Making the System Work For Everyone

When I was young, my dad used to tell me that there was a proverb in Greek that went something along the lines of: “there is a special shame in taking the last morsel of food.” The lesson was an admonition about not being piggish, or maybe showing restraint, or perhaps being gracious. Deep down, though, I always suspected that it was just a ploy to put the last slice of pizza in the fridge so that he could enjoy a late-night snack after I’d gone to bed.

When I came into the venture business 16 years ago, somebody told me something similar. Even though I forget who said it, I’ll ascribe it to Henry McCance, in my mind the font of all wisdom I picked up during that period (“when venture works well, capital is expensive and time is cheap.”) He said, “it’s important to leave something on the table for the next guy – that way the whole system can work for everyone.”

I used to think about that statement a lot. Individuals are incentivized to maximize, although optimization works better for the system. It’s kind of a Tragedy of the Commons problem, right?

I’d forgotten about both sayings in the intervening years, but recalled them again a couple of years ago when I started seeing overfunded rounds at vanity valuations and other cap table shenanigans. The apotheosis of some of the worrying trends seemed to come about 18 months ago. Back then, it seemed that companies were able to raise cheap and easy money at inflated valuations based on perfect execution of their coming two-year plans.

So here we are, almost two years later and some companies have executed and others haven’t – that’s the risk of venture – and a lot of companies that raised then are looking to come back for fresh cash. There’s definitely money still sloshing around and the trainwreck some of us were worrying about seems to be less imminent, to everyone’s relief. Although, I do expect some tensions as the era of easy markups may yield to a time in which “flat is the new up.”

Indeed, every dollar demands a return, especially those of the final investor, whether that might be someone in the public markets or an acquirer. If they stop getting value, they may stop buying what we’re selling; it’s the classic boom-bust dynamic of IPO windows. The anemic number of tech IPOs last year suggests that maybe the outside world has gotten wise to the fact that we’re leaving less for the next guy. The always-awesome Beezer Clarkson wrote a great outlook post at the outset of this year that talked about some of the ways in which the exit markets had evolved: “The market went from valuing growth to looking for sustainable business metrics, which not all VC-backed companies felt that they had to get the valuations they wanted.”

Which of course reminds me of Josh Kopelman’s seminal 2012 post about the JOBS Act that noted the post-SarbOx change in public and private market value creation in the past compared to that of recent years. The topic is a nuanced one, but Josh reminds us that among ten pre-SarbOx tech bellwethers, public investors were able to capture about 97% of the ultimate value creation.  Now that’s leaving something on the table for the next guy! Maybe too much; I’m not sure we need to return to those levels and the markets (both pubic and private) have changed in some meaningful ways, but there’s a happy medium somewhere between that and the dreaded “down IPO.

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