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fred wilson

Earlier this month I wrote an article on Business Insider explaining how I believed Groupon may have used Google as its BATNA (best alternative to a negotiated agreement) to create more liquidity, and it appears they may have done just that.

According to the SEC Form D filing by Groupon, they just closed on $500 million of a $950 million round they are raising.  Interestingly, the filing also states that existing shareholders will receive $344 million in liquidity in this round.  While the filing is not 100% clear what portion, if any, of the $344 million is founders liquidity, I assume both the founders and existing investors are receiving liquidity in this round.

Under Item 16 of the Form D filing, which is the Use of Proceeds section, it asks the Company to provide the amount of the gross proceeds of the offering that has been or is proposed to be used for payments to any of the persons required to be named as executive offers, directors or promoters in response to Item 3 in the Form D filing.  Groupon listed that they will use $355,547,138, and gave the following clarification for the use of proceeds:

A portion of the gross proceeds will be used to pay for shares repurchased by the Issuer in a tender offer for shares held by, among others, certain of the persons named in response to Item 3 above and/or their respective affiliates.

According to Fred Wilson of Union Square Ventures, entrepreneurs often have to hold out longer than VCs in order to get a good exit, and he explains that if that’s the case, its entirely reasonable to provide some founders liquidity to them.  Fred goes on to explain:

I’ve also seen entrepreneurs choose to sell the company prematurely because they want to take some money off the table. If offered the opportunity to take a bit off the table and swing for the fences, many would prefer to do that“.

That appears to be the case with Groupon.  Perhaps Google’s $6 billion offer to acquire Groupon was premature, and in order to swing for the fences, I think its reasonable to provide founders liquidity.  Remaining private and utilizing the secondary markets for some liquidity in return for the that risk is the best case scenario for Groupon in my opinion.  They remain in control of their business and its direction, they maintain their entrepreneurial spirit, there’s less scrutiny from the SEC and they take some cash off the table.  Not a bad!

Additionally, it appears Groupon may have used a broker to source this deal, as Item 15 “Sales and Commission & Finder’s Fees Expenses” is checked off with $7,500,000 listed as a Finder’s Fee for the raise.  It’s unclear if the Finder’s Fee is for the entire $950M or just the recent $500M for this portion of the round.  We’re seeing more brokers involved in secondary transactions, helping to bring more liquidity to the secondary markets.  I think this is great for accredited investors interested in investing in high growth technology companies that they would otherwise not have been exposed to.  Generally these companies have been reserved for the institutional venture capital investors.  These brokers are helping the market by creating more liquidity and more favorable terms to the founders, their shareholders and employees by increasing the demand for their shares.  Its great for all parties.

Well played Groupon.  Well played.

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With 10%+ unemployment, it’s hard for most American’s to imagine, but the dot com bubble is back again. According to many, we are seeing a bubble yet again surrounding internet companies at historic proportions in early stage and late stage investing.

The reality is that there has been a lot of wealthy individuals with their cash sitting on the sidelines since the great recession began in late 2008, and they’re trying to figure out where they can yield the highest returns. With historically low interest rates, declining real estate, and the uncertainty of the public markets, they have been fleeing to invest in private companies, creating an over supply of capital to a limited number of rapidly growing startups. The result may very well have created yet another dot com bubble, so they say.

Yesterday at the Web 2.0 Summit in San Francisco, the prominent NYC based blogger and Union Square’s early stage investor Fred Wilson and the iconic venture capitalist from Kleiner Perkins Caufield & Byers, ranked 582nd richest person in the world by Forbes, John Doerr, took the stage to square off and discuss, among other things, whether we’re in a bubble (or boom) within early stage investing and the secondary markets.

Fred Wilson explained that he feels the current seed stage investing environment is “getting overheated, people are getting crazy, they’re showing up to their first meetings with term sheets.” According to Wilson, he’s seeing two to three person teams receiving $30, $40, $50 million dollar valuations on their first rounds, and as he puts it, “I think that’s not right”.

John Doerr responded by saying “I think what Fred’s describing in terms of the valuation, for sure is right.” But Doerr went on to explain that he feels the times we’re in right now as unusual and exciting, and that “entrepreneurs are better, ideas are better, and the markets are larger.” Doerr closed with “I prefer to think of these bubbles as booms, and every boom, I think booms are good, booms lead to over investment, booms lead to full employment, booms lead to lots of innovation. You know there was a boom when they started railroads, we’re in another bubble or boom and its an exciting time right now.”

Fred followed up by clarifying that although he feels we are in a bubble right now, its great or everyone other than the angel investors “because the now can’t get into deals they used to get into. There’s too much money, and it used to be when you syndicate angel deals everybody could get in cause everybody’s writing a $50k or a $100k check, if its a $1 million round they could all get in, but now there’s many of them that can’t get in.” Fred described that its not good for angels, but that its great for entrepreneurs and traditional venture capitalists because more companies are getting funded so there’s more opportunities for “us to invest”.

Considering Union Square is an early stage investor, one has to wonder if there now seeing pricing pressure on these deals, if Fred is expressing frustration from their own experiences. John Doerr on the other hand is a late stage investor, so you’d have to wonder if he’s feeling some pricing pressure with the DST’s of the world in the secondary market offering growth stage companies more favorable terms and valuations.

To that point, a person from the audience asked the two investors whether they feel the prices we’re seeing in the secondary markets for Facebook, Zynga and Twitter stocks are bubblish and overpriced, and Doerr suggested to buy more now, stating:

“I turn to Mary Meeker, a long time friend, and I think the best of how these are gonna be valued in either an acquisition or a public market, and remember what she said on stage earlier. These are MONSTER markets, she has a better track record at picking ten baggers, and I mean ten times appreciation AFTER companies are public than anybody in the world. I think, yeah, she would tell us to invest a lot of money in a Twitter or a Facebook at valuations at around ones that are in these secondary markets today.”

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Today Fred Wilson wrote about the nearly 1,000 point “Crash of 2:45PM” yesterday, and in his post he described the public markets as a fickle thing.  He went on to say:

“I believe the secondary market where institutional private capital comes into the cap tables of startups and provides liquidity to founders, angels, and early stage investors is the next big thing for liquidity in the startup business and I am pleased to see that market continue to develop nicely.”

Fred has been a long time proponent of the secondary markets, he’s said on a number of occasions that he feels we need a more active secondary market for founder shares and shares purchased on early investors in venture backed companies.  We obviously agree with Fred, and we’re happy to see him continuing to speak positively about the secondary market as a liquidity option!

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