Fred Wilson put up a great post last week which generated a ton of commentary on the post itself and across the blogosphere on the topic of a ‘new path to liquidity’ for startups. Be sure to scan through the comments. Umair Haque had a supportive follow-on post as well. Fred hit on a very compelling point for me personally as a heavy user of a series of Web 2.0 applications and services which have been acquired by the likes of Yahoo!, Microsoft, Google and others only to see the services and apps stagnate in their innovative capability post-acquisition. One might say upon acqusition, these compelling products and services enter an Innovation Abyss inside their larger parent companies. At the same time, as an entrepreneur and entrepreneurial deal-maker in my current role, Fred’s post and subsequent conversation generated strong interest for me as well on the topics of paths to liquidity and the overall VC model.
I think Fred was spot-on in his post. However, it is critical to really parse what he was saying. Felix Salmon wrote a follow-up to Fred’s post on Seeking Alpha, and I believe missed the point Fred was making. Felix seemed to interpret Fred’s post to be saying he was looking for more or better liquidity opportunities for his portfolio companies in an effort to generate a higher rate of return for his fund – hence the statement about ‘greed’.
Quite the contrary, I suspect that Fred and Union Square Ventures and others like it are generating just fine RORs for their limited partners. What I believe Fred was expressing was the statement I made at the top of this post – that the acquirers are not doing justice to the innovation being funded by VCs. What Fred is looking for is a new path to liquidity which generates returns that are comparable to those he gets by selling to Google et. al., but that the targets will also do something with the innovation and keep the founders and core team behind the innovation incented to continue to build their compelling products or services, only now post-deal with more leverage and resources.
Look at a service like FolderShare. It was quite amazing what was accomplished with that service prior to the acqusition by Microsoft. What has happened since? In my opinion, the quality of the service may even be lower as part of Microsoft. How about del.icio.us, to which Fred refers. I cannot point to anything innovative since the Yahoo! deal. I still use both services, but was hoping for something positive following those deals.
In short, I do not believe Fred was asking for higher returns or even more potential acquirers – he appeared to clearly be asking for more appropriate acquirers for his innovative portfolio companies. He may make better returns if he continues to hold the stock post acquisition, but that is not the point. Also, in the absence of better options, Fred and his brethren have an obligation to maximize ROR for their limited partners and execute their fiduciary duty as board members of their portfolio companies, which will mean to continue to sell their portfolio companies in the manner in which they have been – regardless of it may end up stifling the innovation in a portfolio company. Fred appears to be pleading for better exit options for his portfolio companies to help those companies continue to deliver the customer experience gains he expects as a user of the many products and services in which he invests. I hope plea is answered with new paths to liquidity.
The post and its many responses caused me to think more about why this is happening, and I believe I have a hypothesis outlining the underlying reasons behind the situation Fred outlines relative to today’s VC model and the overall technology start-up environment. I do not think the answer for this particular issue outlined by Fred is a private liquidity market such as Opus-5 or Goldman Sachs’ GS True Market, or, while plausible in its own right, a new private exchange for accredited investors as suggested by Roger Ehrenberg. Smells like an opportunity.
I will address these reasons in a subsequent post as part of this mini series and hopefully suggest some opportunities. Like Fred’s reference to pmarca in his post, I too cannot seem to get through posts which are too long (though pmarca authors a very compelling blog). I’ve made my point here, so I’ll cover other points in the next posts in this series.