For the past week, investors and journalists everywhere have criticized the founders of Secret, the $100M anonymous messaging app that just shut down, for selling $6M of their own shares during their Series B financing.
It started with Dan Primack, who wrote:
To be clear: If I were an entrepreneur and a VC offered to put $3 million into my personal bank account, I’d take it. And there is honor is shutting down rather than running out the clock. But if I were one of that VC’s investors, I’d be raising holy hell right about now. And if I were the entrepreneur and had any hopes of raising capital for a future startup, I’d figure out a way to make some sort of good-faith, partial repayment.
It officially jumped the shark with Mike Isaac’s terrible piece in the Times called, “The Lessons Google Ventures Learned from Secret,” where Bill Maris compares Secret’s Founders to bank robbers.
Secret was one of the hottest companies in 2014, so they could pick and choose the investors they wanted to work with. This is why they were able to sell some of their individual stock and “take money off the table,” to reduce the personal risk they were taking by going for a $100M+ exit instead of selling in the $25M to $80M range where 80% of the M&A activity happens. Very few founders are fortunate enough to negotiate this into their term sheet.
But like many apps in the social media space, Secret turned out to be a fad after 18 months. The Founder’s made a good decision to quit while they were ahead instead of pivoting and becoming the media’s next Color. Almost a third* of the money they raised will be returned to investors as a consequence of good decision making.
Yet VCs are upset because the Series B financing made both founders millionaires. One of them, David Byttow, used his cash to buy a Ferrari. Unfortunately for entrepreneurs everywhere, he sold the Ferrari instead of parading it up and down Sand Hill Road.
One investor argued against Secret’s Founders because, “great founders are irrationally confident in their ventures.” You sir, have been played. Great Founders only pretend to be irrationally confident around investors because that makes it easier to raise money. No one builds a successful company by being unwilling to change. Secret was over-hyped and now it’s clear it was a fad. The founders figured that out after 18 months of hard work and knew if they tried to pivot it would ruin the company’s reputation. They made the right decision to quit while they were ahead and return all the money they could. Any good investor will realize these guys have good heads on their shoulders and be willing to bet on their next thing.
The Founder’s of Secret took money off the table fair and square. Secret was a hot company and the VCs were paying for access. The default in the startup world is that investors get all their money out before founders get a dime. Many entrepreneurs spend 5-10 years of their lives building their company, working day and night, and burning through their savings, only to exit and have nothing for themselves. They take all of the personal risk. Do you know what an investor would say if a Founder complained about this arrangement? It’s just business, a deal is a deal.
Bill Maris would be a bad investor if he felt guilty about making money on an investment where the Founders got nothing. Business is business and he has to make a return for his LPs. Instead, he looks like a bad investor for trying to make Secret’s Founders feel guilty about making a couple bucks; especially when they return almost all his money. Entrepreneurs don’t get to diversify and they put in all the work. It’s in Maris’s best interest–and all of their investors’s–to be happy for the founders. Picking a VC is like picking your husband or wife, and founders who can pick and choose will think twice about getting married to someone who’s a hypocrite.
The most ridiculous assertion is that somehow Secret’s Founders will be penalized because they negotiated a business deal that was in their best interest. They built one of the hottest startups of 2014; a startup that was highly risky and garnered dramatic attention from the tech media. They did their best but it didn’t work out and they not only returned almost a third of the money to investors, they made themselves mini-millionaires in the process. This is an amazing story where everyone won. No doubt these guys are champions who will do big things in the future.
Dan Primack is one of the smartest guys covering the VC industry but he’s missing an important perspective here: the entrepreneur’s perspective. The problem is founder’s don’t have time to blog. If they did, it would be made obvious that Secret’s Founders acted in a stand-up fashion and don’t owe their VCs a dollar more. Hypocritical VCs can disagree with me, meanwhile they gut their own portfolio companies for every dime. A deal is a deal and a Ferrari is nothing to be ashamed of when you bought it fair and square.