https://buffer.baremetrics.com

vm 8y ago
$4.6M annual revenue was when they raised the Series A in 2014. The baremetrics dashboard is current.
mmastrac 8y ago
"At the time of the Series A, we felt on top of the world. We had around $4.6 million in ARR (annual recurring revenue) and were growing revenues around 150 percent per year."
guan 8y ago
I understood the $4.6 million figure to be for 2014, when they raised the Series A.
deleted 8y ago
[deleted]
dsl 8y ago
Look at the "Live Stream" on the lower right. It is all placeholder data. I think its just a demo page for whatever baremetrics is.
- tommoor 8y ago
  It’s real data, anonymized
  - person_of_color 8y ago
    Any other companies on this site ?
    - sah2ed 8y ago

samspenc 8y ago

I applaud Buffer for sharing these challenges and financial details, as they have done openly in the past (such as with salaries etc).

goseeastarwar 8y ago

This is the oft-cited dream of founders that think they’ll just pay back the VC’s if the relationship isn’t working out. The reality is that no investor in their right mind would take that deal if they had any confidence in a more successful outcome down the line.

Ceredron 8y ago
Any reasonable investor would gladly take that money from Buffer if they believed the money would give them better chances of more return elsewhere. That does not mean Buffer is worthless. It's not black and white.
icelancer 8y ago
It's reality if you structure the leverage like the CEO did heading into investment rounds. Not everyone can do this and not everyone will prioritize it either.

kayoone 8y ago

Seems like Joel is quite stubborn regarding his values and vision for Buffer, which i believe is a good thing but i can see how it can lead to differences with co-founders and investors once the vision does not align anymore. Felt like it was all over for him when they asked him to eventually step down and from that point he planned to remove them. In the end it also means that their investors most likely lost their confidence in buffer, otherwise no investor would get out in a deal like that.

dsl 8y ago
Came to the comments to say the exact same thing: this is basically just a vote of no confidence in management. I can't imagine any employee joining this company from this point forward without demanding all-cash compensation. Management and the investors have effectively set the value of restricted shares at zero.
- imbusy111 8y ago
  Personally, I think you should treat all stock options/common stock as a lottery ticket with near zero value anyway when joining a startup. In 99% of situations, cash is all you're going to get.
  - dweekly 8y ago
    This is practically reasonable but at most companies everyone's in the same boat (including founders / management) that the big upside is going to be a potential future large liquidity event. In this case, the company seems to have transitioned to being content to operate with low growth and high margins. The right thing for an employee to ask for would actually be profit-sharing. I've heard, for instance, this is how The Mathworks (which makes MATLAB) works; employees get no equity but they don't care because the company is quite profitable and the employee profit sharing is generous.
    - jjeaff 8y ago
      While founders and investors may seem to be in the same boat, they rarely are. Investors are coming from a position of boom or bust to maximize that liquidity event because their success does not hinge solely on your company. If you are a founder, you are all in on it, and unless you are already independently wealthy, or come from money, you would/should most likely optimize for less risk with a healthy upside. For most founders, making 5-10 million on a liquidity event is a life changing event. For most series a and beyond VCs, that's chump change and they will push to put it all on black and let it ride.

rajacombinator 8y ago

Article explains somewhat about the hows but not really the why, other than alluding to “differences in vision.” Maintaining transparency about these things is a bit tricky!

dsl 8y ago
In any other situation it would be the CEO leaving. The investors clearly didn't have enough votes to boot him, and took a cashout to avoid it being a total loss.
- devcpp 8y ago
  Yep, the key figure in this piece is the CEO owning 45% of stock. Hard to beat in any vote.
  - robocat 8y ago
    Surely he now owns relatively more than 45% after "undiluting" his stock. He alludes to that being the case by saying the other minority stockholders have increased their percentage ownership for that reason.

sytelus 8y ago

This is an excellent piece and kudos for being transparent. This is possibly a story of virtually every startup that doesn't quite make it to 10X: You get funding and expand team rapidly but then revenues are not keeping up so you cut down and then wonder where you go from here. For many startups there is a path of being sustainable profitable business that perhaps will never become unicorn but then investors aren't happy with that. I think buying out investors is an excellent idea in this situation and every founder should always think about this possibility when signing the term sheets.

sebleon 8y ago

> $2.5m of $3.5m was for founders and early team [of Series A money] Terms: > Series A class of shares included a protective provision which meant that Buffer was unable to offer liquidity for other shareholders > a return of 9 percent annual interest on their investment at any point So... the founders raised a series A mostly to give themselves liquidity, at the expense of a high interest loan that also threw their early investors under the bus? Well, they definitely achieved their vision of putting together an atypical round. Given their lack of interest in going down the VC-startup path (high growth at all costs, keep raising, aim for IPO, etc), it's unclear what their motivations were to raise a VC round in the first place.

echan00 8y ago
Not everybody is perfect. Sometimes goals change and you realize what you wanted before isn't what you want today. Plus, he did mention his cofounders left, so maybe his ex-cofounders wanted the VC route.
- sebleon 8y ago
  Right on, mentality likely shifted along the way. And yes, everyone makes mistakes, but author shows great character in making things right later on.
nichochar 8y ago
Who feels bad for VCs though? 1. they didn't have to sign the sheet 2. It's really refreshing to see founders and people with vision be in control for once, instead of the opposite
- jjeaff 8y ago
  Stories are legion of VCs throwing their founders under the bus the moment it suits them.
tptacek 8y ago
How exactly does offering an immediate return to those early investors throw them under the bus? Buffer put together a deal and their investors took it. For them to "buy" their equity, it had to be "for sale", and it turns out it was. The normal story of what happens when a company takes an investment planning for hypergrowth and that doesn't pan out is that the company "pivots" to some usually-less-promising hypergrowth opportunity and repeats until it dies. The outcome here seems far better for investors, which is presumably why they took advantage of it.

eldavido 8y ago

There's a lot of negativity here. I give Buffer a lot of credit. They seem to deeply internalize the idea of "realistic expectations" and it sounds like the buy-out was a win-win solution where everyone got (mostly) what they wanted. As he says, the investors might not have been happy about it, but at least he has the backbone to resist trying to squeeze growth out of a market where there's none to be had (in the short term). Most CEOs wouldn't be as courageous, preferring to try to spend like crazy in the search for growth, which just torches investor capital even as it adds little long-term value to the business's equity. In short, a bold move by a very honest guy who's in it for the long term.

TAForObvReasons 8y ago
The interesting question, if the intention was to stick it out in the long term, is whether raising VC money in the first place was a good idea. Bootstrapping the business would have probably been closer in line with the vision and allowed him to retain control without eventually souring relationships
- noelwelsh 8y ago
  It's easy to have 20/20 hindsight. The situation was different when Buffer was formed. There weren't as many examples of successful bootstrapped companies and Joel (the founder) was much less experienced. I don't want to say getting VC was a mistake for Buffer because I can see it might have had an upside of connections and advice for what was an inexperienced team, and I think at that time the management team was more bought into the VC model. Buffer has definitely transitioned away from the VC model, though, and buying out the investors now is the right decision IMO. A lot of comments in this thread are quite harsh. I applaud Joel for having the courage to honestly share his experiences so others can learn from them.
  - PopeDotNinja 8y ago
    It's not clear to me why a VC would invest in a business that did not want commit to a liquidity event. Maybe the VC didn't have a better deal to invest in at that time?

syntaxing 8y ago

So investors put $2.3M into the company and got back $3.3M. They essentially have a ROI of 1M over a span of four years. Am I crazy to think that this is a pretty good deal for the investors?! If someone gives me a ~40% return on a crapshoot investments (like how most start ups are), I would be pretty happy!

tomasien 8y ago
It's fine for the VCs if they can recycle and re-invest that. Otherwise it's a 0.
- syntaxing 8y ago
  Can you please elaborate what you mean? The money is only useful to the VC if they can re-invest it elsewhere?
  - maehwasu 8y ago
    If the VC has another investment on its radar that it can't make due to capital being locked up in a stable but not explosive company like buffer, it would be fine taking the money back with some interest. If it doesn't have that, then taking buffer's money doesn't move the needle much.
    - tomasien 8y ago
      accurate
devcpp 8y ago
Yes, you are slightly crazy. The whole idea of VCs is that while most startups are indeed crapshoot investments, some will make returns in the 100x. 1.5x is sometimes "good enough" but it won't keep a VC afloat if all of its investments go like that. Even 2x means that you only get to invest twice and fail once. And forget about profits or a living wage.
glangdale 8y ago

tomasien 8y ago

This is great news - it sounds like Buffer is a great company to work for and own as an operator. I do think they're a cautionary tale for trying to build a VC backed (in mission and capitalization) company the way they did, but VC backed is not and should not be the norm so that's not a big deal.

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dyeje 8y ago

So the same company that gave paycuts to their entire staff (except the CEO and Director of People) 8 months ago, has enough money to buy out their investors? Interesting. Paycut Discussion https://news.ycombinator.com/item?id=15861043 https://news.ycombinator.com/item?id=15861043

jVinc 8y ago
Sounds a lot like the CEO gauging the company growth and employee pay in order to build up enough cash to push out investors, get a majority so he could "provide liquidity" for himself. I can't say if this is close to the mark, but if so it makes perfect sense why the other founders left. Being at the head of a ship with a captain trying to slow down so he can line his own pocket is a special kind of hell.
- StudentStuff 8y ago
  This definitely could be the case, but alternatively there may really not have been a huge amount of increasing month over month growth left in the B2B segment. Sure, you can work your employees harder to get more leads and customers, but that really starts to show through after a few weeks or months, with diminishing results as time goes on.
- rloomba 8y ago
  I actually had the same thoughts. I'm surprised he's being so transparent about this. I feel for the employees at this company -- just because a company is profitable, doesn't mean that employees are being paid fairly/market rate. I wouldn't be surprised if the founder tries to sell the company in the new few years a discount of the current valuation. With 45% ownership, that's a very large chunk of change.
  - swyx 8y ago
    buffer's salaries are posted here fyi https://docs.google.com/spreadsheets/d/1l3bXAv8JE5RB9siMq36-Ogngks2MT6yQ5gt8YXhUyAg/edit https://docs.google.com/spreadsheets/d/1l3bXAv8JE5RB9siMq36-... make of it what you will but doesnt seem low

richardlblair 8y ago

When you give someone a pile of money you will always wonder if you get that money back, let alone see a return. Returning anything to investors should be seen as a positive. If you disagree, go give someone 6+ figures and have them lose it. You're opinion will change rather quick.

jgh 8y ago
otoh me giving someone 6 figures and having them lose it is much more meaningful to me because: 1. It's my money, not money someone has given to me to invest 2. It's a pretty significant part of my net worth. If I was worth $100 million and gave someone $100k and they spent it all without any return, I doubt I'd lose much sleep over it. If I do that now it would be very hard to get over. I'm not really disagreeing with you here, but the emotions at play are different I think.

rdlecler1 8y ago

If I remember correctly, these guys were proud and very public about building Buffer as a lifestyle business as were the VCs that backed them. At the end the VCs would came out with a negative IRR which was not unexpected—a lesson into why VCs don’t invest in lifestyle businesses.

wslack 8y ago
I find it strange that being this profitable is labeled a "lifestyle business." The hypergrowth/unicorn exit isn't a healthy outcome for many businesses.
- olllll 8y ago
  Because you aren't building a business. You are creating an asset you can sell. Businesses are great and I don't think most people are trying to talk down about them. But VCs are trying to build an asset they can sell. Because when you sell an company that has a high rate of projected growth you get all that money now as opposed to waiting 20 years. There are plenty of investments that pay out solid returns for 20+ years. VC type funds are attractive in no small part because they pay out in a shorter period of time. It really has little to do with building a business outside of the fact that the asset happens to be a company.
  - rdlecler1 8y ago
    That’s not the VC game. These are high risk companies that may never generate a profit. Because the failure rate is so high you need a few outsized winners. Value investing where 95% of your portfolio is generating a 10% IRR doesn’t work. Investor invest in VCs to make money. Investing in companies with VC risk profiles and lifestyle business return profiles doesn’t work.

aj7 8y ago

I’d love to have been a fly on the wall where it was accomplished that the VC’s were pushed out. ‘Cause that’s what happened.

jessep 8y ago

I'm not confused as to why he wants to buy back control of the company, but I'm confused why he wants to be so profitable. Does he say somewhere why he isn't reinvesting more of the profits in the company? Why not be a little closer to the line?

lxe 8y ago

> creating a unique culture with a fully remote team and high levels of transparency, it now started to feel like we had to choose between those things. It was suggested that some of the fundamentals that I had come to value could be removed to create a productivity environment that would increase the growth rate. I refused to compromise on the transparency and remote work aspects of our culture, so we started to explore slower growth goals In what way did "remote culture" specifically negatively affect productivity? How was this measured against the more traditional way of working? Or was this just a perception/bias issue, like "oh hmm the team is remote, so I guess that can be blamed on slow growth"

wgyn 8y ago

> Collaborative Fund suggested that we account for these various paths within the structure of the Series A funding. We added downside protection for the Series A investors, in the form of a right to claim a return of 9 percent annual interest on their investment at any point starting five years after the initial investment. At the time, I didn’t appreciate how important this clause would become. Even our legal counsel commented that this was not something he saw too often. The wording suggests that this was a decision he regrets / a feature of the agreement he didn't think was important at the time. Is that the case? Would it have been less onerous with a lower rate? In general, I'm curious if / how they would have redone this decision.

jaequery 8y ago

This looks to me like a no brainer move! Way to go and congrats on the buyout!

mrhappyunhappy 8y ago

Does anyone even use buffer? I remember it gaining traction several years back but that's about it.

icelancer 8y ago
The data is open here: https://buffer.baremetrics.com/ https://buffer.baremetrics.com/ As an anecdote, we are happy paying customers and have been for some time.
- 1123581321 8y ago
  Interesting to see number of accounts decline, but revenue per account and total revenue increasing. Assuming social networks got better over time at providing account management features at the same time Buffer got better to selling to agencies and large companies.

Danieru 8y ago

Woah, this has got to be the most positive recruiting message ever. It is clear buffer prioritizes the right things and executes then achieves those goals. Impressive.

AYBABTME 8y ago

The way this company operates is inspiring, but as a recent churned customer, the resulting product is lacking. The web UI mixes up order of operations when dragging posts around and when I looked at implementing an API client for their service, I quickly realized why the UI had out-of-order problems. The API doesn't respects any sort of contract, changes types of responses in inconsistent ways and is basically impossible to implement in a typesafe way. The API used by the UI seems to rely on ordering of events received on their backend, but these events don't seem to be commutative, and each UI update seems to be its own API call... All this to say, I appreciate the goals of Joel in building a strong culture and strongly support this, but the product itself isn't that great to use as a customer, which is probably why growth isn't what VCs want. And I'm just hypothesizing that a hard look at the tech stack could maybe help.

nvrmor 8y ago

He's trying to pass this off as a startup growth post, but it's pretty much a direct response to calm the VCs who made Buffer happen in the first place.

sytse 8y ago

"Whereas in the past we’d “had it all” and achieved growth alongside creating a unique culture with a fully remote team and high levels of transparency, it now started to feel like we had to choose between those things. It was suggested that some of the fundamentals that I had come to value could be removed to create a productivity environment that would increase the growth rate. I refused to compromise on the transparency and remote work aspects of our culture, so we started to explore slower growth goals, and what that would mean for the future of Buffer." I respect the commitment of Joel to all remote and transparency, he's an inspiration. Personally I think that high growth can be compatible with all remote and transparency. For example both us at GitLab and InVision are all remote with high growth rates.