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Venture Capitalist Bill of Rights – Article 8: The right to achieve a timely exit April 15, 2010

Posted by Lawrence Lenihan in Uncategorized.
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The key thing that you, the entrepreneur, needs to be aware of when you take a VC partners is that we are not in the business of building legacies and monuments of greatness.  We are in the business of generating returns for our investors.  If we help create the next Google, believe me, we are as proud of our involvement as you are of yours.  However, for us, this is a byproduct of our investment, not the goal.

We have a moral, ethical and legal commitment to our investors to deliver returns on their money.  When we sit down with our entrepreneurs, we make sure we all understand the goals that we are all trying to establish.  If you want to build a monument to yourself, that’s fine, but only if you can generate us a return and enable us to cash-out so we can send a check back to our LPs.    You took our money – you have a commitment to do so.  You know how we operate and that is the deal we struck.

As I said in the Entrepreneur Bill of Rights – Article 8, we are willing to ride your vision for a long time if you deliver and generate value for us.  Generating value means 5X + on our investment.  At that point, we are willing to let you go as far as you want to go. But at some point in time, you need to give us an opportunity to gain liquidity on our investment.  Our funds are 10 year funds, but our investors want cash as soon as they can.  After five years together, you owe us a chance to get liquid.  We might take it, but we might not.  But you should figure that at the 5 year point, we are going to start looking for a door to leave.  We have had investments that we have been in for 10 years – that is an exception, but it happens.

We were the first institutional investor in SecondMarket.  I truly believe that this company can change the world and I am very proud of my involvement in assisting the fantastic management team in achieving their vision.  Barry Silbert, the CEO, and I have very regular dialogues about what we want to accomplish here.  Because Barry and his team have achieved so much in terms of building this market-leading company to where it is, we are willing to let Barry go as far as he can with this company and create something truly amazing.

Barry came to the realization over time that he had no interest in building a public company.  On the other hand, he realizes that FirstMark needs to return dollars to our investors at some point in the future.  We have made a commitment to each other: I will not press for an IPO or a sale of the company so long as he can deliver an opportunity for my investors to achieve liquidity without compromising on the value of their investment.  In other words, we’ll accept an alternative means to liquidity, so long as it is not at a discounted price to an IPO or a sale of the company.

Fortunately for SecondMarket, they control their own destiny.  They have created a very innovative marketplace for private companies that will enable an alternative path for private company capital formation and liquidity that I believe will truly change the world.  You’ll here a lot more about this in the coming months.

But my primary point here is that Barry and I talked about it.  There are no surprises.  Barry knows where I am coming from and I know where he is coming from.  We are going to work together to make sure that we both achieve our objectives.  We are not looking for liquidity in the near term, but we both know what each of our long term objectives is and we are working now to ensure that we are both successful.

On the other hand, “lifestyle business” is not in our lexicon.  We don’t view building a company as an exercise in your personal self-fulfillment.  So, if you do, don’t take our money.  Moreover, if you don’t create value for us and we can’t generate a reasonable return on our investment, don’t expect us to be patient.  Remember Venture Capitalist Bill of Rights – Article 2?  We will spend our time where we can generate the most value.  Since there are only a finite number of boards we can sit on and since our LP’s really want cash in these troubling times, when it is apparent that there is no more value to be created in your company, we really have to begin to look to exit, one way or another.

I think many entrepreneurs are troubled by this, but remember: you didn’t live up to your part of the bargain.  You said you were going to generate value for us (the amount we need to satisfy our investors) and you didn’t.  It may or may not have been your fault: sometimes you just get a bad break.  We want to work with you to get the most out of the company we can – you should too!  But you can’t expect us to have the kind of unfailing loyalty that we would have had you built something special for us.  Are we fickle?  No, I don’t think so.  In my mind, fickle would be if we were unpredictable and acted this way.  We were clear up front with you and you should be clear after reading this Funding Bill of Rights where we would end up.

It’s for this reason that we have all the legal clauses we mentioned before.  Because you might change your mind or you might disagree and perhaps see value just around the corner after these eight years of turning up nothing.  We’ll get out.  It might be uncomfortable or even nasty if you take it personally, but we don’t act this way because we are jerks: its because we committed to our investors that we would generate a return for them or protect their investment when no return is possible.

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