Early-Selling VCs Are About as Surprising as Summer Fog in San Francisco
Whenever an out-of-town visitor comes to stay at my house in San Francisco, it’s as good as definite that I will get some version of this:
“It really is cold when the fog rolls in, isn’t it? Do you know that famous Mark Twain quote about the coldest winter I ever spent was a summer in San Francisco? How come it was just warm and a second later it is freezing? Is it always like this?”
And here’s my usual reply: Yes. Indeed, I do. Please see Mark Twain famous quote about the coldest winter I ever spent was a summer in San Francisco. Mais oui, mon ami — so get yourself a fleece and shut up about it.
I am beginning to feel the same way about the endless series of articles about insiders — especially venture capitalists, who were early investors in a number of Web 2.0 companies — selling out big chunks of their stakes now that lockups have expired.
We’ve done a few — a very few, in fact, by choice — since the fact that some of these insiders are selling comes with about as much suspense as whether Apple’s stock will rise in the run-up to the latest product launches in September.
We’ve done a few of those stories, too, since at least the Apple market valuation is unprecedented in its size and scope.
VCs heading for the exits as soon as possible after a big liquidation event, not so much.
As investor Fred Wilson noted sensibly on his blog A VC yesterday:
“It is an investors job to return capital. I will say that again. It is an investors job to return capital … So to all the folks out there who are shocked and outraged at all the insider selling going on, I would suggest they park their outrage at the door of capitalism.”
While this might seem cavalier to some public shareholders who have lost a lot of money as the stocks of some high-flying Internet IPOs — most especially Facebook, Zynga and Groupon — have been laid low, trusting venture investors to stay at the party now that everyone can come in is willfully naive.
In short, they invest early and take the initial risk, and then they get out once they get the kind of gains they are looking for.
Short sellers have certainly known what’s coming after these IPOs, of course, which is why they loaded up for bear before these lockup events happened.
Combined with genuine business issues around the companies — from mobile monetization to a fall in once-soaring revenue and user growth to whatever the problems of the day is — such a situation has been a perfect recipe for a stock disaster.
Thus, Facebook down 50 percent since its IPO, Zynga down 69 percent and Groupon down 83 percent.
Pretty grim, especially with more lockups expiring in the months ahead, which has made public investors feel like suckers.
For some, that might indeed turn out to be the case; but for others, it is the price of grabbing onto still-unproven but exciting digital narratives, and having to hold on until the story turns brighter.
Which means waiting until each of these companies manages to figure out sustainable revenue streams that lead to fat margins and lucrative growth.
That kind of discipline was mostly ignored by early VC investors, who were placing their bets on other criteria at the start, including on an explosion of users. Getting anything more substantive in place was just starting for most of these companies when they went public.
VCs, in truth, couldn’t have cared less about that. Because seeing moonshot opportunities and seizing them is all VCs do — as venal as that might seem to some right now.
Good riddance, I always say, because having them hang around any longer is not necessarily a good thing, since they are not programmed to be good public investors.
Not that some don’t stick around. Internet companies are famous for having their boards stuffed with VCs, which almost always leads to decision-making that has nothing to do with what is best for a public life over a private one.
So, you want those big VC returns — which are actually harder to come by for a vast majority of players in the space? Then become a VC and belly up to the bar with your chips much earlier in the game.
If not, and you just got here, handing over hard-earned money for stock in Web phenoms that has not been as hot as you thought they would be, I would suggest getting yourself a fleece until the fog passes.
Because eventually, though not for all, it usually does.