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I've always loved the transparency and frank writings by Baremetrics. > As part of the structure of the deal, Xenon guaranteed I’d take home $3.7m, regardless

I've always loved the transparency and frank writings by Baremetrics. > As part of the structure of the deal, Xenon guaranteed I’d take home $3.7m, regardless of what came up during due diligence Interesting, I wonder how this is structured - surely there are items that can come up during due diligence that are deal-breakers for Xenon, and surely due-diligence is performed before the contract is closed? > But they were incredibly gracious and both agreed to write off their investment. General Catalyst’s (who had the lion’s share of that $800k) response showed just how classy they are: “We recognize the work that’s gone into the past 7 years and it sounds like this is a great landing spot for the team. We’re grateful for the opportunity to have supported you along the way.” I have no idea how they managed to get the investors to walk with nothing, when the founders walked away with so much.

alextheparrot 6y ago
Good faith decisions go a long way, if they believe in the founder that 800k becomes an investment to be front-of-line for his next company. The economics make sense insofar as that sum isn’t going to move the fund’s returns a whole lot.
- JackFr 6y ago
  > Good faith decisions go a long way, if they believe in the founder that 800k becomes an investment to be front-of-line for his next company. Or its the cost of a lesson to stay away.
  - Aperocky 6y ago
    He did plan to retire so I don't think he would have needed them. It's more of a see you never type of situation.
    - swyx 6y ago
      if you read between the lines he is definitely going to start something again. some people cannot just sit on their hands.
      - ianmobbs 6y ago
        If you read the actual lines, he said he's moving away from software and into the arts
        lollmao 6y ago
        Read again, it says "for a while". Also, he doesn't want to have to do it out of financial necessity.
fourseventy 6y ago
A 4 million dollar exit is a failure for investors. They don't care about returns of a few hundred thousand dollars.
eli 6y ago
Perhaps they simply had enough confidence in the information readily available at the LOI stage. Baremetrics went through a diligence process not long ago so I’m sure that was a lot already prepared. Keep in mind it’s a relatively small purchase price.
franciscomello 6y ago
Through the investors' eyes, "the proceeds from the sale wouldn't even pay for our time and legal fees in reviewing and signing the transaction documents." That's basically it.
- mikepurvis 6y ago
  And they probably have "write it off" as a very well lubricated standard procedure costing them as little as possible.
  - texasbigdata 6y ago
    Edit: this is very snarky and not intended. I know the CEO of a failed GC company and his experience seemed neutral to positive; they’ve also bid on something where I knew the founder and generally came across very well also. Trying to discuss the fact pattern and underlying principles, not the specific people involved. —— This thread comes off as very tone deaf. As a small minority shareholder the fees to receive a $800k wire round to zero. Plus it’s not $800k, it’s $800k plus whatever the preferred instrument yields on top. This CEO seems super slimy and the story doesn’t add up. Much more likely he’s lying for some reason or other.
    - mikepurvis 6y ago
      I don't think anyone's arguing about the wire fees, it's about the tens of thousands of dollars of lawyer time/fees required to hammer out a bespoke contract for what the $800k represents, the terms under which it is changing hands, etc etc. It would be different if you were an angel and that represented more 1% of your total portfolio, but it's just not the case when it's these big VCs.
- treis 6y ago
  They still have to sign the transaction documents. The only difference in the paperwork is a 0 next to their name instead of $800,000. And I guess the onerous work of cashing a check.
- nkingsy 6y ago
gumby 6y ago
> I have no idea how they managed to get the investors to walk with nothing, when the founders walked away with so much. If you're not going to make any money and the amount you'll lose won't piss of your LPs then the goodwill from an entrepreneur you like working with is worth more than the cash.
nebulous1 6y ago
Apparently the investment was all or mostly through a SAFE. https://en.m.wikipedia.org/wiki/Simple_agreement_for_future_equity https://en.m.wikipedia.org/wiki/Simple_agreement_for_future_... I only know what's on that Wikipedia page, but it doesn't look like it's as simple as the investor owning a stake, rather there are events that have to be triggered first which were perhaps very unlikely to be triggered.
- pedalpete 6y ago
  An exit would most likely be a trigger on a SAFE. But then it comes down to what the cap was, and how much the VC would get on their return. I'm wondering if the math worked out that the firm would end up with less than half their investment, it's in their best interest to have a write-off and the founder benefits and potentially comes back to them with a new business later, instead of squeezing the founder for a few dollars.
  - cj 6y ago
    Yes, an acquisition would be a trigger. Typicaly there's 1x preference so $800k is paid back to the investors before the pie is split up. The cap for Baremetrics was $10m. They would end up with more than the initial $800k if they wanted it.
    - texasbigdata 6y ago
      Which implies, given the sudden rushed combination of “I’m bad at management” and “please no diligence” and “let’s go fast, 6 weeks”, that he’s lying about some or all of the story. The buyer won’t say anything, the seller won’t say anything, this blog posts remains as the record whether it’s 100% true or 75% true. Let’s take a specific example. General Catalysts 2001 fund is projected to generate a 11.9% annual return per the public disclosure from Calpers. (1, sort for the name). That same fund is shown as a 7.1% net IRR by the state of New Jersey. (2) The PR is soooo good, per some of the comments in this thread, General Catalyst is totally fine eating a bottom quartile return in a risky asset class (VC), which if you believed was their general behavior would prevent them from fundraising (therefore existing) going forward? Please. Maybe the fact pattern is as stated, but it seems fishy at best. https://www.calpers.ca.gov/page/investments/asset-classes/private-equity/pep-fund-performance/fund&id=4 https://www.calpers.ca.gov/page/investments/asset-classes/pr... https://www.state.nj.us/treasury/doinvest/pdf/AlternativeInvestments/PrivateEquity/General_Catalyst_SIC.pdf https://www.state.nj.us/treasury/doinvest/pdf/AlternativeInv...
theorg 6y ago
Really interesting to get a window in on a deal like this when normally details (like this confusing investor behavior) would usually be totally opaque to anyone looking in. It must be tough though to bear your soul like this and take the heat he's no doubt been getting (including here).
mbesto 6y ago
I do due diligence for a living. > Interesting, I wonder how this is structured - surely there are items that can come up during due diligence that are deal-breakers for Xenon, and surely due-diligence is performed before the contract is closed? The company was inherently transparent with everything. A big part of DD is QoE and there wasn't much to audit there. This was a deal term that reduced any walkaway risk. > I have no idea how they managed to get the investors to walk with nothing, when the founders walked away with so much. Deal flow and it's not worth their time. Be nice to successfully exited founders and they'll speak your praises for eternity. General Catalyst wants $1B exits. If the founder leads to dealflow that brings that in, the $800k will be an easy ROI.
- dman7 6y ago
  Re General Catalyst: precisely what you said and the brand building they just did. Just ctrl+f in this article to see people's reaction to General Catalyst. This will indirectly help them with even more dealflow.
- nraynaud 6y ago
  Can you re-use the due-diligence of the previous failed acquisition?
  - edanm 6y ago
    Not a lawyer or an expert, but I did go through due-diligence once. One of the hard parts of the process, from the point of view of the company, is gathering all required documents/materials. I'm guessing a bunch of that work can be "reused", assuming they kept all the documents organized, which they would've for due-dilligence.
  - mbesto 6y ago
    This situation has come up before. The answer is that it depends. Let's say I do a diligence on behalf of PE Firm A (and the deal falls through) and PE Firm B wants to use that diligence because they're looking to buy the company now. Legally/contractually I cannot let that PE Firm B see the diligence report I created, however I have seen situations where PE Firm B would purchase the report from PE Firm A, or the target would purchase it and give it to PE Firm B.

alextheparrot 6y ago

Good faith decisions go a long way, if they believe in the founder that 800k becomes an investment to be front-of-line for his next company. The economics make sense insofar as that sum isn’t going to move the fund’s returns a whole lot.

JackFr 6y ago
> Good faith decisions go a long way, if they believe in the founder that 800k becomes an investment to be front-of-line for his next company. Or its the cost of a lesson to stay away.
- Aperocky 6y ago
  He did plan to retire so I don't think he would have needed them. It's more of a see you never type of situation.
  - swyx 6y ago
    if you read between the lines he is definitely going to start something again. some people cannot just sit on their hands.
    - ianmobbs 6y ago
      If you read the actual lines, he said he's moving away from software and into the arts
      - lollmao 6y ago
        Read again, it says "for a while". Also, he doesn't want to have to do it out of financial necessity.

fourseventy 6y ago

A 4 million dollar exit is a failure for investors. They don't care about returns of a few hundred thousand dollars.

eli 6y ago

Perhaps they simply had enough confidence in the information readily available at the LOI stage. Baremetrics went through a diligence process not long ago so I’m sure that was a lot already prepared. Keep in mind it’s a relatively small purchase price.

franciscomello 6y ago

Through the investors' eyes, "the proceeds from the sale wouldn't even pay for our time and legal fees in reviewing and signing the transaction documents." That's basically it.

mikepurvis 6y ago
And they probably have "write it off" as a very well lubricated standard procedure costing them as little as possible.
- texasbigdata 6y ago
  Edit: this is very snarky and not intended. I know the CEO of a failed GC company and his experience seemed neutral to positive; they’ve also bid on something where I knew the founder and generally came across very well also. Trying to discuss the fact pattern and underlying principles, not the specific people involved. —— This thread comes off as very tone deaf. As a small minority shareholder the fees to receive a $800k wire round to zero. Plus it’s not $800k, it’s $800k plus whatever the preferred instrument yields on top. This CEO seems super slimy and the story doesn’t add up. Much more likely he’s lying for some reason or other.
  - mikepurvis 6y ago
    I don't think anyone's arguing about the wire fees, it's about the tens of thousands of dollars of lawyer time/fees required to hammer out a bespoke contract for what the $800k represents, the terms under which it is changing hands, etc etc. It would be different if you were an angel and that represented more 1% of your total portfolio, but it's just not the case when it's these big VCs.
treis 6y ago
They still have to sign the transaction documents. The only difference in the paperwork is a 0 next to their name instead of $800,000. And I guess the onerous work of cashing a check.
nkingsy 6y ago

gumby 6y ago

> I have no idea how they managed to get the investors to walk with nothing, when the founders walked away with so much. If you're not going to make any money and the amount you'll lose won't piss of your LPs then the goodwill from an entrepreneur you like working with is worth more than the cash.

nebulous1 6y ago

Apparently the investment was all or mostly through a SAFE. https://en.m.wikipedia.org/wiki/Simple_agreement_for_future_equity https://en.m.wikipedia.org/wiki/Simple_agreement_for_future_... I only know what's on that Wikipedia page, but it doesn't look like it's as simple as the investor owning a stake, rather there are events that have to be triggered first which were perhaps very unlikely to be triggered.

pedalpete 6y ago
An exit would most likely be a trigger on a SAFE. But then it comes down to what the cap was, and how much the VC would get on their return. I'm wondering if the math worked out that the firm would end up with less than half their investment, it's in their best interest to have a write-off and the founder benefits and potentially comes back to them with a new business later, instead of squeezing the founder for a few dollars.
- cj 6y ago
  Yes, an acquisition would be a trigger. Typicaly there's 1x preference so $800k is paid back to the investors before the pie is split up. The cap for Baremetrics was $10m. They would end up with more than the initial $800k if they wanted it.
  - texasbigdata 6y ago
    Which implies, given the sudden rushed combination of “I’m bad at management” and “please no diligence” and “let’s go fast, 6 weeks”, that he’s lying about some or all of the story. The buyer won’t say anything, the seller won’t say anything, this blog posts remains as the record whether it’s 100% true or 75% true. Let’s take a specific example. General Catalysts 2001 fund is projected to generate a 11.9% annual return per the public disclosure from Calpers. (1, sort for the name). That same fund is shown as a 7.1% net IRR by the state of New Jersey. (2) The PR is soooo good, per some of the comments in this thread, General Catalyst is totally fine eating a bottom quartile return in a risky asset class (VC), which if you believed was their general behavior would prevent them from fundraising (therefore existing) going forward? Please. Maybe the fact pattern is as stated, but it seems fishy at best. https://www.calpers.ca.gov/page/investments/asset-classes/private-equity/pep-fund-performance/fund&id=4 https://www.calpers.ca.gov/page/investments/asset-classes/pr... https://www.state.nj.us/treasury/doinvest/pdf/AlternativeInvestments/PrivateEquity/General_Catalyst_SIC.pdf https://www.state.nj.us/treasury/doinvest/pdf/AlternativeInv...

theorg 6y ago

Really interesting to get a window in on a deal like this when normally details (like this confusing investor behavior) would usually be totally opaque to anyone looking in. It must be tough though to bear your soul like this and take the heat he's no doubt been getting (including here).

mbesto 6y ago

I do due diligence for a living. > Interesting, I wonder how this is structured - surely there are items that can come up during due diligence that are deal-breakers for Xenon, and surely due-diligence is performed before the contract is closed? The company was inherently transparent with everything. A big part of DD is QoE and there wasn't much to audit there. This was a deal term that reduced any walkaway risk. > I have no idea how they managed to get the investors to walk with nothing, when the founders walked away with so much. Deal flow and it's not worth their time. Be nice to successfully exited founders and they'll speak your praises for eternity. General Catalyst wants $1B exits. If the founder leads to dealflow that brings that in, the $800k will be an easy ROI.

dman7 6y ago
Re General Catalyst: precisely what you said and the brand building they just did. Just ctrl+f in this article to see people's reaction to General Catalyst. This will indirectly help them with even more dealflow.
nraynaud 6y ago
Can you re-use the due-diligence of the previous failed acquisition?
- edanm 6y ago
  Not a lawyer or an expert, but I did go through due-diligence once. One of the hard parts of the process, from the point of view of the company, is gathering all required documents/materials. I'm guessing a bunch of that work can be "reused", assuming they kept all the documents organized, which they would've for due-dilligence.
- mbesto 6y ago
  This situation has come up before. The answer is that it depends. Let's say I do a diligence on behalf of PE Firm A (and the deal falls through) and PE Firm B wants to use that diligence because they're looking to buy the company now. Legally/contractually I cannot let that PE Firm B see the diligence report I created, however I have seen situations where PE Firm B would purchase the report from PE Firm A, or the target would purchase it and give it to PE Firm B.