3 ms·

We need counter capital - DHH

32 points by dsr12 7y ago

mdorazio 7y ago
> Why isn’t there a market for selling a minority stake of your profitable tech company to people who’d be happy to be paid back in distributions and dividends, rather than capital gains? Off the top of my head, a few reasons: 1) How is an investor supposed to cash out of such a deal in a reasonable amount of time? What's the secondary market for the stake, in other words? 2) There is already a large sector specifically devoted to funding small, profitable businesses: banking. Banks are climbing over each other to give out business loans to companies with solid financials. If you're confident in your business, what's wrong with a loan? I often see this as founders wanting to have their cake and eat it too ("I want money, but not an actual obligation to pay it back"). 3) Despite what founders often think, small businesses, despite profitability, are often high risk investments in the medium term. If you're going to gamble on a risky investment, you typically want the potential upside to be correspondingly high (i.e., the VC model).
- dhagz 7y ago
  With regards to your second question, I think the preference to selling a minority stake over taking out a loan is that the loan is debt, the minority stake is not. A lot of what DHH is arguing for here was only possible for 37Signals/Basecamp because of how they structured and ran their business. He basically bought a seat as a (non-controlling) member of their LLC, and that was really it. So he bought a share of their profits. And Bezos had the option to sell the stake back after 7 years.
  - mdorazio 7y ago
    Right, which is exactly why I put the cake comment - small business owners want the benefits of VC capital (no debt repayment or interest) without the downside (up-or-out constant growth pressure). For the investor, it just doesn't make much sense. Thanks for clarifying how the 37S deal worked, though. Having a structure like a 7 year buyback clause goes a long way toward mitigating my first point.
- larnmar 7y ago
  Furthermore it seems to me that investing in a stable company smaller than a certain size is likely to have too much key man risk. If I invest in a small business on the assumption it’s going to keep yielding me stable dividends for the next thirty years, I’d better be damn sure the people in charge aren’t going to get bored or call in rich at some point. Huge public companies have enough scale and momentum that they can survive the departure of any reasonable set of individuals, but small companies don’t always.
tanseydavid 7y ago
The sentiment in the DHH post really hits the mark as far as describing dynamics of the problem. But, sadly, I think that any given investor can hardly be bothered to think about these things -- at least as it applies to them. IOW -- "sounds good (except for when I am trying to make a return on my money)"
jasode 7y ago
>So why is that kind of deal not available to more founders? Why isn’t there a market for selling a minority stake of your profitable tech company to people who’d be happy to be paid back in distributions and dividends, rather than capital gains? It seems like a glaring gap in the market. [...] There’s got to be a way to make this work. It's not available because no smart investor has found a way to make it work ... yet. I'm not sure we can extrapolate Jeff Bezo's particular motives for investing in Basecamp into a widespread market solution. Back in 2006 when DHH said Bezos made the investment, Bezos was already worth ~4 billion.[0] In other words, being a multi-billionaire allows the luxury of making some investments "for fun" instead of worrying about being fired as a manager of a fund. In my 2 previous posts[1][2], I attempt to explain the logic of why VCs / hedge funds / private equity ... do what they do and why they care about "growth". So, one way to make it work is that you (the royal "you" as in the daring contrarian maverick investor) prove to the world that you can take some money and make it earn 8%+ returns by doing what DHH suggests. Nobody prominent has done that so nobody copies them and therefore, the "market solution" looks non-existent. Does everyone want a new alternative asset class that simply buys minority non-controlling stakes in smaller companies and just takes a slice of the dividends? Let's call it the SmallCoDividendsFund. Ok, show the world how you reliably return 8%+ every year from DHH's strategy and limited partners will be beating down your down door to give you more money! You don't have to write essays evangelizing the alternative investment thesis; instead, just invest real money in SmallCoDividendsFund, get awesome returns, and all the media outlets will provide publicity and encourage copycat investors. [0] https://en.wikipedia.org/wiki/Jeff_Bezos#Wealth https://en.wikipedia.org/wiki/Jeff_Bezos#Wealth [1] https://news.ycombinator.com/item?id=15728480 https://news.ycombinator.com/item?id=15728480 [2] https://news.ycombinator.com/item?id=21365966 https://news.ycombinator.com/item?id=21365966
- toomuchtodo 7y ago
  > Does everyone want a new alternative asset class that simply buys minority non-controlling stakes in smaller companies and just takes a slice of the dividends? Let's call it the SmallCoDividendsFund. Ok, show the world how you reliably return 8%+ every year from DHH's strategy and limited partners will be beating down your down door to give you more money! You don't have to write essays evangelizing the alternative investment thesis; instead, just invest real money in SmallCoDividendsFund, get awesome returns, and all the media outlets will provide publicity and encourage copycat investors. I own startup equity, index funds, real estate, even a stake in someone's poker winnings. I model SaaS company valuations for fun. I would consider myself a sophisticated investor. If you gave me access to a fund that acted sort of like Berkshire Hathaway, where someone went and picked out (with a careful eye) growth tech companies (that have also been derisked and had reached a point where they were profitable and self sufficient) that might not ever go public but would throw off cash, I would be interested in buying into such a fund, even if the shares were somewhat illiquid. You might even call it something catchy, like a "Continuity" fund. This is similar to how investors get exposure to SpaceX through a Fidelity fund that isn't publicly traded. Private markets are the new public markets, apologies to Matt Levine, without all of the hassle of being public (looking at you Tesla! 420 secured). A problem that might be encountered is that more money doesn't necessarily generate more growth (depending on the market space constraints), so LPs beating down your door is a hinderance. You want long term investors who are happy to collect their cut while you're busy executing, not obsessing short term over share value.
draw_down 7y ago
I think the question is whether it's more beneficial to the founder to run one of those extractive $100m VC-funded moonshots, or the kind of business being proposed here. I understand that this would be better for the market, or ecosystem or however you want to put it. But if in the end, the founder can take some millions from a VC-funded effort that didn't quite get where it wanted to go, that will likely remain an attractive option to founders. Again, I understand why we would all want a non-VC-funded Patreon. But for the founder of Patreon, if they end up taking a few million dollars, this option being proposed here would need to best that. And then on the investor side... well, has Bezos continued to make investments similar to his investment in Basecamp? If not, why not?

32 points by dsr12 7y ago

> Why isn’t there a market for selling a minority stake of your profitable tech company to people who’d be happy to be paid back in distributions and dividends, rather than capital gains? Off the top of my head, a few reasons: 1) How is an investor supposed to cash out of such a deal in a reasonable amount of time? What's the secondary market for the stake, in other words? 2) There is already a large sector specifically devoted to funding small, profitable businesses: banking. Banks are climbing over each other to give out business loans to companies with solid financials. If you're confident in your business, what's wrong with a loan? I often see this as founders wanting to have their cake and eat it too ("I want money, but not an actual obligation to pay it back"). 3) Despite what founders often think, small businesses, despite profitability, are often high risk investments in the medium term. If you're going to gamble on a risky investment, you typically want the potential upside to be correspondingly high (i.e., the VC model).

dhagz 7y ago
With regards to your second question, I think the preference to selling a minority stake over taking out a loan is that the loan is debt, the minority stake is not. A lot of what DHH is arguing for here was only possible for 37Signals/Basecamp because of how they structured and ran their business. He basically bought a seat as a (non-controlling) member of their LLC, and that was really it. So he bought a share of their profits. And Bezos had the option to sell the stake back after 7 years.
- mdorazio 7y ago
  Right, which is exactly why I put the cake comment - small business owners want the benefits of VC capital (no debt repayment or interest) without the downside (up-or-out constant growth pressure). For the investor, it just doesn't make much sense. Thanks for clarifying how the 37S deal worked, though. Having a structure like a 7 year buyback clause goes a long way toward mitigating my first point.
larnmar 7y ago
Furthermore it seems to me that investing in a stable company smaller than a certain size is likely to have too much key man risk. If I invest in a small business on the assumption it’s going to keep yielding me stable dividends for the next thirty years, I’d better be damn sure the people in charge aren’t going to get bored or call in rich at some point. Huge public companies have enough scale and momentum that they can survive the departure of any reasonable set of individuals, but small companies don’t always.

tanseydavid 7y ago

The sentiment in the DHH post really hits the mark as far as describing dynamics of the problem. But, sadly, I think that any given investor can hardly be bothered to think about these things -- at least as it applies to them. IOW -- "sounds good (except for when I am trying to make a return on my money)"

jasode 7y ago

>So why is that kind of deal not available to more founders? Why isn’t there a market for selling a minority stake of your profitable tech company to people who’d be happy to be paid back in distributions and dividends, rather than capital gains? It seems like a glaring gap in the market. [...] There’s got to be a way to make this work. It's not available because no smart investor has found a way to make it work ... yet. I'm not sure we can extrapolate Jeff Bezo's particular motives for investing in Basecamp into a widespread market solution. Back in 2006 when DHH said Bezos made the investment, Bezos was already worth ~4 billion.[0] In other words, being a multi-billionaire allows the luxury of making some investments "for fun" instead of worrying about being fired as a manager of a fund. In my 2 previous posts[1][2], I attempt to explain the logic of why VCs / hedge funds / private equity ... do what they do and why they care about "growth". So, one way to make it work is that you (the royal "you" as in the daring contrarian maverick investor) prove to the world that you can take some money and make it earn 8%+ returns by doing what DHH suggests. Nobody prominent has done that so nobody copies them and therefore, the "market solution" looks non-existent. Does everyone want a new alternative asset class that simply buys minority non-controlling stakes in smaller companies and just takes a slice of the dividends? Let's call it the SmallCoDividendsFund. Ok, show the world how you reliably return 8%+ every year from DHH's strategy and limited partners will be beating down your down door to give you more money! You don't have to write essays evangelizing the alternative investment thesis; instead, just invest real money in SmallCoDividendsFund, get awesome returns, and all the media outlets will provide publicity and encourage copycat investors. [0] https://en.wikipedia.org/wiki/Jeff_Bezos#Wealth https://en.wikipedia.org/wiki/Jeff_Bezos#Wealth [1] https://news.ycombinator.com/item?id=15728480 https://news.ycombinator.com/item?id=15728480 [2] https://news.ycombinator.com/item?id=21365966 https://news.ycombinator.com/item?id=21365966

toomuchtodo 7y ago
> Does everyone want a new alternative asset class that simply buys minority non-controlling stakes in smaller companies and just takes a slice of the dividends? Let's call it the SmallCoDividendsFund. Ok, show the world how you reliably return 8%+ every year from DHH's strategy and limited partners will be beating down your down door to give you more money! You don't have to write essays evangelizing the alternative investment thesis; instead, just invest real money in SmallCoDividendsFund, get awesome returns, and all the media outlets will provide publicity and encourage copycat investors. I own startup equity, index funds, real estate, even a stake in someone's poker winnings. I model SaaS company valuations for fun. I would consider myself a sophisticated investor. If you gave me access to a fund that acted sort of like Berkshire Hathaway, where someone went and picked out (with a careful eye) growth tech companies (that have also been derisked and had reached a point where they were profitable and self sufficient) that might not ever go public but would throw off cash, I would be interested in buying into such a fund, even if the shares were somewhat illiquid. You might even call it something catchy, like a "Continuity" fund. This is similar to how investors get exposure to SpaceX through a Fidelity fund that isn't publicly traded. Private markets are the new public markets, apologies to Matt Levine, without all of the hassle of being public (looking at you Tesla! 420 secured). A problem that might be encountered is that more money doesn't necessarily generate more growth (depending on the market space constraints), so LPs beating down your door is a hinderance. You want long term investors who are happy to collect their cut while you're busy executing, not obsessing short term over share value.

draw_down 7y ago

I think the question is whether it's more beneficial to the founder to run one of those extractive $100m VC-funded moonshots, or the kind of business being proposed here. I understand that this would be better for the market, or ecosystem or however you want to put it. But if in the end, the founder can take some millions from a VC-funded effort that didn't quite get where it wanted to go, that will likely remain an attractive option to founders. Again, I understand why we would all want a non-VC-funded Patreon. But for the founder of Patreon, if they end up taking a few million dollars, this option being proposed here would need to best that. And then on the investor side... well, has Bezos continued to make investments similar to his investment in Basecamp? If not, why not?