Foursquare, Take Your “Fuck You” Money

Today Micheal Arrington wrote a post directed to the Foursquare team asking them not to sell out.  My advice to the Foursquare team, take your ‘fuck you’ money off the table.  At the end of the day, founders build companies to create shareholder value and return profits to their investors, employees and co-founders.  Whether that’s through an acquisition or founder’s liquidity within a round of financing.

Venture Capitalists and the media act in their own best interests, as they should, it doesn’t mean they are acting in the interests of the founders.  As a founder, you should be thinking of your family, team and then your investors in that order when making a decision like this.

A few years ago, VentureHack’s wrote a great post titled ‘Should I Sell Or Raise Capital?‘.  They articulated it best when they said, “if you raise capital, you risk your current value for a chance to capture your future value“.  They went on to say that a founder should take the acquisition if the sale dramatically changes the lives on the founders and the early team.  Let’s face it, Foursquare has only raised $1.35MM in an angel round just over 6 months ago, so a $100MM acquisition will dramatically change the lives of most of the early employees and co-founders at Foursquare.  My guess is that a $100MM acquisition right now this early in their company’s lifecycle would provide ‘fuck you’ money to all involved.  CrunchBase says they have about 10 employees at Foursquare, that’s a lot of dough to share for such a small team.  I’m not sure anyone should be telling them what to do in this situation…

The fact of the matter is, there are very few multi-billion dollar franchises created like Google, Yahoo, Facebook, Amazon, etc.  Some companies are built to be sold, and I’m not suggesting that Foursquare cannot become a mult-billion dollar franchise, but who am I to tell them not to take their ‘fuck you money’?  Sure Dennis Crowley and Alex Rainert have made their ‘fuck you’ money at DodgeBall, but not everyone involved in Foursquare has.

Not all acquisitions go south, in fact, as I recall it, Flickr was hanging around Alexa 2,000 in 2006 and today its Alexa rank is 31 and Vimeo had a rank of about 4,000 in 2006 and 2,000 2007, and today they’re ranked 252.  Let’s not forget YouTube, which grew to Alexa 3 post acquisition… sure, YouTube was already on a path to dominance when Google acquired them, but the point is that whether its Yahoo, IAC, Google or anyone else, they have all had M&A winners and losers, but who are we to say the founders shouldn’t have sold?

Hindsight’s 20/20… perhaps Chris and Tom should have sold MySpace a year later in 2006, but who knew in 2005 that by 2010 Facebook would be worth $50 billion?  As VentureHack’s puts it, you should sell if “your company or market is going sideways and the company will be worth less before it is worth more“.  If that’s the case, perhaps Chris and Tom saw it coming and got it when the getting was good.  Perhaps that’s the case for Foursquare, who knows.

I do know that first movers are rarely the winners.  Ask Friendster.  Foursquare has a lead, but they are in no way the clear winner in the location based apps space.  Gowalla could still make a run for it, and companies like Yelp or Facebook could make it hard for Foursquare to dominate this space.

I will agree with Arrington on one point, and that’s that their best option is to try and negotiate founder’s liquidity in a larger Series A round.  Perhaps they should raise $200MM and take out $50MM to swing for the fences.  Clearly they’re trying to do that, but that’s up to the market, not the founders.

Anyway, my advice is to tell everyone to ‘fuck off’ and take your ‘fuck you’ money while its there, whether that’s an acquisition or founder’s liquidity in a Series A.

6 Comments

  1. Jay, you know I agree. Remember Dennis and Naveen made some money on dodgeball and there is no 200mm raise that gives founders 50mm and you know that.

    I agree with your presumptions about Mike though.

  2. Agreed, there is no $200MM raise will give them $50MM in liquidity, so they should think about their families, employees and investors (in that order).

  3. I like your analysis of the FS situation. Also, you make a great case for seizing the day to maximize return for all stakeholders. Replicating the multi-billion dollar enterprises that were created in the 90′s and 00′s will be tough due to the dearth of venture capital and scarcity of IPOs.

  4. Mark – I’m not suggesting that they cannot create a multi-billion dollar business. However, if they raise capital now, they risk their current value for a chance to capture their future value, so if they raise capital now, they should seek some liquidity now as well, and if not, sell it. I get that the founders have already made coin at Dodgeball, but there are other folks at Foursquare that they should consider as well.

  5. Cashing out would have an interesting effect on their incentives. Maybe they could exchange some of their stock for cash plus options, so they can take some money off the table but maintain the same “delta,” in the sense that they still get a similar share of the value they add to the company.

    VC’s are lucky: they can apply the Kelly Criterion and bet the appropriate fraction of their bankroll in order to maximize returns assuming their investments take the high-risk, high-return path. Meanwhile, the folks they fund have to make the same underlying bet with basically all of their bankroll.

    If founders want diversification, but VCs don’t want them spending their cash on living the high life instead of growing the company, perhaps they could offer LP interests in the VC’s fund, instead of cash. That, or some form of escrow so the money is off the table, but not available until the company gets sold or goes public (or the VCs otherwise cash out). Secondary markets plus SarBox have created pressure for some very interesting changes in the way the VC business works.

  6. Byrne – First Round Capital recently announced an exchange fund, which is what I think you’re proposing. At a minimum, I think all VC’s should be doing this.

    You should also check out EB Exchange Funds, which allows venture backed entrepreneurs to pool a percentage of their founders shares into the exchange. As they put it on their website, they “allow entrepreneurs to make a rational financial planning decision by diversifying a small portion of their large illiquid holdings and to build a strong network of leading entrepreneurs”.

    http://www.ebexchangefunds.com/
    http://techcrunch.com/2010/01/29/first-round-capital-entrepreneur-exchange-fund/

Leave a Comment.