Twice in the last week (here and here) I've mentioned the presentation that a leading California VC firm, Sequoia Capital, gave to CEOs of the companies it had funded. The message was: severe turbulence ahead, strap yourselves in, and to survive you must throw every bit of surplus weight and cargo (ie, employees and expansion plans) off the craft.
My friend the business strategist Lawrence Wilkinson (who is involved in a company with one of my family members) recently posted a fascinating item on his "Scenarios and Strategy" site about the other side of this interaction: the ways some private equity firms are using tough times to get very tough on the companies they have backed.
The tension between funders and entrepreneurs is familiar and well-explored territory. Any interesting account of the tech economy presents it as a major theme. To take one example from many possibilities: Charles Ferguson's High Stakes, No Prisoners, the tale of creating and selling his own tech company. Yes, this is the same Ferguson who last year produced the influential Iraq documentary No End in Sight. The basic tension of course arises from the fact that VCs want to use the scarce resource they control -- money -- to get more of the scarce resource that company founders control, namely shares of corporate ownership, including the cut of the rewards if a startup makes it big.
But Wilkinson, who has seen many rounds of this battle before, says it has taken on a newly nasty tone. According to him, many of VCs and other funders are now saying: bad times mean your company isn't growing as fast as we hoped. So, we will take more of "your" share:
I've been awash in reports, some in the press, some from friends, of private equity investors leaning on the companies in which they have stakes to reprice those stakes- to give the investors more. The arguments from one case to the next are idiosyncratically different in their details, but they all have the same general thrust: "we made our investments expecting more growth than it now seems likely the company will achieve, so you (the company) should give us a bigger stake."...
The issue is in no way misrepresentation... The issue that called the question was.. the sudden dramatic downturn in the economy: credit is tight; anxiety is high; spending has dropped like a rock... a situation triggered- and to some extent at least, abetted, if not indeed caused- by the excesses of the very financial firms now doing the demanding.
I've been around long enough to have gone through several busts; I've learned that many (if not most) investors understand opportunism to be not just their right, but their obligation. (And indeed, I've seen some forms of opportunism contribute powerfully to turn-arounds.) But I've never seen opportunism practiced in such a rapacious way as these recent days- nor, I'd suggest, so desperately nor short-sightedly selfishly....
It's a situation all too resonant with the first version of the Paulson Bail-out Plan: privatize the upside; socialize the risk.
The whole thing is worth reading, and is another illustration of the ways in which the recent financial turmoil, serious enough on its own, is taking on a more destructive and longer-lasting form as it begins to burden the operations of the "real" economy.