Bertrand Schmitt

Welcome to Tech DECIPHERED episode 51. We are going to talk about companies that ultimately became too big to succeed. What do we mean by too big? We mean that, in most situations, they probably raised too much to end up having some level of good success. The weight of their financing weighed on them, and what could be opportunities for the right exits.

Bertrand Schmitt

So, Nuno, let’s start about this and obviously we will talk about some pretty big companies that went under, some smaller ones that also didn’t go well, and some are still alive, just absolutely not where we would have expected them a few years ago, and not enough to make everyone happy in these companies. Maybe we start by explaining a bit more what is success or failure?

Nuno Goncalves Pedro

Let’s start with the punchline today instead of… Hopefully you guys will stay for the examples because they’re pretty cool. But let’s start with a punchline and why cashing isn’t necessarily related to success or failure. Why success sometimes on paper isn’t success in the end. It ain’t over until the fat lady sings. Probably not a very appropriate expression any more, but it really ain’t over until the company actually liquidates and everyone’s made their money, et cetera.

Nuno Goncalves Pedro

Let’s start with first principles: the first thing is a valuation on paper, a company is raising a private round of funding, a series B, a series C, a series D from venture capital investing, investors, even IPO ing, even going public into the stock market.

Nuno Goncalves Pedro

The valuation before any liquidation and an IPO would be an effective liquidation. Any valuation before a liquidation is on paper. It means what it means. It means that someone is willing to pay a certain price per share for the company at that valuation of the company. It doesn’t mean the company is actually worth that. It means there are certain actors that think that the company is worth that.

Nuno Goncalves Pedro

What it means is you can raise a ton of money, and in particular, you can raise a ton of money at a lot of valuation. You can be a unicorn on paper, so worth over a billion dollars. You can be a decacorn worth over $10 billion on paper. But that’s all on paper until there’s liquidation, be it an IPO, a full on trade sales where someone buys you out, et cetera, et cetera. Basically, it ain’t done yet.

Nuno Goncalves Pedro

Now, why isn’t cashing necessarily related to success? Why do people still make money? Well, people still make money because other things happen in the life of the company. When a company is raising, potentially series b or series c, it might be that certain investors or certain executives or founders of the company do what is called a secondary transaction.

Nuno Goncalves Pedro

What that means is they sell some of their stock to a third party that’s willing to buy their stock and gives them liquidity. It’s effectively a mini liquidation. They get some liquidity out of the stock that they have, and we’ll discuss some stories today of people that made a killing and their company failed miserably. People that made hundreds of million and their company failed in the end, investors that made a killing, that the company, in the end, also failed.

Nuno Goncalves Pedro

The correlation between the company failing or not, and you making no money is actually not necessarily there. You might have made money along the way. It might be, for example, that the company IPO’ed after your lock-up is done, which classically is after six months. Investors sold their stock, or they sold all of their stock. A lot of founders sold some of their stock, et cetera, et cetera, that they made a lot of money, and that the company dropped dramatically as a stock.

Nuno Goncalves Pedro

It might be the company’s nearly worthless now, but it was worth a lot at some point where people may have exited some of their positions. Again, money doesn’t correlate necessarily to success or failure. Success needs to be seen in a different light, which is the light of liquidation, not the light of “on paper valuation”.

Bertrand Schmitt

Yes. One thing I like to remind people, there is a big difference between the private and public markets. If you look at the private market, when we talk about valuation, valuation is set by really typically one lead investor. It’s not as if you’re in the public market. You have transactions every day happening, and you need a lot of investors to have a strong belief about the valuation of your business at the moment in time. Because if the valuation is too high, it will go down, the valuation is too low, it will gradually go up. There is some rationality in the market, at least step by step, and over the mid to long run.

Bertrand Schmitt

In the private market, it’s very different. As long as you keep finding that one investor that value your company where you want it to be, you are good enough. As long as this investor can bring the money or convince a few more to participate to that round, and that’s about it. We will see I guess, in many of these stories, you often end up having one investor that is willing to make a big leap in faith in term of valuation, in term of prospect for the company, in term of how much money to put to work.

Bertrand Schmitt

Basically, this has this ability to keep increasing price when technically a true market with multiple participants would not have come up with the same price. There is really a difference in pricing and therefore valuation. Another piece of the puzzle is a lot of private equity investors have to have a strategy to put a certain amount of money to work for each one of their investments. In some situations, that’s forcing a typical investment that might be too big versus what that company at this stage of the game should be really willing to take.

Bertrand Schmitt

Ultimately, valuations are connected to how much you put in a run. Typically it could be early on, 20%, later on, more 10% of your run, because you don’t fundraise for one or 2%, and you typically, hopefully don’t fundraise for 50% at once. It has also another impact. If you are a really big fund, you might force companies to fit your strategy by accepting big amount of money that might be too big for that company at this stage of the business. Let’s not forget, venture capital should be around investing step by step in a relatively, in some ways prudent manner, where at each level of new financing, you do that because you have reached new milestones and there is some agreement about what this milestone could be at different stage of different type of businesses.

Nuno Goncalves Pedro

We mentioned this in previous episodes. For those who haven’t listened to the those episodes, you should go back and listen to them. But valuation is a little bit like baggage. It’s like things that you’re carrying with you. It feels like, great, I’m worth a billion, you’re not worth a billion. Someone’s willing to give you money at a billion valuation, but there is an expectation that you’re going to reach at least that valuation and go well beyond it. That creates baggage. It creates like a bag of rocks that you’re carrying. You’re now carrying a whole lot of rocks. If you’re worth a billion, right, you really need to hit a lot more than a billion to be worthwhile for the last investor that valued you at a billion as a lead investor.

Nuno Goncalves Pedro

Shall we move to the nasty ones? Let’s go to examples. There are some fantastic examples here. I would make just one caveat before we go into the examples, which is there’s no investment advice in here. There never was in any of our podcasts. More importantly, we’re not dissing on anyone. I’m personally friends with some of the people we’re going to talk about today, so I just might flag some of them. I might not flag others. I don’t want to piss them off. It’s just things that happened, and we want to be showing you that.

Nuno Goncalves Pedro

The second piece is, we will mention a few things today that might be factually correct, but they are coming from different sources. It would be important at some point to put a grain of salt in some of the things we might say. We’ll try to qualify them when we say it, but just to put that in question, but let’s go with the first one. Quibi great, great company, huh?

Bertrand Schmitt

Quibi, I think everyone in tech is probably not want to say smiling when talking about Quibi, but I think this one is very odd company where a lot of people in tech, myself included, were expecting this company to fail from the get go. Let me explain to you why it was a company that was, and you might not know about it. It was a company started by Jeffrey Kastenberg and former HP CEO Meg Whitman.

Bertrand Schmitt

Both of them are really stars in their space. I think where people were suspicious were, okay, one knows how to make big movies, another one knows how to run an e-commerce business. But at the same time, what they were trying to do, launching a new streaming services where you build content and you launch streaming services itself and that is focused just for mobile consumption, and not just mobile in the sense of for the form factor of the phone, but also for a bite size consumption, was surprising in a day and age where you have big established streaming platforms already in place. Two, you have new native to the former platforms. What I mean is that you have the TikToks of the world and therefore the question was where are they fitting?

Bertrand Schmitt

It didn’t feel the typical startup approach where you start somewhat humble, you grow step by step, and then you deliver the good step by step here. In that situation, it was all in one go. I’m putting significant amount of money on the table before ever launching the service, and I believe they invested more than $1 billion.

Nuno Goncalves Pedro

They raised in total 1.75 billion. I think they raised 1 billion upfront.

Bertrand Schmitt

Yeah, 1 billion upfront. I’m not sure there is any other story of startups that raise so much in advance before even launching the service. Every other startups will talk about went step by step in term of I provide some service, I have some success, maybe I have too much too fast success, which give me the ability to raise too much, I’m not careful enough. But no one started so big with so much money, and I think that’s usually a sign that stuff might go very wrong, because you have huge expectation at the launch of the service and the minute these expectations are not met. You cannot go back. All your equity investors bought your story. If you are a few percentage wrong, that’s okay. But in their situation, I guess I’m not even sure they did 10% of their targets, you’re just dead.

Nuno Goncalves Pedro

They magically raised another 750,000,000 almost two years later. That’s why it was 1.75 billion in total. They got acquired by Roku, undisclosed amount. Which means it was like a wash in ways that cannot be described. But I think there are more fundamental issues to Quibi Kiwibi, to your point, they’re raising a lot of money up front, is always like huge amounts of red flags for me. Like, why would you raise so much money up front?

Nuno Goncalves Pedro

I know some of the best entrepreneurs in the world. I’ve been fortunate to meet some of them. They never raise this much money, to start. To your point, because they want to go in a staged way. They want to start building their team in a way that you start creating that culture, that initial thesis, understand if it works or not, put an MVP out for the product, see if they have to realign, pivot around, et cetera. You can’t pivot if you’ve made a big splash on a 1 billion product.

Nuno Goncalves Pedro

Their problem was actually fundamentally flawed, right? Because their bet was sort of twofold. One is that people obviously want to consume more and more on mobile, and they wanted to have shorter and shorter content to be consumed on mobile. They needed new content with a new tech. They had some tech around that content as well that allowed them to consume it, either landscape for portrait mode, et cetera, et cetera, blah, blah, blah.

Nuno Goncalves Pedro

Honestly, people just want to consume great content. I think in this case, and I know Jeff, he’s not a buddy, he’s not a friend. I know Jeff, I think he’s an amazing guy, but he should have been the one that should have figured that out. I mean, great content is just great content, right? People are going to consume it everywhere. If it’s like 15 minutes of an episode that takes 45 minutes, when I’m on my way to the work, I will do it on my mobile. It’s fine.

Nuno Goncalves Pedro

Why did we need a new format? More than that, it was tried in the past. You and I remember this because we’ve been in telecom world early on, and in the telecom world, they tried this. They tried, there were companies that were bet on this. There were companies by guys from Hollywood that tried this, that tried the short format stuff, and it never really stuck.

Nuno Goncalves Pedro

It’s not to say that short formats haven’t stuck. We knew that in user generated content, they have stuck. TikTok is stuck. The shorts on YouTube are sticking, but it’s a different type of content. It’s not this type of content. Again, some people might say they were too early. I don’t think they were too early. I think they got it wrong and they just raised stupid amounts of money. The raising of money, to your point, Betrand, got them stuck in a path where there was very little way back where they had to get and nail that V1.

Nuno Goncalves Pedro

I used the product, I still have it in some of my phones, and it was appalling. What would I consume? I mean, I watched a couple of things and even the content wasn’t amazing, right? Again, a total failure.

Bertrand Schmitt

The other piece of the puzzle is that when you bring these two-star ex CEOs, content creators, and you raise so much, everyone is waiting for you to fail.

Nuno Goncalves Pedro

[inaudible 00:12:45]

Bertrand Schmitt

My point is that it’s sad to say, but that means that every journalist was waiting to write a story about how their stuff was not working. My point is that there’s only one chance. Either you get it right from the first week or you’re dead.

Bertrand Schmitt

Because then you have a lot of negative buzz. How do you get out of a negative buzz? They became the joke of the week. Not immediately at launch, because people could see, as you say, it was empty, it was not quality, it was kind of useless versus your alternatives of either watching regular content on a smaller phone anytime, anywhere. Now you can. You can replay. Not a big deal.

Bertrand Schmitt

You have YouTube or you have TikTok for a different type of consumption. Again, a TikTok, a YouTube and Netflix, they all were started step by step. Netflix didn’t start to invest in production. They started step by step.

Bertrand Schmitt

I think that’s a key part of the puzzle. You cannot invent all the pieces at once. If you put too much money at once, typically it’s a big risk. Even if you have great people at the top, there is only so much you can do. There is a reason why typical investment go step by step and are synchronized to milestones that are representative of the success of the business.

Nuno Goncalves Pedro

Indeed. In this episode of Schadenfreude, and for those who don’t know what Schadenfreude is, it’s the pleasure derived by someone from another person’s misfortune. That’s the definition of it. If you guys remember the Simpsons, there was this sort of bigger kid on Simpsons that always laugh when someone else fell or did something stupid. The famous Aha. When someone did something wrong. That’s schadenfreude. We don’t derive pleasure from this. I mean, we obviously. I hope all of these guys. But anyway, it’s my little British joke today.

Nuno Goncalves Pedro

The second one is Katerra. A company that was going to revolutionize how construction was done and using a lot of methodologies and services and technology to improve construction at scale.

Nuno Goncalves Pedro

The numbers vary wildly. I mean, from 1.4 billion that they raised to 3 billion that they actually raised. Pitchbook is around 1.4 something billion. Maybe that’s what they raised in equity. Some other places say 2 billion. I’ve seen news, a Wall Street Journal news that said 3 billion in the end, I believe they filed for chapter 11. I don’t know what happened in the reorg and the restructuring of the debt. If there was some assignment then to creditors, I have no clue.

Nuno Goncalves Pedro

But that’s massive, it is a construction ish company. It was a tech construction company. They were going to do things differently. It’s another softbank. We don’t want to take a stab at them. I mean, it’s like you have to go big or go home. In this case, they went big and-

Bertrand Schmitt

They went home.

Nuno Goncalves Pedro

-did not get big, so they became home. They went big first, and then they went home, sadly enough. It’s a shame, because they were trying to revolutionize our construction zone. We know that we’ve had this promise of prefab for a long time. We’ve had this promise of new methodologies of construction for a long time. We are in dire need of more housing. It’s a shame it failed, but yes, what a massive failure. I mean, 1.4 billion raised, or 3 billion raised, maybe, with that and stuff. Incredible.

Bertrand Schmitt

It’s not just that, but it made more than 20 acquisitions. I mean, it’s a lot of acquisitions for any startup company to do, which is also, for me, raising some questions about, okay, what is the core of this business? I mean, if you end up doing 20 acquisitions, that’s, again, a lot.

Bertrand Schmitt

Especially for a company, if I remember well, and I was rechecking some articles that probably was not even having positive gross margins. I’m not even sure they had positive gross margin at any point.

Bertrand Schmitt

That’s super scary if you cannot reach that. I mean, who in their right mind keeps investing in such a business? That, for me, is very scary. Was there any technology or was it just all the process? My impression is that they were claiming they do end to end and prefab, but prefab okay, it’s nice, it’s good. I think there is some logic to it, but it looks like it has been tried before. Looks right. They try to do too much at once in term of trying to integrate too much of the construction industry in one company.

Bertrand Schmitt

But I think there is a lot to learn and another piece of the puzzle very quickly they brought some big name CEOs, like Michael Marks was the founder of the business, so definitely some big names. Another situation of celebrity founder/CEO, who thanks to his past, managed to raise a lot more than maybe anyone else would have been able to raise, given the situation of the business and the reality of the business.

Nuno Goncalves Pedro

A couple of insights here. They raised normally, I think the first two rounds, they raised 8.4 million in angel and seed round. I mean, large seed round, but obviously this is a construction tech company, and they wanted to build stuff.

Nuno Goncalves Pedro

Then they did a series b of 75 million, 160,000,000 series C. I think Softbank didn’t come into any of these rounds. Softbank came in at the billion dollar round, 900 and something million round with a few other investors, I would assume going a little bit more pearship, because then you have to grow very fast.

Nuno Goncalves Pedro

It’s a space that I’ve actually looked quite a bit at. Not the space specific that Katerra was on, because they were in a space of building larger buildings. I looked quite a lot of single family housing, et cetera, et cetera, and using for those types of houses, the prefab concepts and a lot of tech for it.

Nuno Goncalves Pedro

The issue is, as much as you can want to use tech and do manufacturing and pre-build stuff and do less things on site, you become a services company at scale, right? Because you still have to have builders, you still have to have people on site.

Nuno Goncalves Pedro

Regulations are funky. I’ve looked so much at the space. It’s funky by county, it’s funky by locality, and then you have licensing stuff. This is something that maybe they were onto something. I do not know. I can’t tell you if they had amazing tech or not. I was not an investor in the company. But certainly at some point you’re like, did they prove at some point that this was going to scale quickly? Were they ready to blitzcale from 75 to 100 and something million to 900 and something million in arrays? Maybe that was the point where it tipped over a bit too fast.

Bertrand Schmitt

We’ll talk more about WeWork, but it also feels it has some similarities with WeWork. We talk about gross margins that were extremely small. But there is also the question about the reality of the tech. Was there really any tech beyond I’m doing prefab somewhere else. I mean, what tech are we talking about when we talk about prefab?

Bertrand Schmitt

In a way there is that question around, was it just a construction company? This is fine. Constructions company are great. I have nothing against. The big issue becomes when you are trying to say you’re a tech company. Therefore I deserve tab valuation, therefore I deserve tech level of investment, when actually you are not at the core of the business, of how you do your business. That result in an horrible mismatch of investment expectation.

Bertrand Schmitt

One thing you talk about raising a billion dollar from some investor at some point, it comes with huge expectations of putting this money to work pretty fast. People rarely give you 1 billion to work, to use it sparingly over the next ten years. No, we give you a billion because we expect you at this point where you can scale very quickly, get good results, and maybe you need more in two years from now.

Bertrand Schmitt

The question is, if you use it very quickly and you use it wrongly, then it’s gone, and then it’s very hard to find anyone willing to provide another billion or 2 billion if it doesn’t go right.

Nuno Goncalves Pedro

The next one is Bird, Micromobility for the win.

Bertrand Schmitt

Yes, and I feel, Bird, we are going in that category that I respect a lot of companies that have truly reinvented a new industry in their situation, micromobility. They started in LA, they started with a few electric scooters. They started a revolution in how you use transportation in a different way, more efficient way. It was coming on the back of a few innovations. First is more electric motors being easier to manage and to charge. The other piece, of course, was your phone. The fact that these mopeds or scooters were easy to find through your phones, because this device themselves had a battery which can power up their gps location.

Bertrand Schmitt

Unfortunately, it came with a lot of issue. Where do you park them? How do you manage to charge them? What do you do about people who don’t leave them in a good spot? About the danger, obviously to others if people do crazy things with these devices. It came with a lot of issues, and I think ultimately the operational complexity might have been too much. Another piece of the puzzle is that America might not be ready for this type of devices at scale.

Bertrand Schmitt

If not America, maybe only a few cities in America are really designed for that college campus as well as some heavily dense downtowns. But you won’t have so many in America, obviously in Europe, in Asia, it’s a different story. But even there it was not a smooth ride. There were a lot of companies that tried micromobility and a lot of them failed. I don’t know the details of the inside stories. I’m sure there were some obvious mistakes and as usual, too much financing.

Bertrand Schmitt

Valuation went too fast. Too quickly. That’s part of the typical story. I don’t have the exact metrics in front of me, but I think it moved extremely fast. In maybe a year or so between the initial start of the service and insane level of investment, there was a race, if you remember, globally, among all of this type of business, there was a question of who will be first, would be first in all of these cities. Basically you need that money to move fast in a way, even before you could prove your model. Because if you take the time to prove your model, you will potentially end up being last. If you are last, it might be trouble.

Bertrand Schmitt

Especially that some municipalities didn’t want too many players. At some point they tried to limit how many players are operating. That logic to go first quickly was good, but at the end of the day, it means you cannot validate the model, optimize it, fine tune it.

Bertrand Schmitt

In a way, this is a different type of situation. These companies had some reason to have to move fast. Too much investment in the space by too many VCs, too much competition, and municipalities were giving pressure to be one of the first entrants at the end of the day.

Nuno Goncalves Pedro

I know the space really, really well. I was involved in a firm that had several investments in the space. I wasn’t involved in any of those investments. Bird was not one of their investments. But to be honest, they only made money out of one of their investments in the end and they didn’t make a huge amount. Question in my end is the space totally imploded? I’m friends with Brad Bauer, who did lime, and that obviously exited. Not a great exit either, but they exited.

Nuno Goncalves Pedro

I think it’s just a space. The E-scooter sharing piece, the bicycle sharing piece that the unicorn economics actually never quite worked. Then if you add hyper competition with a lot of well funded companies and then you put on top of it regulation, when time comes, you have the recipe for perfect disaster. I don’t think this is a stab at e scooters. It’s not a stab at ebicycles. There’s still market out there for people to own stuff and do stuff. But it is definitely a failure of right sharing.

Bertrand Schmitt

Maybe on that point it’s interesting to compare to Uber, because Uber definitely a successful company today. The difference is that they didn’t have to invent the technology. The car was already there. You could use Uber with an existing car. You didn’t have to manage the cars, you didn’t have to charge them, you didn’t have to do any of this. I think that was a big difference.

Bertrand Schmitt

In terms of regulations, yes, there were regulations around Uber, but different, I would say definitely less destructive with this micromobility services. You really had municipalities selecting which service would be the official service of the city or limiting to two or three. That was really a different situation versus an Uber where regulations were more general and there was not a numerous clauses, a maximum limited number of companies allowed to compete. For me, some interesting differences.

Nuno Goncalves Pedro

Moving to Fab.com, ecommerce play raised over 300 million. Jason, the founder, someone that I know very well as well, a lot of respect for him, know a couple of people that work there at scale, actually helped one of those people exit in a secondary transaction. Some of the stock that that person owned and that person made almost as much money as they made on the exit, which was rumoured to be 15 million.

Nuno Goncalves Pedro

They raised over 300 million. The exit is rumoured to have been around 15 million. We shall never know was definitely a unicorn back in the day. For those who don’t know the story, very, very quickly it was started as fabulous, which was not fabulous, but fabulous, which was a social network for gay men and their friends. Then it pivoted into an ecommerce play with daily designs and things like that. Grew fast, raised a lot of money, and then sort of imploded.

Nuno Goncalves Pedro

Would be interesting to sort of figure out what happened. It was one of the earlier plays around social commerce that got a lot of hype. Maybe that was why it raised so much money. In the end, the scalability of the business model wasn’t there, and then it failed, and it couldn’t raise more money, and so it sold for not much.

Bertrand Schmitt

Yes, and I think that’s also a company where it moved very fast. It raised a lot of money. I’m not clear that the unit economics justify any of this, because at the end of the day, if you have rational unit economics, you are still in a good situation, even if you raise too much. But if your unit economics are very wrong, you are kind of forced to keep fundraising. If you are forced to keep fundraising, and anything goes wrong. That’s when trouble usually comes.

Nuno Goncalves Pedro

The examples we’ve talked until now, the four examples, are all examples of blitzcaling failing miserably. You raise a ridiculous amount of money, and it just created all this stuff. Then the company couldn’t scale. Now, with Quibi, probably even. It wasn’t a blitzcaling example, just started with a blitz scale. There was nothing in it. There was a blitz scale.

Bertrand Schmitt

From zero to one in a day.

Nuno Goncalves Pedro

But the others are examples where blitzscale failed miserably. Probably none of a better example on blitzcaling failing miserable than our favourite, WeWork. We’ve mentioned it so many times now.

Bertrand Schmitt

Yes, WeWork is probably the poster child for some reason. It was more visible. I mean, it had a very visible funder. They raised a lot of money. If we look at valuation, it went up to 30 billion in valuation. That was private, just before the IPO. That’s when the CEO was forced to leave the business, just before IPO. If you remember all these articles before IPO about the funder.

Bertrand Schmitt

And then it went to 2 billion, then it went to 500 million, and now it went through chapter eleven in November 2023. Not a lot of news, actually, in term of its emergence out of chapter 11. I guess there might be a core business that might be more sustainable beyond chapter 11 once they’ve renegotiated the leases they had, if they can.

Bertrand Schmitt

It’s probably a story of company on any levels where you had gross margins that didn’t really make sense. You had long term investment like these leases, that were clearly wrong and done at the wrong time, when the market was very high, suddenly the market goes down, and you have the wrong lease, you are in trouble. That’s exactly what happened.

Bertrand Schmitt

There was the last piece of the puzzle, which is no technology. Trying to sell yourself as a tech company when you are not a tech company, therefore getting tech valuation, and ultimately there is nothing that make you a tech company. You should be valued like other players in the space, and there are some good ones, but there is no real reason to value you differently. But then when you have raised billions, it’s super hard, and you have a company that is not finely tuned, that’s very hard. Go back quickly enough.

Nuno Goncalves Pedro

They raised pre-IPO, I think, 9 billion. In total, if I believe these numbers, with pipes in it and debt and stuff, they raised close to 17,000,000,016.69 billion. I mean, it’s incredible. I think the key issue of this company is a company that was trying to trade with tech company multiples, that was always not a tech company.

Nuno Goncalves Pedro

To your point, not only they were not a tech company, as the real estate angle to what they were doing in some cases was just fundamentally and structurally incorrect. The leases that they had in place, the way they negotiated them in many cases, et cetera, et cetera, was just strong.

Nuno Goncalves Pedro

It was a big view. We’re going to create this huge community, a bunch of tech around it, underlying, to make people really interact as if they’re part of the same company, but they’re all part of different companies, just sharing a space. That is never the case. I mean, so totally overblown, massive, massive amount of spend into this.

Bertrand Schmitt

Yes. Lucky for the CEO, Adam Newman, it looks like he managed to do very well getting at least half a billion dollar, I believe, just before it imploded.

Nuno Goncalves Pedro

The secondary right?

Bertrand Schmitt

Yeah. Softbank was kind of locked in a transaction with him. Obviously it’s far from the valuation of paper he had given his shares in the business, but it was still, I remember, a very huge exit for him as a founder, while at the same time the business was totally imploding and every employee who was expecting to have a nice exit at IPO and change their life, got nothing.

Bertrand Schmitt

That was pretty stark contrast. It’s not a story of the CEO sold many years before. It’s totally independent. He’s not even running the business anymore. We’re talking about the guy who completely failed the IPO process, because during IPO, I think it became clear that the business was in trouble and was not a reasonable business, but still managed to get out of jail card just before the business imploding.

Nuno Goncalves Pedro

This is not a get out of jail free card. This is a please go to this resort card. I mean, with all due respect, I mean, you made 500 million or more.

Bertrand Schmitt

Yes. With your private jet and the new island you bought. It was very stark, and I would say for even a lot of hardcore capitalists like us, maybe too much to see, especially when it happens at the same time and looks like it was caused probably not just from the CEO. I think that a lot more were to blame, some execs, some investors. But still, it was kind of shocking for a lot of people who worked there and were hoping for a nice exit and believed all these stories.

Nuno Goncalves Pedro

For a more recent one, where the CEO did pretty well as well, Hopin, a virtual event play, where it basically recently sold what is seen as the key part of their business, which was the virtual event and webinar hosting product. They sold it to RingCentral, undisclosed. There’s rumors it was 15 million, nobody knows.

Nuno Goncalves Pedro

They raised more than 1 billion. Not the valuation, the valuation. The last round we know was 7.8 billion, that they raised more than 1 billion. The founder made a really nice cash out of 195 million is that correct?

Bertrand Schmitt

Yes, close to 200 million. What’s even more crazy is that this company was just started in 2020 or maybe 2019. It was really started just before the pandemic. Then suddenly everyone wants to go out of physical events, because the pandemic to virtual events makes sense.

Bertrand Schmitt

But then suddenly I remember his business really exploded in a positive way. I mean, everyone wanted to switch to something, and in a way, it was the only game in town. I understand that he was also trying to extract very crazy pricing. It created a lot of revenues quickly, but a lot of anger from potential clients.

Bertrand Schmitt

What looks like is that they definitely cashed in on that surge of business for maybe two years, or maybe at least a good year, and then it slowly died on and then quickly died on because we’re out of COVID and no one saw real value in virtual events. I don’t know, you know, but initially, personally, I had a positive mind around virtual events, but step by step, what I saw is that they just didn’t want to lose that on a regular basis. That approach of trying to translate to directly a physical to a virtual events was not really working.

Bertrand Schmitt

I’m not sure in the history of business, there was such a fast growth in valuation for any company from zero to 7.8 billion in two years.

Nuno Goncalves Pedro

This is a fat company. Everyone went on the fat. They had positive momentum through Covid when everyone was stuck at home. I think investors just wanted to propel it. Again, it’s a case of blitzcaling going wrong, right? Give me a lot of capital and I’ll scale it. Well, there was nothing to scale on. The company eventually couldn’t really make it work.

Nuno Goncalves Pedro

I do not know anything about the internals. Whether they had product issues or they had management issues, I have no clue. But basically it feels like a fat play, right? There was a fat play. They gave him too much capital, put to deploy too early, and they thought they probably had product market fit when they didn’t have it. Then when they were trying to scale it, it didn’t go to the next level. The CEO did. Well, I think is the conclusion, did better than the company I guess.

Bertrand Schmitt

But in a way it was smart to say, okay, there is a lot of investment on my disposal, maybe I don’t really know how to use all of this so quickly. I know I will get pressured to use a lot quickly in some ways make mistakes. Therefore, you know what? If you want me to accept so much investment, maybe I will just say yes, but in exchange of a big cash out, because I know I’m putting at risk my business doing so. That could have been a sort process, to be frank. What I also don’t know is how much others were allowed to cash out at the same time.

Bertrand Schmitt

To be fair, I believe they had pretty insane metrics in 2020, maybe up to early 2021. I think they went to zero to 100 plus million AR in six or eight months. From a pure metrics perspective, this was totally insane. Go back to your point. Ultimately it was a fat for sure. It’s easy to say that post Covid at the time we were all freaking, or most of us were freaking out. Definitely there was money coming because money was moving from physical events to virtual events.

Bertrand Schmitt

I remember in that space, the whole question at the time was how much will it stick? Is it something that will stay on because that’s a better way to run events or that’s an alternative way that people will see valuable and will keep using going forward. But ultimately it ended up being neither. It was just something that was not so useful the minute you can do physical events again.

Nuno Goncalves Pedro

Worst of all is now we have a bunch of companies going after that. There’s too many startups going after that, trying to raise money, which to be honest, I think is a bit of waste of resources for everyone involved. Maybe moving to the last example of those that failed miserably. Blue Apron.

Bertrand Schmitt

Yeah, I followed Blue Apron and like Bird, I feel they built a new type of business that ultimately might not have proven so successful, but at least they created a new category. That category of the meal you prepare at home, because you have received some ingredients and a recipe exactly tailored for these ingredients, and you have the step-by-step guide on how to do it. Basically you prepare your meat by yourself, but everything is there and it’s easy for you to manage. You are saving time while still doing it the old way, doing the right preparation.

Bertrand Schmitt

It created a new category. Some companies had some level of success there, but then they fundraise, they raised, they went IPO, and then everything went down, post IPO. They had issues running the business, execution issues, basic issues of safety, managing efficiently, running the business operationally tight enough in term of margins. Also, I believe they had too much user acquisition cost. It was ultimately costing them too much to acquire new users. When it moved from let’s go at all costs to let’s go efficiently, suddenly kind of discovered it was very near impossible to run this business efficiently enough.

Nuno Goncalves Pedro

It’s a space that, again, I looked extensively at this. Different types of plays, from pre-prepared to almost done, to plays where you just had the ingredients, et cetera. Blue Apron for a long time, was the poster child.

Nuno Goncalves Pedro

It is not a case of blitzscaling going wrong. They raised normal rounds, 3 million, 5 million, 50 million, 145 million for a series D. Then they had some debt in it, then they IPO-ed. Pre-IPO, they’d raised 256 million according to my numbers.

Nuno Goncalves Pedro

It’s more of an issue of fundamental product market fit, I think, on the one hand, which is, had they really found product market fit, or was it just they were paying to get in front of users to use them a couple of times, and then they had very little stickiness to the packages. I’ve always had this doubt. Do people at home want to cook themselves? Want to bring pre-prepared food, meals, delivery? Or will they go out for the right price? What’s the right combo? There’s a lot of competition. There’s a delivery place, there’s all this stuff going after you as a customer and a consumer at home, what would you prefer having?

Nuno Goncalves Pedro

It was a tough market, as you mentioned, there were operational execution issues as well. There were issues around unit’s economics, if I recall it correctly. Looking at the space, there was always a little bit of a challenge around that.

Nuno Goncalves Pedro

But in the end, it was product-market fit. Like, I mean, stickiness, people coming back, loving them, and scaling that to really become a very pervasive service. A shame they failed, as I said, they raised 256 million pre-IPO, and they sold for 100. A little bit over 100, right?

Bertrand Schmitt

Yes, 100 million.

Nuno Goncalves Pedro

A hundred and three million or something like that. A shame. I don’t think this was one of those where there was too much capital at the table. It was just something that, in the end, couldn’t scale.

Bertrand Schmitt

Yes, I agree. That’s the first. That was not really a blitz scaling type of play. Maybe let’s move to some that are still alive but not doing great. We will start with a company and product I really like, actually personally, Evernote, I think it’s a great product. I also have a love hate relationship because there are some bugs I really cannot stand. Years after years it’s still not corrected, but overall a very useful utility.

Bertrand Schmitt

A very old company actually we call it a startup, but it started in 2000. They really had their run with the launch of smartphones. When smartphone launched they did a great move which is to extend from the web to your smartphone. They were the first note taking app to appear on the market with a high quality of product, optimized for the different OS, optimized for not just phones but then tablets. A very multiplatform approach and very importantly synchronization between all your devices.

Bertrand Schmitt

That was really huge, but it didn’t work out as expected at some point they reached pretty early on, early on after this move to mobile at a valuation at a billion dollar in 2013. But from there it was probably more of a painful downhill. Probably one reason has been that all the platforms end up launching a notes App, Apple notes, Google notes, Microsoft notes with their different products.

Bertrand Schmitt

So suddenly it was pretty difficult for them to monetize and more important, most of these players launched free version of their products, so suddenly they had pressure that how do you justify a paid product, a paid version of the product when so much competition has free version? Multiplatform was probably the main reason you would pick Evernote, but it was probably not enough to get a big market and to keep revenues rolling. I certainly believe they had some technical difficulties. I remember some detailed blog post about the issues on a technical level with our platform that they still have issues so that they didn’t finally manage to get rid of and therefore justify some level of premium.

Nuno Goncalves Pedro

Evernote, just a couple of notes, pun intended, was a huge fan as well. I think they left pricing too late. They didn’t do experimentation with pricing until very late. Then, when they finally did experimentation with pricing, they totally messed it up. I was one of the people that stopped using them when they totally changed their pricing model. It’s like from now on you have to pay. I was like, I understand, but then I’m going to go somewhere else.

Nuno Goncalves Pedro

Two, it’s in a space that, in my opinion, still isn’t solved. There aren’t great note-taking apps out there still. I mean, we have Google Docs and stuff, but that’s more like a Word doc type replacement. Keep from Google is not great. It’s really not at the level of what Evernote allowed you. It’s a shame because it really never did well. Thirdly, they had some issues with syncing at some point, one of the things that bugged me about it a lot. Their syncing had huge amount of issues, multidevice. They sort of messed it up a little bit.

Nuno Goncalves Pedro

Last comment I would make is I met Stepan, who was one of the founders, and I met his son Alex, who was one of the executives at the company in 2006 before they raised, I believe, their first serious institutional round. They were amazing, lovely people. I fell in love with the product immediately, used it for a long time, as I said, became a friend with Alex and I think it’s really a shame.

Nuno Goncalves Pedro

I don’t think it’s a story of a company that did things significantly wrong.

Bertrand Schmitt

No.

Nuno Goncalves Pedro

It’s just a company that kept having maybe they did a pricing thing fundamentally wrong. Maybe they messed up at some point on new product launches. Maybe that was their downfall, I don’t know. But it’s a company that just kept chugging along, raising the money they should raise being of extreme utility to their users. That somehow ends up in a bad outcome. That somehow ends up in an outcome that is below probably the whatever 300 something million they raised between debt and equity.

Bertrand Schmitt

Yeah, I think at some point it’s a question of execution not being tight enough and at the same time ultimately having raised too much to satisfy the objectives of their investors, you raise 300 million, ultimately beyond their valuation. It’s tough to keep investor interested if your KPIs are not there, are not following up.

Bertrand Schmitt

I think what we have seen is that all these giants companies actually prefer not to acquire Evernote, but to build their own, thinking that there was little value for them to acquire Evernote, which in a way is a surprise. You would have expected potentially some exit. Microsoft has acquired so many businesses in that space.

Nuno Goncalves Pedro

I felt there were some rumours at some point that Google was going to buy them et cetera and that didn’t work out, I don’t know. Maybe there were maybe deals at the table at some point that didn’t go through.

Bertrand Schmitt

Maybe.

Nuno Goncalves Pedro

That would be my best guess. I don’t know why they didn’t go. True. Next one, Clubhouse. We all were mad about it. We all wanted our invite to get in and now nobody goes in. I’m exaggerating, I’m exaggerating, but nobody goes in. Obviously I tried using it recently. They’ve totally pivoted. It’s now more of a play that is around messaging and grouping and things around voice than it was at the beginning. They got copycatted pretty immediately by Twitter. With the Twitter rooms.

Bertrand Schmitt

That’s probably what killed them, actually.

Nuno Goncalves Pedro

I don’t know. I think Clubhouse. I always had a doubt whether… I had two doubts. I had a doubt whether this was a fad or it was a real market trend that was going to stay through time. We looked at this deal, just to be clear. The second thing was, obviously, competition was a big issue. Can everyone launch this? Well, we sort of were right. Everyone’s launched it. LinkedIn has it as well, et cetera, et cetera. Now you have group voice stuff almost everywhere.

Nuno Goncalves Pedro

The third thing, I think, that we had it out on was from a group perspective and group voice stuff. Is this a feature or an actual business? We didn’t really see it as an actual business. We did see what they were trying to build. They were trying to build a social voice network. Or a voice social network, so to speak. There were a couple of examples in China that had taken off. I don’t recall the name of the companies, but there were a couple of companies that in China that actually had taken off. I don’t think any of them is magnificently huge today, but they had taken off.

Nuno Goncalves Pedro

There was this assumption that voice needed its own place. In some ways, I think we all agreed. But again, it brought me back to this notion. Maybe it’s a feature, maybe it’s not really a business at scale. Maybe it will tie into other products. Maybe we don’t need another social network just for voice.

Bertrand Schmitt

Yeah, I think it might be that more that each social network has to rebuild itself in term of your friends, your connection, all of this. It takes a while to follow the right people. It’s a lot of pain to keep adding. If one of them, be it Facebook, Twitter, whatever, does that job well, like Clubhouse well enough, then why would you bother with Clubhouse? Why would you bother to go there once in a while if you anyway, go to Twitter every day? I think that has been the issue for the story.

Bertrand Schmitt

We did record one episode on Clubhouse, if you remember, or at least it was a series of Q&A that was at the height of the craze for Clubhouse. That’s another story of a company that went in a wave, I think was quite careful early on to develop itself step by step. But then suddenly, this influx of users, KPIs, actually, they were up and to the right. It’s not a Quibi story where they pay a lot of money to get users. They don’t get them.

Bertrand Schmitt

Here, they manage to get users at scale very quickly. KPIs are insane. Valuation goes from very little to 4 billion. 100 million infusion of cash and then nothing from there. I mean, it stayed on for maybe 12 months Max. Something of interest. Barely 12 months. Yeah, I’ve not been back.

Nuno Goncalves Pedro

Clear case of consumer fad. Just, it scaled and then people just like, okay, I’m good, I can go somewhere else. And people did.

Bertrand Schmitt

Yeah. I feel that Twitter was very fast to launch a competitive product for once, maybe. The result, probably a lot of users like myself, ultimately were able to basically get a similar product already from Twitter. No need to go somewhere else.

Nuno Goncalves Pedro

Last company in this gang of the ones that are still alive but not necessarily doing great is Citizen, which is a crime reporting app. Many of you may have used it if you’re based in the US. It tells you what’s going on around. You get videos of the latest incident because you have Citizens. That’s the name of the app, is Citizen, taking videos of whatever happened. It’s pretty cool in that standpoint because you can see all the crap that’s going around you, the stabbings, the killings, et cetera, where you shouldn’t go. It’s great to follow.

Nuno Goncalves Pedro

They started monetizing as well. To be honest, I think their wall transition piece is a bit too aggressive. Initially, I was like, are these guys forcing me to get into a trial? Then I realised, no, there’s ways around it. But it wasn’t very clear on their wall. There’s a couple of practices they had on the app that, to be very honest with you, I wasn’t a huge fan of. I live in a relatively uneventful place, thank God. Obviously, I might go back to San Francisco. That’s a good place to have an app like Citizen in.

Nuno Goncalves Pedro

The interesting thing here is the company has laid off people. Sequoia’s dropped out of their board, which I’m not sure means the company is doing badly. It might mean there was disagreements between Sequoia and other board members or Sequoia and the executives or something like that. Sometimes I would say the majority of cases where a large investor or a significant investor drops out of a board is because there’s significant disagreements at the table. There might be other reasons, but that’s certainly, in my experience, what normally happens.

Nuno Goncalves Pedro

But it seems like the company is not doing as well as it was in the past. I mean, they’ve made some revenue, so it’s not one of these consumer apps that doesn’t make any money. They were in the tens of millions of revenue, according to some sources, I don’t know. It doesn’t feel they’re doing great. They’ve been criticised a lot for obvious reasons. Vigilantism, over surveillance, maybe lending itself to racial profiling. It’s in the hands of people, so people do whatever they want with it. I don’t know.

Nuno Goncalves Pedro

Anyway, we’ll see what happens with the company. Maybe it’s a lighter still around but not doing great type of case. We’ll observe, but it’s one that definitely comes to mind, maybe switching to the ones that did okay, well, but should they have gotten that outcome? These are all transactions that were acquisitions in the end, interestingly enough, I would argue that a couple of them were acquihires, significant acquihires. The others may have been interesting deals that certain VCs may or may not have been significantly involved in making happen.

Nuno Goncalves Pedro

We start with Loopt. Loopt is how we sort of started knowing a gentleman named Sam Altman, who now everyone knows because obviously the CEO of OpenAI. He is still the CEO of OpenAI.

Bertrand Schmitt

Yeah, CEO of OpenAI as of January 17, 2024.

Nuno Goncalves Pedro

Again. Right?

Bertrand Schmitt

I don’t know what happens tomorrow, so.

Nuno Goncalves Pedro

Obviously he was CEO of a Y Combinator before that and he’s super well known. Loopt was his first big claim to fame. It was a company that allows you to share your location, was started in 2005. So a long time ago, almost 20 years. I used it very early on, I used it in feature phones. The company was around for seven years in total, six years and a bit. Seven years. I know a few people that were involved in the company. I do not know Sam, but I know people that work with him at Loopt.

Nuno Goncalves Pedro

I won’t go into too many details. The information I have was not given to me by the people that I know there. But it is interesting that the company sold, they raised, I think, 30 something million. They sold for 40 something million to Green Dot, which I believe at that point was already a public company. Magically or maybe not Green Dot had on its board Mike Moritz, obviously from Sequoia Capital. Magic, or maybe not, greenDot was an investment from Sequoia Capital. Magic, or maybe not: loopt was also an investment of Sequoia Capital. I will not say anything else, but it feels all very magical.

Nuno Goncalves Pedro

I heard from sources, again, not related to the company, so I can’t vouch for the veracity of this, that there was an offer maybe sometime before, maybe a year or so before, from a very large company in Silicon Valley, that should go unnamed, that’s irrelevant who they were, but a very large Silicon Valley company, that was significantly higher than 40 something million and that company had bad blood with one of the VC firms that was an investor with Loopt. And so that deal may or may not have been axed, and it may have been that then there was a way out for Loopt later on.

Nuno Goncalves Pedro

But again, this is the beginning, the origin story of Sam Altman, and it’s obviously an incredible story. A very high achieving individual that is now maybe controlling the destinies of a significant part of the world. But that’s how it started, with Loopt. Not an amazing outcome. I don’t think the play was an acquihire. It feels a little bit like a facilitated deal, which was, I’m sure, still a decent outcome for people involved.

Bertrand Schmitt

Which you could argue is a good thing for me, helping fundraise your next round, helping you in a final transaction to get a deal done and make an exit. I think that’s a core part of being a VC. I see that as a positive that they help for this transaction.

Nuno Goncalves Pedro

For me, that’s the dream, that VCs can have the ability to do these types of deals, and it’s great for founders, it’s great for the VCs. This is like ultimate gamersmanship, right? This is when you can create real value after investing in the company.

Bertrand Schmitt

Yes.

Nuno Goncalves Pedro

Kudos if it’s the case that value was created through the VC firm. Kudos to them. I mean, incredible, incredible. We all take our hats off, and we’re all very envious of that.

Bertrand Schmitt

Yes, for sure. In that situation, 30 million raise, 40 million outcome. It’s not a lot of value creation. As you say, there was a significant outcome a year before that was possible and that was not realised because of some VC firms. That’s another issue.

Nuno Goncalves Pedro

Maybe second example is Slide. Max Levchin, obviously part of the PayPal Mafia. Worked with Peter, with Elon and all those guys that you probably have heard about at PayPal. Slide was trying to do some interesting stuff around social, some really cool concepts. To my knowledge, it never really scaled. Ended up being acquired by Google. Transaction that was 180 something million plus an earn out of 40 something million.

Nuno Goncalves Pedro

A strange transaction because Slide was then deprecated, I believe, soon after or relatively soon after. I am not saying anyone made this deal happen. It was definitely down from the last valuation we know from Slide, which had been at half a billion, was a great outcome for Max. I think probably a decent outcome for Max, at the very least for a few other people there. Keith Rabois, I think at some point was the VP of strategy and development there.

Nuno Goncalves Pedro

I don’t know who facilitated that outcome, but it feels like an interesting outcome for a company that then lead to anything else after the acquisition. Not sure it was really an acquihire either. I don’t think Max stuck around very long, if I’m not mistaken at Google afterwards. Interesting. It’s one of these, do them if you can, if you can do these outcomes, great, go ahead and get it done.

Bertrand Schmitt

Maybe we can talk about another one. This one was a very interesting acquihire. It was Diane Greene’s startup, Bebop, which got acquired by Google Cloud. Ultimately it was acquired because they really wanted Diane, they wanted Diane to run their Cloud business. I’m not sure they cared at all about the startup in question, but for sure she made it clear that, hey, if you want me, you have to acquire my business.

Bertrand Schmitt

That was probably a positive outcome for the investors. I’m not sure if that startup was in the right trajectory in the first place, and maybe it was, it was just early. But ultimately that’s a very rare type of outcome where a big company will want well enough, an entrepreneur as the CEO, to bring them on board to run a big chunk of their business and therefore ready to spend what can be significant money in order to acquire the startup in question and bring them aboard without having a real interest in that startup in the first place.

Nuno Goncalves Pedro

If this is correct, the investors were Andreessen Horowitz, Sequoia. Who else was in there? Maybe I’m missing someone, but Andreessen Horowitz, Sequoia for sure. If this is also correct, they only raised the Series A, supposedly for 3 million in 2013 March, and they were bought by Google. It was 272 million. I think it was 380 million by Google in 2015. This might qualify as one of the largest acquihires in history.

Bertrand Schmitt

Yes, and a great return for the investors, for the entrepreneur. Let’s not forget, Diane Greene was one of the co-founder of VMware.

Nuno Goncalves Pedro

Oh, of course. She did this little company, in case you guys haven’t heard about, called VMware. I mean, she is incredible. They wanted a CEO for Google Cloud really, really badly.

Bertrand Schmitt

She was royalty in the Cloud space, especially in these days and age. That was great, I think, great for everyone involved, to be frank. A great story.

Nuno Goncalves Pedro

I’ve only met her once, separately heard from four people that have worked with her or have had very deep interactions with her. Everything I hear about her is incredibly positive. I’m sure the 380 million were more than worthwhile for Google, as an acquisition. 

Nuno Goncalves Pedro

Moving forward another significant acquisition, and this is actually a friend of mine, Mårten Mickos, for those who don’t know, was at MySQL. He was not the founder of any of these companies. The CEO was brought in, turnaround company took them to the next level. MySQL sold to Sun Microsystems. He’s now the CEO of HackerOne and in between he was the CEO of Eucalyptus. Eucalyptus I think got acquired, if I’m not mistaken, for actually around 100 million.

Nuno Goncalves Pedro

To my knowledge, again, I’m not sharing anything that’s deeply confidential, Mårten will kick my butt if I do. But they really wanted Mårten. HP really, really wanted Martin and Martin was like, I’m running a company, guys, thank you. At some point they just bought the company. I’m sure strategically it made some sense in terms of stack for HP, but they really, really wanted Mårten. I’m not sure they wanted Mårten for a very long time, because all orgs change people and reorg and do all sorts of things. And so maybe he left after a few years, but they really, really wanted him.

Nuno Goncalves Pedro

So, again, a case of significant in my book acquihire. Obviously the company had a business, they were growing, so it’s not like from scratch, but definitely a significant amount of interest in one specific person to join ranks.

Bertrand Schmitt

Yes, congrats on Mårten. I met him a few times. I have really high opinion of him and his leadership and the different businesses he was in. Maybe to finish. Why don’t all companies exit? Have a successful exit? I think that, at the end of the day, obviously it’s not easy. As we have seen, you can have different approach to company building and blitz scaling can be one of them. But I cannot say it has had a great success so far. Moving too fast, too quickly, it’s a very, very, very dangerous game.

Bertrand Schmitt

Some entrepreneurs manage to get out, I would say on the positive side, thanks to some secondary transactions or equivalent, but typically that means that employees, most investors don’t get a great outcome. If you do an acquihire. Obviously it’s typically not a great exit. We have a few examples, but they are extremely rare. Typically, it’s talent hunting for a great CEO. But beyond that is not a typical good sign of exit.

Bertrand Schmitt

I would like to add that selling to a big M&A, a big transaction is becoming harder and harder, and I think that’s a big worry in Silicon Valley and beyond about, if we have a good business can we even sell it? That will be a big question going forward. I trust regulations have become more and more difficult, regulators have become more and more diligent and tech has been the centre of a lot of investigations.

Bertrand Schmitt

What happened with Adobe and Figma after 12, 15 months of diligence and an abundant transaction for what was to be one of the biggest return in transaction in the VC space, it’s sending a lot of shockwaves, I guess. Do you have an opinion on this?

Nuno Goncalves Pedro

Yeah, I would like to be on the fee side like a lawyer or whatever. I mean, can you imagine the amount of fees that were made and then there’s no transaction? Obviously I’m making a joke. It must have been very frustrating for everyone involved, for bankers, for lawyers, et cetera.

Nuno Goncalves Pedro

We are seeing more and more of it and I think that’s the movement. US, Europe, everyone’s getting more aggressive, tech companies merging with each other. If it’s adjacent spaces, same space, you’re like, if you’re going to have unfair advantage in this space, I’m sorry, we’re not allowing it. It takes a time, I mean, as you said, it takes over a year sometimes for regulators to finally after back and forth with the companies that the companies are like, you know what, this is not going to work. They’re not going to allow us to merge. This is going to hamper mega-mergers. Yes, I think it will. But as we know, a lot of this is also driven by politics.

Bertrand Schmitt

Yes.

Nuno Goncalves Pedro

And appointments. And so it might change again in the future. I think it’s a bit cyclic. The way I look at it is, I think we’re going through a rough patch. If I had to make a guess, it’s going to be a cycle. At some point we’re going to go on the other end, and we’re going to have a more positive cycle towards mergers and high amount, high valuation mergers, which was the case. I mean, this was a tens of billion merger. So it’s a significant piece.

Nuno Goncalves Pedro

Maybe changing a little bit to other options that companies have and why don’t all companies actually exit. One’s a little bit the acquihire logic. Acquihires are an acquisition of a company for its team or certain members of its team, not really the acquisition of the company itself normally, it’s just I want those resources. I might have to buy the business to get the resources as we mentioned before.

Nuno Goncalves Pedro

Why doesn’t it always work? Well, there has to be an organisational fit into the new company that’s acquiring the interests of everyone involved, employees and founders on the company that’s getting acquired need to be aligned. I might not want to go to that company in the end.

Nuno Goncalves Pedro

Then can you make it worthwhile for these people? I mean, they had stock in the company, probably had a relatively poor salary unless it’s a very big acquihire, they probably would have a very poor salary. It might not be interesting for me to go to a larger company, not just because I don’t like the job, but because maybe they’re not going to pay me enough for me to go and do this, or maybe I want to go and do my next company. That’s one thing that I feel makes acquihires a little bit more complex than people think.

Nuno Goncalves Pedro

The other one is bankruptcy. A lot of people talk bankruptcy, in particular in the US, because there’s Chapter 11, which gives you protection from creditors. Chapter 11 is complex. It’s expensive. Small startups are not going to apply for Chapter 11. You sort of just go under and let it go. California, there’s something called assignment for the benefits of creditors, which is ABCs, which allow me to assign to a third party that is, in general, neutral. Not sure it’s always neutral to pick up the assets and try to get as much value out of those assets as possible.

Nuno Goncalves Pedro

Why don’t companies go that route? Well, it’s a little bit of a notice of failure. Even if you went Chapter 11, if you’re a large company, you only go there at the point where you have no other option. You’re just trying to keep the company alive. More than that, it’s very difficult to come back from Chapter 11 relatively successful because you’re going to have to basically clean up the team. You’re going to basically have to disperse assets. You need to renegotiate with your debtors. I mean, it’s a mess.

Nuno Goncalves Pedro

ABCs is the end of the road in California. It’s like you’ve given up. We’re closing the company. We’re just basically assigning these assets, see how much capital we still can get out of it. It’s not really, I mean, it’s sort of an exit. If there’s a lot of IP in the company, if there’s tangible assets you can still sell, maybe you can get quite a bit of money out of it. But apart from that, if you’re just a software company, it’s sometimes very complex to extract much value out of it.

Bertrand Schmitt

Certainly not much value for common shareholders, employees. I mean, at best you’ve got 10 cents on the dollar for investors, I guess. I would be careful. I mean, that’s definitely not an exit you want to think about. Maybe one more point on acquihire. I think there are probably less of them these days, given the ones doing them are the big tech companies that have been doing layoff or freezing recruiting. That’s probably bad optics in the first place, but on top of it, yeah, why would you do this type of acquihire?

Bertrand Schmitt

I mean, you really have to be in that hot space like AI, where you have this big level of talent that, okay, I’m seeing a team that is ready to do what I need, I’m acquiring it, and they’re going to do what I want them to do. But beyond very hot space, it will be a hard one.

Nuno Goncalves Pedro

Last but not the least, IPOs. People are like, oh, why can I? Well, no, you can’t, because those markets are even tougher than the markets for raising private capital as Bertrand said very well at the beginning, you have to have one investor at the very least, that’s super excited about you and willing to value at a certain level.

Nuno Goncalves Pedro

IPO markets are retail markets. You have to be underwritten. There’s a bunch of players that come into it, from institutional investors to you and me. Maybe there’s an option in some cases. I’ve seen some people try to play this one, which is I’ll IPO in a smaller market, like an Australian stock exchange, ASX, or in a local market if I’m not an American company. That might provide some liquidity. But then again, you’re stuck with being a public company, and you have more reporting. You have quarterly stuff normally in most stock exchanges, et cetera, et cetera. It doesn’t really solve for it.

Nuno Goncalves Pedro

IPOs are, sadly, rarely a solution for these sorts of problems. With a market in IPOs, that is even worse right now. It’s even worse for a company, even if I’m a very large company, and I was expecting to IPO route about now to raise some more money and more capital. It’s a really tough market to IPO in, as the last tech IPOs have shown us.

Bertrand Schmitt

Yeah. IPO, you have to be very careful because the IPO window right now is closed, but it might reopen. I’m sure it will reopen, but at the same time, you cannot really count on it because you don’t know when the market will be open for IPO. That’s a very dangerous game to plan specifically for a specific IPO in time because the market can change basically a quarter, and suddenly you cannot do IPO for two, three years.

Bertrand Schmitt

I mean, 2022, 2023. It’s already two year with very, very limited IPO. As we just discussed, you need to be at a significant valuation. You need to be underwritten and have, as a result, a really more clear business and retailers to buy, in a way, really your business model. It’s a tough one. And it costs a lot of money not just to go IPO, but to stay IPO. You really need to be able to afford it. But at some point, that’s, of course, as a good company, great company, that’s the best exit you can get.

Nuno Goncalves Pedro

To conclude today’s episode, Episode 51, our episode on Too Big to Succeed, we have gone through a little bit the underbelly of failures where you can still make a lot of money even if your company, in the end, fails miserably. We explain how that happens. We went into a couple of nasty examples of companies that failed miserably after raising a lot of money, most of them, sadly, because of too early blitz scaling or trying to blitz scale.

Nuno Goncalves Pedro

We also share some examples on the ones that are still alive and not doing great, and some examples on companies that did okay. Well, in the end, should have they gotten that outcome or not? Where we talked about a couple of gigantic acquihires or very large acquihires, as well as a few deals that were maybe articulated or helped by some interesting VCs. Finally, last but not least, we ended on a note with, why don’t all companies exit? Thank you, Bertrand.

Bertrand Schmitt

Thank you, Nuno. See you next time.

Nuno Goncalves Pedro

See you.