Moby Dx: A Novel of Silicon Valley - Volume 1 Max Ebb

Chapter 6 Exits

In the spring of 2010, Travie McCoy and Bruno Mars captured the sentiment of the moment, crooning of billionaires and of longing, of celebrity and fortune and Forbes. And even if they hadn’t, teenagers would have absorbed the message from the world of money, money, money all around them: The so-called meritocracy we live in is a ranked and rated, one-dimensional society where money is the adult scorecard.

The way startups are turned into money is through exits. Whether you’re the founding entrepreneur, an investor, or an early employee, there’s almost no chance you’ll end up a billionaire, but it does happen.

If you’re an early-stage investor, the most likely outcome on any one investment is that you’ll lose your money, although there’s a small chance that you might make more on it than you lose on all the others, and an even smaller chance that you’ll make much, much more.

If you’re an entrepreneur or employee, if you’re lucky, you’ll find that you worked ungodly hours for a below-average salary for a very long time. You will have sat and cried alone; alone because you gave up your social life in pursuit of your dream, or more often, someone else’s. Alone because you can’t talk to anyone else because your obsession is, ultimately, boring to them, even if it’s momentarily entrancing. There is, however, a remote chance you might make a few years’ salary as a bonus, and an even remoter chance that you might make a fortune.

A venture-backed startup company generates money for the investors and stockholders in one of two different ways. One, a private offering, amounts to a merger with or acquisition by another company. The other, a public offering, is the sale of a company to the public, that is, to you and me.

If you’re selling your company’s shares to the public, first you must register those shares with the SEC and demonstrate conformance to a host of regulations too numerous to mention, all of them intended to ensure good governance and transparency. Then you must find buyers for the shares, a process usually involving large fees paid to bankers, and then you go to Wall Street and ring the bell when the shares are first sold. Given that public markets define a small company as one worth $250 million to $2 billion, you’re well past the startup stage if you’re selling to the public. All the more reason that it’s every entrepreneur’s dream to do it. Intel raised $6.8 million in 1971. Genentech raised $35 million and Apple Computer raised about $100 million in 1980. Netscape raised $140 million in 1995. Millennium Pharmaceuticals, $57 million in 1996. Amazon, $144 million in 1997. Genentech, $1.94 billion in its second ipo—itself a contradiction in terms—in 1999. Google raised $2.7 billion in 2005, and Facebook raised almost $16 billion in 2012. Whether the investors buying these shares do well or poorly is another matter.

There are many more variations in the world of mergers and acquisitions, again, too numerous to mention. The main idea is that in contrast to what I’ve just described, wherein a small percentage of shares is offered to each of many different public buyers, in M&A the transaction is with just one buyer. There may be nuances that creep in, such as a transfer of the assets only and not the people, or of the ip (intellectual property) and not the physical assets, but the main idea remains the same; materially everything becomes the property of one or a very small number of companies, trusts, or other entities. These deals can be great for the seller, like Life Technologies’ purchase of Ion Torrent for $725 million in 2010, or Yahoo’s of Tumblr in 2013 for $1.1 billion, or HP’s of Autonomy for $10.2 billion. Whether the buyers do well is, again, another matter.

There is one kind of exit that is somewhere in between these two, and that’s the private, not public, market sale of a small number of shares. Lacking the transparency required of public offerings, this secondary market activity is restricted to qualified investors, which is a technical term meaning investors who are supposed to be able to lose it all without a whimper. Trades like this have been very rare since the 1920s, when buyers were fleeced buying fraudulently touted entities. About these purchases, I have these words in Latin, caveat emptor, and then this one final one in English, Groupon.