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> 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,

> 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.

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.