[alapshah]

In case anyone is missing what has happened here, this is why people hate on private equity/VC.

As far as I can tell, Loopt wasn't doing very well. http://www.google.com/insights/search/#q=loopt.com&cmpt=... They had an attempt to revive the company to compete with Groupon last year that many here thought was stupid and died an early death (http://news.ycombinator.com/item?id=2696412)

Michael Moritz (Sequoia partner) is still on the board of Green Dot, now a publicly traded company worth north of a billion dollars. Almost the entire board (http://ir.greendot.com/phoenix.zhtml?c=235286&p=irol-gov... ) is Private Equity/VC guys, they do this kind of inside baseball all the time, it's no sweat off their back to do Moritz a favor.

He convinces Green Dot to acquire Loopt for a huge amount of cash (Green Dot was sitting on $225 million in cash). Sequoia makes a cool $15 million.

Related: the always-informative Planet Money did a special on Private Equity and you can see how Bain Capital got its money back on a company that went bankrupt: http://www.npr.org/blogs/money/2012/02/23/147257517/how-mitt... TL;DR the company they bought acquired another company and raised significant debt- they used that debt to pay back Bain Capital.

[majani]

Buddy exits like this one and the Hunch exit are very demoralising. They make startups look like some sort of game. As you indicated, Loopt was clearly dying ( http://www.google.com/insights/search/#q=loopt.com&cmpt=... ) and yet people still got rich off of it.

Product + Hype -> Big Exit is starting to seem like a perfectly legitimate business plan nowadays.

[webwright]

I think calling this a "buddy exit" isn't really fair. Same with Hunch. That's like calling Next selling to Apple a "buddy exit". If Square went south, what kind of exit could they command based on Jack and his team? If Facebook was dying, what would Zuck and his team be worth?

Sam and Chris are both brilliant guys and great BRANDS. Not Steve Jobs great-- but great nonetheless. Guys like this attract A-players and attract PR. Could Sam and his group have $43M in impact for the buyer? Surely.

Listen, success is just a big multiplication formula. If your "leadership brand" number is high enough, you just about can't lose. But that holds true for any other number in the formula (product awesomeness, timing, marketing, business model, etc).

[underwater]

> Sam and Chris are both brilliant guys and great BRANDS [...] Guys like this attract A-players and attract PR.

What about the minor things like, you know, making money? They took 17 million in funding and failed. But that's OK because they're buddies with the VC's and can try, try again.

[webwright]

You should consider your tone here. It's unwarranted. You literally know nothing about what went on here, know nothing about the value that they're are getting (patents? team?).

Is it okay/smart for Facebook to buy/hire a team of 4 engineers for $8M or is that because they are buddies with VCs? I assume Loopt had an engineering team of 20+. Is it that out of bounds to think that that (plus patents and perhaps some tech) could have an eventual financial impact of more than $43M?

[underwater]

I question your original assertion that these two guys deserve success because they are great brands and can attract PR.

Their job was to grow Loopt and make money. They failed to do that. So either they're not as brilliant as you say or that stuff isn't as important as you make it out to be. Result matter. Whether you're a great brand shouldn't.

[blasterford]

If the team were worth that much, then they would have made Loopt astoundingly profitable in the last 7 years, and we'd all be using it.

Judge people on their success/failure. Not on what other people think of them.

Loopt was a flawed, quickly obsoleted idea. That was pretty obvious from the outset.

[webwright]

"If the team were worth that much, then they would have made Loopt astoundingly profitable in the last 7 years, and we'd all be using it."

Great teams can attack crappy markets or just get the timing wrong. The leadership team that brought Apple back from the brink was the same team that built NeXT. Next wasn't astoundingly profitable and none of us were using it.

[coffeemug]

Plenty of great teams never see the light of day, and plenty of mediocre teams have huge successes. Luck matters.

[nitrogen]

Note to blasterford: it looks like your subsequent comments after this one are [dead], possibly due to repeated flagging.

[pg]

I know you meant this to be a nasty remark, but do you realize you're actually saying something very nice about VCs? You're saying that they're driven by loyalty to their friends rather than by profit.

That isn't really true. The main reason most VCs are friends with people is because they think they can make money out of them in the future. But it shows how far into falsehood you've leaned in your attempt to be nasty when you end up unintentionally implying something so nice it isn't true.

[freshhawk]

I think you're missing his point here.

That VC money is investor money. These aren't angels being nice with their own money, these are VC's playing fast and loose with their investors money and it's not ethical behaviour.

[jarek]

I'm not seeing where GP indicates they don't realize that VCs' loyalty to their buddies can easily bring them in profit in the long term.

[pg]

Loyalty to their buddies only brings the VCs profit in the long term if their buddies are good, which is exactly the point of webwright's that underwater is trying to contradict.

[anon808]

"Could Sam and his group have $43M in impact for the buyer?"

what do you mean by impact? how can this even be measured?

"If your "leadership brand" number is high enough, you just about can't lose. "

again, what does leadership brand mean? And what does it have to do with building a business that earns money/makes profit (revenue - expenses). Just because something/someone has market or exchange value, doesn't mean they have use value. If the goal is to sucker some large corporation out of a small chunk of cash (small for the large corp) be upfront about it. But saying there's some higher form of value that 'brands' bring that has nothing to do with building profitable businesses is disingenuous. Steve Jobs built companies that earned money (from business operations, not financial market operations). HUGE difference.

[webwright]

"But saying there's some higher form of value that 'brands' bring that has nothing to do with building profitable businesses is disingenuous."

Where the heck did I say that? I said building profitable businesses is a formula and leadership/brands are a multiplier in that (very complex) formula.

I'm saying that A-Players with great brands have value. It's pretty hard to unravel that value. What's the financial impact of bringing Jobs back to Apple? What was the financial impact of Google buying Android? What would the financial impact be if I was running Square instead of Jack Dorsey? There's no way to know. But you can't disregard the impact of great people because you can't precisely measure it is wrong.

[anon808]

you said success is a formula, and because you were talking about an exit for an unprofitable company as being a success, it seemed logical to me that you ranked ceo 'brand' value over business profitability.

People have value (in general), calling some people A-players is trying to ascribe value to some, and as you say, that's hard to unravel. I agree ranking and valuing people is hard/impossible, why should we try . . . why are you trying? Why not let people show their own value by doing great things. I don't disregard the value, i just admit that we don't know it, the only thing we do know is if a business made money or not. It doesn't mean the person that started a shitty business is also shitty, but it also doesn't mean they're a success if all the sudden someone bestowed a crown of exit on them.

[richcollins]

Next was profitable. OS X and iOS are Next. Care to make a long bet on how much of Loopt tech is still around in 5 years?

[webwright]

Next was profitable? Do you have a source for that? They raised hundreds of millions of dollars and sold 50,000 units. In '93, Canon plowed a second investment in to keep them afloat. Even with the new $, they laid off 300 of 540 employees. They couldn't sell their hardware operations and went pure software. I'm not saying they toss out all of the tech, but calling NeXT profitable is just plain false. It was a failed company with great leadership. Certainly there was some technical value in the deal, but much of the $429M paid was for Jobs and the people he had working with him.

[philwelch]

Profitable, but underwater. NeXT sold to Apple for half a billion when over a billion in funding had been pumped into it (let alone valuation).

NeXT alone was never going to do what Apple has done. Apple had a sustainable hardware business (after being fixed up a little with sexy designs) that gave them enough manufacturing leverage to do iPod, and iPod gave them enough operations leverage and economy-of-scale to do what they're doing now.

[Alex3917]

"Care to make a long bet on how much of Loopt tech is still around in 5 years?"

More of it than is around now. Location based apps are just getting started.

I think there is sort of a last mile problem for data, in the same way that there is a last mile problem for hardware. As much people come to see the world this way I think we will end up with more and more possibilities for local social than we can currently even imagine. I think this acquisition will be a good opportunity, as Loopt will effectively be able to use these financial tools as bait to get more people into their system.

[cft]

Blogger was sold to Google for $5mm, not as buddy exit, but as a regular exit. I guess Loopt has eight times more potential.

[temphn]

Sales is part of doing a startup. Selling the company is the biggest sale. You have to give them props for finding the people willing to buy.

Additionally, Loopt (being founded in 2005) did a ton of work that was obsolesced by the iPhone and ubiquitous GPS. Their timing was off, but you really can't fault them for giving it the college try. At a minimum GreenDot's internal engineering capacity has been massively upgraded.

[bitterfounder0]

Demoralizing indeed.

Google's acquisition of Slide for $100m crushed me. Myself and several others built more successful companies. We had 10x the userbase, larger profits (assuming this based on userbase), and fewer employees (team of 3 here). The difference was I was bootstrapped and working in stealth.

Lesson's learned: avoid bootstrapping. Raise venture capital from well networked investors. Do not work in stealth mode. Do a lot of PR. Be loud!

This ensures that the failure of your company will be an embarrassment for your investors. The louder the better. They will be inclined to have a friend buy you out to save face.

Disclaimer. I'm not saying that should be your primary goal. Goal number one should be passionately building a product you love. A buddy exit is simply a safety net.

[anon808]

don't be demoralized, and don't let others decide how you should run your business or what you should value. if you have a profitable business be happy with your success and build on it. lottery winners happen every day, don't let that ruin building great products and businesses for you. the problem with outside investors (any investors, VCs, angels etc.) is that your business automatically inherits their values, and if their values are different enough from yours the friction could destroy your business and/or destroy your values.

[sbov]

At some point, depending upon why they're buying, I think having fewer employees is a bad thing. It means whoever is acquiring you has to do more work to turn it into a fully fledged business. At least that's the sentiment I heard when our startup sold (4 employees total).

[drusenko]

It's no secret that the "going rate" for startups that are successful and get acqui-hired is $1-2M per engineer.

It's hard for big companies to find talented engineers, and so when they acqui-hire, they can just instantly shuffle those smart people out of the project they're working on and onto something else.

The bet is that each smart engineer will provide at least $1-2M of value to the company in the long-run.

[dwerew45234sdf]

Your answer seems correct. Moritz and Sequoia invested allot of money ($10 millions) over 10 years ago into Green Dot. 'Sequoia Capital owned about 30% of the company during its over $2 billion IPO last year.'[1] Needless to say Sequoia and Moritz have allot of power at Green Dot.

Now if we ask ourselves if Loopt was not a Sequoia company, would Green Dot have paid that much money for Loopt's people and technology. They could of easy got a better deal somewhere else.

However I think Sequoia needed to save face on Loopt. They needed to make sure it had an successful exit. The more successful company's in Sequoia portfolio the more investors are willing to invest in them right?

[1]http://www.quora.com/Green-Dot-company/Why-did-Sequoia-inves...

I don't know why PG is trying to hype this up. I see ycombinator becoming more and more like a old boys network.

If your doing a startup don't get discouraged. The reason you should be doing it in the first place is cause you truely believe in the product and the business and not looking to flip your startup for quick cash.

[nikcub]

raising debt to pay a dividend back to investors is more common than not amongst the LBO funds. it makes sense if you have a steady and decent income stream, it is a bit like drawing down on equity in your house in order to take a holiday, except the rates are much better (when people complain about this, I am not really sure what they want to be done about it)

the VCs of silicon valley are very far away from the Wall St type of private equity (although they are becoming closer with the secondary markets now opened up - it used to be that your vc investors were in all the way until the exit)

as for Sequoia, it is pretty well known that the top tier VCs look after their own. Look through the Sequoia history and you won't find very many outright failures, it is a reason why entrepreneurs choose to work with them. I very much doubt Moritz can 'make' Green Dot do the deal, but I am pretty sure he put it all together - it is more a testament to his/their dealmaking abilities than any leverage he would have as a minority shareholder and director in a public company.

[phillmv]

>as for Sequoia, it is pretty well known that the top tier VCs look after their own. Look through the Sequoia history and you won't find very many outright failures, it is a reason why entrepreneurs choose to work with them.

Oh, I just want people to stop pretending this is a meritocracy.

[adamtmca]

Planet Money also did a follow up on one of Bain's deals that went right. TL;DR Bain bought a company, levered it up, restructured it and successfully took it public.

The company executives all got bonuses, Bain made a ton of money and the workers got to keep their jobs. The company is still running today.

[gojomo]

If the $17 million previously raised bought half or less of the outstanding equity, then the VCs (depending also on other preferences) might only have a claim on about ((43.4 total - 9.8 retention pool)*50%=) $16.8 million of the deal proceeds. So this might be a largely-sideways exit for the venture investors.

Still, many think location services can only pay off via connections with payments/coupons/promotions so the tie-up does make sense as more than just a favor between investment buddies.

[rksf]

Typically, venture rounds are participating preferred securities (at least). So, the more likely scenario here is: 43.4 MM Sale Less: 9.8 Cash Retention Pool = 33.6 MM Available for Shareholders

Less: 17MM Preferred to VCs (Face Value of VC Investment) = 16.6 MM (split among VCs, founders, employees)

VC Participating Share: ~35% * 16.6 = ~5MM

Available for Founders / Employees = 11MM

Total to VCs = 17+5=22MM

[ajju]

>typically, venture rounds are participating preferred securities (at least)

That is increasingly false for A rounds, at least.

This 2 year old discussion talks about that, but from what I hear these days, any startup that doesn't "desperately" need money will not agree to participating preferred in the valley.

http://www.quora.com/How-common-are-participating-preferred-...

[rksf]

Yes, that is a good point. Some research suggests that today only ~35% of Valley Series A are part preferred(according to recent legal reports), but Crunchbase suggests that Loopt took series A in 2005, Series B in 2008 and Series C in 2010. Total capital raised (according to that post) was $32MM across 3 rounds. Not sure how much was primary or if any of it was taken out by later rounds, of course. Anyhow, I don't know for sure, but I suspect there were some protections around the securities, given the timing of the early rounds and the total amount invested. http://www.crunchbase.com/company/loopt

[randome3889]

You clearly don't understand VC or Private Equity very well. 15 mil is chump change for Sequoia. Sure they would rather not lose it but 43 million is not a "huge amount of cash" in the VC world. They probably just got back a 1x or 2x return and that is about it.

[rhizome]

Which is why buddy exits are such a problem: there's so much money in the greater pool that they can hand out life-changing cash on a whim to people who might not deserve it as much as others. Sure, life isn't fair, but I'd rather people didn't pretend otherwise.

[freshhawk]

Fairness is less of a problem than VC's treating their investor money as a slush fund to dole out to their friends.

Doesn't everyone know that it's "more about who you know that what you do"? Even on HN most people don't pretend otherwise unless it's the all too prevalent press releases and astroturfing posts/comments.

[rhizome]

No, everybody doesn't know. Why do you think the conventional wisdom doesn't reflect that it's a buddy game rather than a meritocracy? Why is the word "meritocracy" ever even mentioned? Is it just a red herring thrown out by successful people to keep the masses suffering?

[freshhawk]

I think we disagree on what the conventional wisdom is.

I have never heard anyone successful talking about the state of things refer to a meritocracy actually existing. Lot's of comments about how some method is more of a meritocracy or closer to this hypothetical ideal. Talk to anyone about nearly any business and the advice is to make good connections. The "it's not what you know, it's who you know" is such an old saying that it's a cliche. It's "a saying". It's conventional wisdom.

The aphorism "build a better mousetrap, and the world will beat a path to your door" has only been used, during my lifetime (30 years), as an example of naivete. You also need good design and marketing and the right connections. To me, this is the conventional wisdom.

Nothing about money in the western world is a meritocracy, I honestly can't find anyone serious trying to say it is. Especially with all the number crunching lately concerned with the growing class divide in the US.

Am I ignorant? Outside of some kind of Glenn Beck style "woooo America! Fuck Yeah!" pundit that have I completely missed a meme or school of thought that is claiming a meritocracy exists (even though that's objectively wrong)?

[shareme]

some backstory..beware personal opinion

I had the opportunity to interview with Loopt sometime ago, right when they in fact did the name change to Loopt.

My read than was that they in long term terms were going to fail as certain constraints to do things were not in their best interests...at that time it was Mobile Operator limits..tie-=ups

Its a sad thing as current deal looks to be only based on patents values..not what Sam's team put into it..