Just articles, posts and thoughts that I’ve found interesting
falling asleep on the beach while reading a book, anime style art
Crooks’ Mistaken Bet on Encrypted Phones (New Yorker) – How European police have cracked “safe” encrypted phones often used by criminals, and the wealth of data it’s provided. Come for the tech story and stay for insight into why cocaine is huge in Europe, how smuggling logistics work, and the slang used to describe murder.
The Dangerous Rise of ‘Front-Yard Politics’ (The Atlantic) – Derek Thompson on why obsessing over slogans and words (and the performative display of them), is further distracting us from getting stuff done and creating artificial conflict.
“To get big-brained about it, something like La Sombrita could only happen in a high-regulation/low-trust society like the US. In every other variation (low regulation/high trust, high regulation/high trust, low regulation/low trust) you get either larger public works without fear of vandalism or misuse (a proper bus shelter), or like in Quito (a lower regulation society) you get natural ad hoc bottom-up solutions.”
Got a lot of reactions to my last post about acquihires (specifically, lack of them) and how that might change the approach startups take to pursuing ‘soft landings.’ Wanted to clarify and respond to some of those questions, backchannels, etc.
It’s often ok to just shutdown. I wasn’t suggesting that every founder/team/investors would prefer an acquihire to other forms of wind down, and definitely not that founders always “owe” their investors this attempt. If anything I was trying to emphasize to founders that it’s ok to try a different process, often against the common wisdom.
To founders (some in our portfolio) who assumed I was specifically subtweeting them. Nope. Of course the suggestion was spurred on by what I’m observing in the market – including a lot of stories from founders we haven’t backed – but I was commenting on the market at large.
I don’t want to fund an acquihire marketplace. If you want to build a marketplace for small acquihire transactions go right ahead but my post wasn’t a Request for Startup 🙂
Some people disagreed with me! “Nah, you give up all leverage when you do what you recommended,” was the feedback from a few readers. My POV is that it’s more nuanced than this. You have no leverage – or at best fake leverage aka bluffing – when you don’t have alternatives. Go have some private conversations, float some trial balloons, etc. But I truly believe the strategy I detailed is UNDERUSED in our industry.
Makes the Founder Seem Like a Loser? No way. I think it’s artful and thoughtful when done correctly. All of this is changing IMO – analogous might be layoff lists these days – no shame in being included in one when you know you did the best you could but the company had to make cuts. Obviously more falls on the CEO/founder shoulders but again, I think my strategy is going to be self-selecting for the type of leaders who authentically can articulate the situation and has some value to transact.
Appreciate the discussion – it’s why I enjoy blogging 🙂
“Worst case scenario we’ll sell to a larger startup or public company for about ~$1.5m per engineer.” Yes, this was the ‘fallback plan’ for many team in the web2 era and they weren’t wrong. Especially in the early days of mobile/iOS engineering, if you hired strong technical talent into your early stage company, you basically created an acquisition outcome floor. I was on both sides of these transactions – buying startups for Google/YouTube and angel investing in high quality technical founders. Sometimes you’d even get lucky and receive stock in the acquirer, which was how I gained pre-IPO equity in high growth stars like Pinterest and Facebook.
Starting our venture fund Homebrew professionalized and scaled my insights into soft landings. Acquihire potential absolutely isn’t enough in and of itself to justify venture funding (we play to win!), but in certain situations investors do talk about these things as positive optionality. And during our first few years we leaned in to help teams find the right home when it didn’t work out for them as an independent company. This produced two successful intra-portfolio acquisitions where one team joined a larger startup we previously seeded (Chime and Bowery Farming were the buyers) and a whole bunch of other transactions. The proverbial win-win-win: founders got to land their company often with some retention premium; employees got job offers; and we got capital back, that even if it wasn’t a power law return, allowed us to recycle into new investments or the existing portfolio. I’d say that for a small, two person fund we got pretty good at this motion when needed!
And now I’m telling you the world is different. Very different.
a busy city intersection with lots of giant billboards and people walking, at night, digital art [DALL-E]
In 2023 with few exceptions acquihires are dead as we knew them. The majority of typical acquirers (large and small) don’t have incremental headcount budget. Those who do, often believe they can hire from the open market without the hassle of an acquisition. Cash is at a premium so it’s not going to cap tables (preferred or common walk away from the deals with no dinero). In fact, sometimes acquirers are asking for the remaining cash on hand from the startup in order to ‘zero out’ the salary burden they’re taking on [HW note: 99.9% of the time my answer is no fucking way]. And when they’re giving stock to existing shareholders instead of cash it’s at high 2021 valuations, buried below a preference stack.
None of this means we’ve backed off helping founders in these situations, but we do try to set expectations with them and collaborate with the other investors. My personal rule of thumb is that to the extent there’s cash or valuable IP still in the company, we need to make sure that we’re good stewards of those assets (per above, why I balk at giving up cash in an acquisition where there’s little bidirectional value exchange). But when it comes down to the forward-looking time of the founders and team – eg do they actually want to go work at the potential acquirer – their opportunity cost and happiness is really important. No founder should feel compelled to sign up for four years of earn out misery just to get their venture investors a few cents on the dollar.
Times like these call for somewhat different strategies, perhaps shifting from the ‘companies are bought not sold’ mindset (which is very much true in situations where the startup has optionality or at least competitive offers). My counterintuitive suggestion is that more founders should publicly announce they need to find a home when seeking this outcome. Put together a great post or deck about the situation, quality of the team, what they know how to do better than anybody else, and why they’ve had trouble raising additional capital. Let potential acquirers find you (who knows you might even end up with some funding offers). It’s sort of a litmus test – if you can’t make the argument convincingly in public I’m suspect you’re going to somehow magically figure it out in a quiet, closed door process. Not in today’s market conditions.
Downsides? Emotional I guess. But really, “this didn’t work out the way we hoped” is the theme song of startups so join the chorus.
Giving up negotiating leverage with a potential acquirer? Again, not really in this market. The only way you get to negotiate is if you have a BATNA, and my POV is this will increase that likelihood for 80% of companies in this position. So go talk with a few of your most promising relationships first, but don’t hesitate to go wide when you’re not getting immediate traction.
Some VC with an operations team should go build out the template for this – make it easy for founders and normalize this process, removing any stigma. Instead of spending your last quarter of existence digging through haystacks for needles, build a magnet, and pull the needles towards you. If over the course of the next year you see any Homebrew portfolio company try this out, I’ll let you know! And good luck, it’s rough out there.
