I believe that Silicon Valley is like Las Vegas, except they make you pass a number of tests before they let you gamble. This means that only a relatively select group gets to sit at the table. The purpose of this post is to analyze the folowing problem:
Joe Founder comes to Silicon Valley with a laptop full of dreams, but no money. Joe wants to maximize his chances of making a few million dollars in five years. What should Joe do?
First off, let’s acknowledge once again that Silicon Valley is a sea of conflicts of interest. You have the Sand Hill Strip, where “reputable” firms like “Palo Alto Grand Investments” or “Burlingamio Ventures” want Joe to invest his body and soul, swing for the fences, hit the ball into the San Francisco Bay and become the next Sergei Zuckerberg. It sounds awesome; the problem is that the chances of this are slim. Joe does not like. 1/100000 odds of making billions of dollars is unappealing.
Still, Joe needs money to make money. He has to pretend to want what VCs want. He learns to spew lines such as “I want to change the world by helping people connect faster. My company is to GooBook what the telegraph was to horses. A quantum leap in virality technology.”
Joe gets Wayne Cofounder to join him, and they put together an impressive demo of ZombiePlatypus. They perfect their pitch and their deck. When a partner at GiganticTree Ventures asks them how they plan to reach sales of 100M/year, they have all the right answers. They don’t tell her that they are hoping that GooBook will acquire them for the magic number of $30M. Because they will keep 20% equity each at the time of the acquisition, that means $6M each before taxes and vesting. In other words, money problem solved.
With GiganticTree’s money in the bank, Joe and Wayne focus on recruiting an awesome, all-star team. They try to lure as many GooBook employees as they can, because that would make it easier to pass GooBook’s filters when evaluating an acquisition; if GooBook wanted to keep those people but couldn’t, they’ll be happy to get them back as part of an awesome team. This has an added advantage: GooBook employees know how acquisitions work at GooBook, and can help short-circuit the process.
The M/A folks at GooBook have to acquire something. That’s their job; they have a pile of money in the bank for that purpose. So, what will they acquire? Whatever looks like a safe bet. They like their jobs and they don’t want to be fired over a stupid acquisition.
Joe and Wayne work on building something they know GooBook could acquire without looking stupid. Something they might be able to do in-house, except their most talented engineers are desperately working on ways to extract more money out of ads, or to reduce the costs of their gargantuan infrastructure. Some are stationed in Antarctica building a self-cooling datacenter; others are diverted from creative projects into the new 99.9999999999% uptime initiative: one second of downtime costs a million dollars. Forget that stupid 18% free-time web app project, and come help make some mon-ay. The quarterly report must look good. Shareholders demand it!
So Frank Merger from GooBook starts talking to ZombiePlatypus. By now they have some traction: hundreds of thousands of users, some of whom are even real. The product looks useful and promising. They are making enough money to pay for the coffee, bandwidth and toilet paper consumed at their South-of-South-of-Market (SoSoMa) office in San Francisco.
Joe and Wayne are good communicators and hustlers, so they make noise. They blog a lot. They pester TechDaily and TeraOhm until they get featured there once in a while. They become well known on Hacker Noise. They give tech talks wherever they can. They amass an army of followers on Spitter.
GooBook wants them, so Frank relays a lowball offer: 15M in stock. It’s a no-go: GiganticTree Ventures would only double their money, and remember that they want 100x. A struggle between founders and VCs ensues. This is the key part of the process.
Joe and Wayne have control of the company. If they are not motivated to swing for the fences, it will not happen. GiganticTree understands that ZombiePlatypus won’t be the next GooBook, and now they have limited options. What they can do now is shop ZombiePlatypus around in order to get the most out of it.
It turns out that Spitter is also interested in ZombiePlatypus. Long story short, the bidding war between Spitter and GooBook pushes the price up to 26M. Good enough. GiganticTree is quadrupling their money in a relatively short time, which is not that bad. Joe and Wayne make $5M each. WIN.
Now that Joe and Wayne have solved their money problem, maybe they will want to create some world-changing stuff after some resting-and-vesting. But that’s a different post.
Here’s to cynicism and hustling.