6 ms·

I feel the same way, especially in regards to everyone opining on the investors taking a markdown. For context, it was General Catalyst and Bessemer. - General

I feel the same way, especially in regards to everyone opining on the investors taking a markdown. For context, it was General Catalyst and Bessemer. - General Catalyst: $2.5B+ in Assets Under Management - Bessemer: $4B in Assets Under Management DISCLAIMER: If you take venture capital, you should obviously always do it as a responsible fiduciary of both the company and the capital. With that said, I'm positive both of those firms will be fine. They're looking for 100x returns, a $400k write-down from a seed investment is nothing. If anything, it's worth doing that on the off-chance Josh goes on to create the next Uber or Salesforce and they want to invest again. SV runs on relationships.

georgeecollins 6y ago
I don't want to make any moral judgements against people making business decisions, in particular this founder for making the best deal possible. Good for him. However, no matter how much money General Catalyst or Bessemer made last year, I would not want to invest with them going forward. I get that this is only money on the margins, and they get a benefit from a write off. Still, how hard would they have had to fight to get some of their money back? It sends a disturbing signal to me to write the whole thing off. Someone will reply: "But they made $10b last year! You don't understand the business." And I am sure I don't. But the world is full of people who made a lot of money or were in the process of making a lot of money and then get careless. Or reply: "It's part of the model! If they don't get 10x-100x they just want to write it off as fast as possible. That's what there investors want." Sure, but if you are careless people will take advantage of you. Also, I just don't buy that all institutional investors that back VCs are that savvy. A lot of them are just following a trend and over funding an asset class. Tell me I am wrong. I am no expert.
- loceng 6y ago
  There's the time-opportunity cost - they can't afford to be perfectionists and squeeze 100% of what they potentially could from a situation, which is arguably undue stress as well - and will cause further externalized losses in what their other focuses are.
- feral 6y ago
  I thought the VC was generous here. But there's some benefit to being generous. How many future founders will read that blog? If you were a founder, would it influence your choice of investor, to know if things don't work out, they will be magnanimous, rather than squeeze?
  - dasudasu 6y ago
    I doubt they knew he would make a blog post with this many details. But still, good will can get around through word of mouth.
    - ticmasta 6y ago
      He mentions his VCs have always been available and engaged, so I think it's reasonable that they knew he would be open and public about the deal; he always has in the past.
    - andygcook 6y ago
      Baremetrics and Josh are known for their hyper transparent blog posts. They even publicly share all their revenue metrics. It’s highly likely the firms knew Josh would write a blog post about the exact exit terms.
  - RedditKon 6y ago
    Exactly this. It isn't worth it for either of those funds to play hardball over $400k when hundreds of founders will read that, and will ultimately decide if they want the fund on their cap table for the next Uber/Lyft/Data Dog/Airbnb/etc. I said it before, but it's worth repeating - SV runs on relationships.
- gabereiser 6y ago
  Ideally all investors want their returns. In this case, it’s a drop in the bucket for their portfolio and they are incentivized for investing in seed rounds (with the hopes of it being an Uber or a Salesforce). It’s quite common. Trend investing is happening too, FOMO, all of that, but their goal is to take $400k seed and turn it into a $40m exit. If you diversify enough it will happen, not if.
- CosmicShadow 6y ago
  If you make a million dollars an hour, how much time is justified in trying to capture a few hundred thousand dollars when you have limited resources? Oh, you also have to step on the face of a future golden boy to reach it on the shelf. You also have to divert your legal team of several $1000+/hr staff from million & billion dollar cases to this for a month or two. You then have to tell your investors that actually allow you to live that you made a really smart decision and returned them $50 instead of $500MM. To any normal person or small business, that's a lot of money to be captured and ignoring it is mind boggling, but again for them it's not worth the time and effort. The relationship or good will is worth a lot more, not to mention whatever write off stuff they get and the opportunity cost of their team. There is nothing careless about this. If you wouldn't work with a VC because they aren't a penny pincher then man you are really going to be in for a reaaaalll treat!
  - RedditKon 6y ago
    Don't forget the $500/hr crisis management firm when the story hits TechCrunch. "Billion dollar VC firm destroys founder's 7-year path to acquisition".
- nrmitchi 6y ago
  In this situation I think General Catalyst and Bessemer got more than 800k worth of good-will by not blocking this deal that they knew wouldn't get them the results they were originally looking for. If a single founder decides to accept their money based on this action, and then has a VC-style outcome, they've made a good decision.
- aaisola 6y ago
  It has to do with supporting the winners that are actually going to return money to your investors. They are refusing to fall prey to sunk cost fallacy, which is a good thing.
- hedgehog 6y ago
  Four parts: 1) the bulk of returns are the few best performing investments, 2) there are material fixed costs in carrying an investment (partner attention, conflict management, admin overhead), 3) it's a way to get proprietary insight into a new space, and 4) there's value in founder relationships (deal referrals, recruiting). Large funds write small checks to get an early view into promising companies that are too early for bigger investments. They are aware that many won't out but they believe they are better served getting in early & divesting most vs waiting and having less information or access.
  - bigiain 6y ago
    Also, it just occurs to me - I wonder if Josh and Baremetrics have _already_ helped these the VC firms our with enough deal referrals, contact, networking, and deal closing ammunition (and I suspect not, but given this is SV, data on other startups that was not publicly available but that Baremetrics was collecting?) - that made it an easy choice for them to say "Sure! We're totally happy with everything you've done for us overt the last 7 years already. Thanks man!"
- RedditKon 6y ago
  You don't win 100x-ers by squeezing founders over tiny exits. VC funds have a duty to their LP base to maximize returns, but I would argue the good will generated by moves like this are what protect their ability to get into "hot" companies and thus protect those returns. Pursuing your strategy would likely harm the fund's reputation and their ability to return LP capital in the future. Also - a point of nuance. VCs are not in the habit of writing off everything, that would be a false takeaway from this article. If the amount invested was bigger or the exit was more like 2x or 3x for the VCs, your points of criticism would be more valid.
  - jariel 6y ago
    "squeezing founders over tiny exits." They are not 'squeezing' remotely. Otherwise, there would be not such thing as 1x participating in the deal in the first place. Getting your $800K back while the founder gets $3M is not 'squeezing' it's literally just a transaction. Also - a founder negotiating a price outside the valuation of the shares is getting very close to illegal (Conrad Black went to jail for this). I think the founder was actually lucky that the funds simply didn't care.
    - kjksf 6y ago
      Reading between the lines, this deal wouldn't happen if investors didn't agree to write off their investment. So their choice was between nothing today or nothing later. Tax-wise it was probably better to write it off now than carry a zombie investment into the future. Like you said: their investment was a transaction and they made rational choice. It's the emotional "we can't loose money" or "how dare the founder sell without us getting a cut" that would be a worse choice.
      - jariel 6y ago
        Either way he's definitely ended his entrepreneurial career. Nobody is going to put a dime into a guy who does that - the risk that he'd do something much grander when the stakes are much higher is obviously there. He should have sold the company, honoured the terms of his agreement.
- smnscu 6y ago
  Just another data point. While I would probably never pursue VC funds, their move resonated with me and now I have the names General Catalyst and Bessemer seared into my brain (not to mention sharing the story to my friends and other people with startups). $800k for that kind of advertising is decidedly not a bad move.
- cbozeman 6y ago
  You are wrong. But its not the business that you don't understand, its people. The age-old adage, "There's two kinds of people in the world..." applies to an enormous amount of traits, but here's one where its exceptionally true: The kind of people who become VCs and have billions of dollars of AUM (assets under management) understand time-value of money calculations, and they understand them almost intuitively. $800,000 sounds like an enormous sum for most people, because for 99% of Americans, $800,000 is life-changing money. It pays off your entire mortgage, or most of it. It sends all your kids to college. It pays for their private schooling. For the venture capital firm, $800,000 represents a minor clerical error. Even discounting the goodwill that this displays, engaging the machinery to recoup this $800,000 investment will incur significant financial costs, but more importantly, it incurs opportunity costs. Sometimes its better to just flush the money down the toilet and move on.
  - jariel 6y ago
    "engaging the machinery to recoup this $800,000 investment will incur significant financial costs, " ? How? They write 1x participation into most contracts, and that's the normative expectation. It's not a 'legal battle' is literally a normal transaction between parties. $1M is not 'nothing' to a firm with $500M under management - that $500M is not their money, it's other people's money. If they are getting a %10 return for their LPs at $50M a year, and they are keeping 20% of the upside, which is $10M. So the $1M loss comes out of the fund, not their pockets, but still, $10M/year gross revenue doesn't 'feel' like a huge company now does it? A lot of these VC's are just 'rich' not 'rich rich' like mega-exist founders, just for some perspective.
    - ska 6y ago
      I think it's a mistake to assume that the VC had the choice between this deal with our 800k recouped, or the same deal without it. The real choice was likely this deal where we let the 800k go, or future uncertainty. This isn't "rich people don't care about 800k". This is more like "400k write down makes sense at this time".
      - 6y ago
- ayewo 6y ago
  VC runs on relationships, at least this is true for top-drawer firms like Sequoia. In fact, early this year Sequoia gifted its original $21m investment in Finix Payments after it discovered new information that Finix could be a potential competitor to an existing portfolio company (Stripe). https://techcrunch.com/2020/03/09/sequoia-is-giving-away-21-million-to-a-payments-startup-it-funded-as-it-walks-away-from-deal/ https://techcrunch.com/2020/03/09/sequoia-is-giving-away-21-...
- tptacek 6y ago
  This is going to sound snarky, but isn't: assuming you're within the normal parameters of an HN commenter --- even a very successful one --- neither General Catalyst nor Bessemer wants your money. Top tier VC firms aren't like Vanguard. They are choosy about their LPs --- that's why they're called LPs and not "investors". They have an investing thesis, and they go sell it to university endowments and pension funds. Those endowments and pension funds, in turn, have their own investment goals, and they are not as simple as a first-principles analysis on HN would suggest; in many cases, VC LPs are putting money into that asset class knowing that it's going to underperform other asset classes. So it's a little cringey reading comments about how people here would choose not to invest with Bessemer based on how they handled a liquidation preference. They really don't care what you think here; you and the partners at Bessemer aren't even working from the same premises. (A good, though very dated, source on this is the old Kaufmann report on VC as an asset class).
  - dsfdsfkl 6y ago
    lol wtf, most people are talking about founders pitching for investment. If they have standard term sheets from GC or Softbank, likely the founder will go with GC No one is talking about GC's investors....
    - tptacek 6y ago
      I don't know what comments you're referring to, but my comment refers to the one it replies to.
- downandout 6y ago
  It is a common mistake in tech circles for people to believe that they are smarter than the people making decisions like this. Besides the obvious part about protecting their reputation as being easy to work with, there are always details behind the scenes in decisions like this that make them make more sense. You don’t know their tax position, what relationships/deals that being less friendly here might have endangered, etc. Investors have given them $2.5 billion for a reason. One of those, undoubtedly, is that they are not stupid. Suffice it to say that they believe that this decision is worth at least $800k to them in the future, or they wouldn’t have done it. If you are ever in a position to become a LP with General Catalyst, then perhaps you can ask them for their rationale and decide for yourself if they are trustworthy based on all the facts. Until then, making judgments based upon not even close to all the facts is just useless speculation. Your conclusion - that they are just stupid or terrible fiduciaries - is almost definitely wrong. You are no expert, but they are.

georgeecollins 6y ago

I don't want to make any moral judgements against people making business decisions, in particular this founder for making the best deal possible. Good for him. However, no matter how much money General Catalyst or Bessemer made last year, I would not want to invest with them going forward. I get that this is only money on the margins, and they get a benefit from a write off. Still, how hard would they have had to fight to get some of their money back? It sends a disturbing signal to me to write the whole thing off. Someone will reply: "But they made $10b last year! You don't understand the business." And I am sure I don't. But the world is full of people who made a lot of money or were in the process of making a lot of money and then get careless. Or reply: "It's part of the model! If they don't get 10x-100x they just want to write it off as fast as possible. That's what there investors want." Sure, but if you are careless people will take advantage of you. Also, I just don't buy that all institutional investors that back VCs are that savvy. A lot of them are just following a trend and over funding an asset class. Tell me I am wrong. I am no expert.

loceng 6y ago
There's the time-opportunity cost - they can't afford to be perfectionists and squeeze 100% of what they potentially could from a situation, which is arguably undue stress as well - and will cause further externalized losses in what their other focuses are.
feral 6y ago
I thought the VC was generous here. But there's some benefit to being generous. How many future founders will read that blog? If you were a founder, would it influence your choice of investor, to know if things don't work out, they will be magnanimous, rather than squeeze?
- dasudasu 6y ago
  I doubt they knew he would make a blog post with this many details. But still, good will can get around through word of mouth.
  - ticmasta 6y ago
    He mentions his VCs have always been available and engaged, so I think it's reasonable that they knew he would be open and public about the deal; he always has in the past.
  - andygcook 6y ago
    Baremetrics and Josh are known for their hyper transparent blog posts. They even publicly share all their revenue metrics. It’s highly likely the firms knew Josh would write a blog post about the exact exit terms.
- RedditKon 6y ago
  Exactly this. It isn't worth it for either of those funds to play hardball over $400k when hundreds of founders will read that, and will ultimately decide if they want the fund on their cap table for the next Uber/Lyft/Data Dog/Airbnb/etc. I said it before, but it's worth repeating - SV runs on relationships.
gabereiser 6y ago
Ideally all investors want their returns. In this case, it’s a drop in the bucket for their portfolio and they are incentivized for investing in seed rounds (with the hopes of it being an Uber or a Salesforce). It’s quite common. Trend investing is happening too, FOMO, all of that, but their goal is to take $400k seed and turn it into a $40m exit. If you diversify enough it will happen, not if.
CosmicShadow 6y ago
If you make a million dollars an hour, how much time is justified in trying to capture a few hundred thousand dollars when you have limited resources? Oh, you also have to step on the face of a future golden boy to reach it on the shelf. You also have to divert your legal team of several $1000+/hr staff from million & billion dollar cases to this for a month or two. You then have to tell your investors that actually allow you to live that you made a really smart decision and returned them $50 instead of $500MM. To any normal person or small business, that's a lot of money to be captured and ignoring it is mind boggling, but again for them it's not worth the time and effort. The relationship or good will is worth a lot more, not to mention whatever write off stuff they get and the opportunity cost of their team. There is nothing careless about this. If you wouldn't work with a VC because they aren't a penny pincher then man you are really going to be in for a reaaaalll treat!
- RedditKon 6y ago
  Don't forget the $500/hr crisis management firm when the story hits TechCrunch. "Billion dollar VC firm destroys founder's 7-year path to acquisition".
nrmitchi 6y ago
In this situation I think General Catalyst and Bessemer got more than 800k worth of good-will by not blocking this deal that they knew wouldn't get them the results they were originally looking for. If a single founder decides to accept their money based on this action, and then has a VC-style outcome, they've made a good decision.
aaisola 6y ago
It has to do with supporting the winners that are actually going to return money to your investors. They are refusing to fall prey to sunk cost fallacy, which is a good thing.
hedgehog 6y ago
Four parts: 1) the bulk of returns are the few best performing investments, 2) there are material fixed costs in carrying an investment (partner attention, conflict management, admin overhead), 3) it's a way to get proprietary insight into a new space, and 4) there's value in founder relationships (deal referrals, recruiting). Large funds write small checks to get an early view into promising companies that are too early for bigger investments. They are aware that many won't out but they believe they are better served getting in early & divesting most vs waiting and having less information or access.
- bigiain 6y ago
  Also, it just occurs to me - I wonder if Josh and Baremetrics have _already_ helped these the VC firms our with enough deal referrals, contact, networking, and deal closing ammunition (and I suspect not, but given this is SV, data on other startups that was not publicly available but that Baremetrics was collecting?) - that made it an easy choice for them to say "Sure! We're totally happy with everything you've done for us overt the last 7 years already. Thanks man!"
RedditKon 6y ago
You don't win 100x-ers by squeezing founders over tiny exits. VC funds have a duty to their LP base to maximize returns, but I would argue the good will generated by moves like this are what protect their ability to get into "hot" companies and thus protect those returns. Pursuing your strategy would likely harm the fund's reputation and their ability to return LP capital in the future. Also - a point of nuance. VCs are not in the habit of writing off everything, that would be a false takeaway from this article. If the amount invested was bigger or the exit was more like 2x or 3x for the VCs, your points of criticism would be more valid.
- jariel 6y ago
  "squeezing founders over tiny exits." They are not 'squeezing' remotely. Otherwise, there would be not such thing as 1x participating in the deal in the first place. Getting your $800K back while the founder gets $3M is not 'squeezing' it's literally just a transaction. Also - a founder negotiating a price outside the valuation of the shares is getting very close to illegal (Conrad Black went to jail for this). I think the founder was actually lucky that the funds simply didn't care.
  - kjksf 6y ago
    Reading between the lines, this deal wouldn't happen if investors didn't agree to write off their investment. So their choice was between nothing today or nothing later. Tax-wise it was probably better to write it off now than carry a zombie investment into the future. Like you said: their investment was a transaction and they made rational choice. It's the emotional "we can't loose money" or "how dare the founder sell without us getting a cut" that would be a worse choice.
    - jariel 6y ago
      Either way he's definitely ended his entrepreneurial career. Nobody is going to put a dime into a guy who does that - the risk that he'd do something much grander when the stakes are much higher is obviously there. He should have sold the company, honoured the terms of his agreement.
smnscu 6y ago
Just another data point. While I would probably never pursue VC funds, their move resonated with me and now I have the names General Catalyst and Bessemer seared into my brain (not to mention sharing the story to my friends and other people with startups). $800k for that kind of advertising is decidedly not a bad move.
cbozeman 6y ago
You are wrong. But its not the business that you don't understand, its people. The age-old adage, "There's two kinds of people in the world..." applies to an enormous amount of traits, but here's one where its exceptionally true: The kind of people who become VCs and have billions of dollars of AUM (assets under management) understand time-value of money calculations, and they understand them almost intuitively. $800,000 sounds like an enormous sum for most people, because for 99% of Americans, $800,000 is life-changing money. It pays off your entire mortgage, or most of it. It sends all your kids to college. It pays for their private schooling. For the venture capital firm, $800,000 represents a minor clerical error. Even discounting the goodwill that this displays, engaging the machinery to recoup this $800,000 investment will incur significant financial costs, but more importantly, it incurs opportunity costs. Sometimes its better to just flush the money down the toilet and move on.
- jariel 6y ago
  "engaging the machinery to recoup this $800,000 investment will incur significant financial costs, " ? How? They write 1x participation into most contracts, and that's the normative expectation. It's not a 'legal battle' is literally a normal transaction between parties. $1M is not 'nothing' to a firm with $500M under management - that $500M is not their money, it's other people's money. If they are getting a %10 return for their LPs at $50M a year, and they are keeping 20% of the upside, which is $10M. So the $1M loss comes out of the fund, not their pockets, but still, $10M/year gross revenue doesn't 'feel' like a huge company now does it? A lot of these VC's are just 'rich' not 'rich rich' like mega-exist founders, just for some perspective.
  - ska 6y ago
    I think it's a mistake to assume that the VC had the choice between this deal with our 800k recouped, or the same deal without it. The real choice was likely this deal where we let the 800k go, or future uncertainty. This isn't "rich people don't care about 800k". This is more like "400k write down makes sense at this time".
    - 6y ago
ayewo 6y ago
VC runs on relationships, at least this is true for top-drawer firms like Sequoia. In fact, early this year Sequoia gifted its original $21m investment in Finix Payments after it discovered new information that Finix could be a potential competitor to an existing portfolio company (Stripe). https://techcrunch.com/2020/03/09/sequoia-is-giving-away-21-million-to-a-payments-startup-it-funded-as-it-walks-away-from-deal/ https://techcrunch.com/2020/03/09/sequoia-is-giving-away-21-...
tptacek 6y ago
This is going to sound snarky, but isn't: assuming you're within the normal parameters of an HN commenter --- even a very successful one --- neither General Catalyst nor Bessemer wants your money. Top tier VC firms aren't like Vanguard. They are choosy about their LPs --- that's why they're called LPs and not "investors". They have an investing thesis, and they go sell it to university endowments and pension funds. Those endowments and pension funds, in turn, have their own investment goals, and they are not as simple as a first-principles analysis on HN would suggest; in many cases, VC LPs are putting money into that asset class knowing that it's going to underperform other asset classes. So it's a little cringey reading comments about how people here would choose not to invest with Bessemer based on how they handled a liquidation preference. They really don't care what you think here; you and the partners at Bessemer aren't even working from the same premises. (A good, though very dated, source on this is the old Kaufmann report on VC as an asset class).
- dsfdsfkl 6y ago
  lol wtf, most people are talking about founders pitching for investment. If they have standard term sheets from GC or Softbank, likely the founder will go with GC No one is talking about GC's investors....
  - tptacek 6y ago
    I don't know what comments you're referring to, but my comment refers to the one it replies to.
downandout 6y ago
It is a common mistake in tech circles for people to believe that they are smarter than the people making decisions like this. Besides the obvious part about protecting their reputation as being easy to work with, there are always details behind the scenes in decisions like this that make them make more sense. You don’t know their tax position, what relationships/deals that being less friendly here might have endangered, etc. Investors have given them $2.5 billion for a reason. One of those, undoubtedly, is that they are not stupid. Suffice it to say that they believe that this decision is worth at least $800k to them in the future, or they wouldn’t have done it. If you are ever in a position to become a LP with General Catalyst, then perhaps you can ask them for their rationale and decide for yourself if they are trustworthy based on all the facts. Until then, making judgments based upon not even close to all the facts is just useless speculation. Your conclusion - that they are just stupid or terrible fiduciaries - is almost definitely wrong. You are no expert, but they are.