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.

Arrington Is Dead Wrong About Facebook’s “Bubble Like” Price

The last month has seen a dramatic 40% increase in the price of Facebook shares on the private market to $50 a share, reflecting a $25 billion market cap.  In a TechCrunch blog post earlier this week, Michael Arrington wrote about this price rise and cited the “tightening supply” as a partial explanation for the “bubble like price increase in Facebook stock”.  As a result of the economics courses we took in college, we have a keen appreciation that prices are driven by supply and demand.  While we note that Facebook has long looked warily on the secondary market in its shares, negatively impacting the liquidity, our larger point here is Michael’s assertion that the price rise is a “bubble”.

When we published our report valuing Facebook at $50 billion, we based our price target on fundamental research.  We believed that the shares were markedly undervalued in the private market for a number of reasons, not least was the lack of quality research providing an informed valuation.  We were confident that if the market was provided with thoughtful information, the share price would react accordingly.  While we don’t take full credit for the run up in Facebook shares over the last month, as Facebook continues to make meaningful progress, we certainly feel we played a part in the shares beginning to approach our view of fair value.  So while TechCrunch sees a bubble, SecondShares sees a private market that is woefully short of useful investor information, and responds accordingly when that information is provided.   Where they see a bubble, SecondShares sees companies like Facebook that are changing the world in fundamental ways and creating massive shareholder value.  Where they see a bubble resulting from constricted supply, SecondShares sees a market where prices are low because of a lack of buyers.  We believe that markedly less than 1% of the potential accredited investors on the planet are even aware of the fact that they could buy shares in Facebook on the private market.  So while there is constriction on the supply side, the demand side is even more nascent.

We look forward to providing the market with our views, and to providing a platform for others in our community with informed opinions to share their views with our growing audience for finance related information on the companies driving the social media revolution.   We also look forward to continuing to call out, even the well informed, like Michael Arrington, who have done zero financial analysis to understand a company’s true value, but feel comfortable leveraging their platform calling prices a “bubble”.  IPOs and mergers have been the traditional exits for shareholders.  The second market is providing the third exit for employees, founders, angels, and VC’s to monetize their investments, and its just beginning to open.  We appreciate why Facebook and other companies are wary of this new market.  But the genie is out of the bottle, and over time, Facebook and others will see the enormous value the secondary market will bring to their companies, investors and employees.   We look forward to being along for that ride.  Arrington will get it right eventually.

New Exit Door Opening

The National Venture Capital Association recently released data highlighting that Q1 2010 VC fund raising dropped 31% from Q1 2009, to $3.6 billion.  Upon reviewing the data, technology blog TechCrunch wrote that “Until exits pick up again, investors will remain cautious on venture capital as an asset class.”  First, let’s take a look at the data in terms of total funds raised by quarter over the last two years.

A different perspective is looking at the quarterly change in funds raised, relative to the same quarter in the previous quarter.

The funds raised by VCs dropped again in the first quarter in 2010 relative to the Q1 2009,  which had already dropped significantly from Q1 2008.  However, if I were a VC I’d be heartened by two facts.  First, traditional exits for VC’s picked up dramatically in Q1 2010 compared with previous quarters.  The chart below shows exits via M&A (per Thomson Reuters):

In addition, IPO volume picked up in the first quarter, with information technology (4) and biotech (3) leading the charge in terms of number of IPOs:.

The second fact that should be ncouraging to VCs is the emergence of the secondary market as a third option for exits.  All three “exits” are rife with peril.  To paraphrase a recent comment from Zynga’s CEO Mark Pincus, “Going public is not an exit its an entry”.  Inferring that it’s an entry in to a new hell with rules and regulations and costly filings and mindshare suck for management.  In a merger, the VCs are happy, but management now has a new boss with limited context, and the usually leave and their baby withers (MySpace being the classic example).  The issue with the selling of shares in the private market is the mis-perception that the seller must know something bad about the company or must not care about the company (if its an employee).  Why is selling shares in the private market perceived so differently differently than an IPO or merging?  Its perceived differently because its relatively new.  However, the companies leading the social media revolution (e.g. Facebook, Zynga, LinkedIn, Twitter…..) have all seen dramatic increases in interest in buying their shares in the nascent private market , The fact is, selling shares in a private market transaction is a win for everyone, and the sooner everyone opens their eyes to that fact, the faster our little ecosystem of private shares will grow.