There seems to be a lot of rumors, suggestions, and ideas floating around about secondaries but little hard data … so Tod Sacerdoti, Jeff Lu, and I decided to survey 100 founders (93 responded) of some of the largest tech companies about secondary transactions: and here are the answers.
Our hope from this survey was to help inform what the current best practices are.
On a personal note: I’ve never done a founder secondary transaction myself and likely never will (though one of cofounders at LiveRamp did a secondary). But if I did do a quality secondary transaction at LiveRamp, we likely would have never sold the company and instead took it to IPO (and thus have had a significantly higher return for our shareholders). So secondaries could add a lot of value – especially for founders without a significant previous exit.
As an investor, I have been an investor in many start-ups that have done secondaries. Meaning some of the old shareholders sold some or all of their stock. I have also participated in buying secondary shares of companies on many occasions.
In the first question, we got some requests for a sixth option for “early employees.” We didn’t want to change the survey in the middle to skew results, but we did want to flag that as some feedback. For the most part, it seems like everyone is open to secondary for a broad swath of stakeholders.
The next 2 questions go together. A little over half of the respondents have someone on their cap table who they regret having. Interestingly, in those cases, over 50%+ would prefer a new investor or operator/friend to buy the troublesome investors out vs. their existing investors.
One of the hardest things to do at a company is to kill off the parts that aren’t working. A company is all about building things, not destroying them. So it’s unnatural to go about tearing it apart.
But every so often, it’s necessary. To keep the business healthy, you have to take a hard look at operations and get rid of areas that are no longer important or contributing to growth.
And timing is critical for this. Killing off parts of your company is hard enough, but doing so early is truly difficult. That’s why one of the best times to take a hard look at what parts of the company you need to get rid of is during a recession.
If you have a big enough company, you could even designate someone as CKO — a Chief Killing Officer. That person’s entire job would be to look at everything the company does and try to kill it.
Here are some areas you should look at closely during a downturn to see what you can destroy:
1. Take a look at your products.
In a downturn, a company should focus on what it does really well and let go of what it doesn’t. That’s why it’s essential to take a hard look at your products to see what you can kill.
For example, Uber has a lot of initiatives involving trucking and self-driving cars. Those might be really good investments or they might be distractions to their core businesses. This is a good time to really dive into them.
Imagine where your company would be if it outsourced everything it wasn’t good at and focused only on what it was good at. A recession is a great time to ask this question and see what you can lose.
“Being wrong might hurt you a bit, but being slow will kill you.” – Jeff Bezos
Last year I read a biography of former Air Force Colonel John Boyd. Boyd was one of the most decorated fighter pilots of all time (he flew in the Korean War). But he was most known for changing the way people thought about warfare — he pioneered the OODA loop (Observe, Orient, Decide, Act) — which is essentially about how to move quickly.
He realized that even underpowered planes could beat much better equipped flying machines if they got to take more actions. Maneuverability beat velocity. But the deciding factor was the number of actions a pilot could take in a minute. The F16 was built as an intentionally underpowered plane (it is one of the slowest fighter planes) — but it is super easy to move, has great visibility for the pilot (just one pilot unlike the very bulky F14 that was in the Top Gun movie), and is very small.
Moving fast and the ability to react and keep moving and changing is what wins wars. The Israelis embodied Boyd’s lessons in the Six Day War. Tempo wins.
This idea of OODA loops and Actions Per Minute will be very familiar to video game fans (where pace intensely matters).
The OODA loop is even more important in start-ups. Being slow WILL kill you. Pace is very important. Again, tempo wins.
“Good things may come to those who wait, but only the things left by those who hustle.” – Abraham Lincoln, Queen Elizabeth, or John Snow (no one actually knows who originated this quote)
This is not to underestimate thinking strategically and planning. The bigger the organization, the more important planning is. Big companies can only do a very small number of things … so it is really important to pick the things that they do.
Small companies’ only advantage is that they can move fast. So they should never give up that advantage by over-planning. Small companies ideally should know what their true north is (5 year goal) and have very fluid quarterly plans. Hard plans beyond a quarter are almost certainly going to be wrong.
That does not mean that planning is useless for start-ups. It isn’t. And as start-ups get bigger, they need to plan more. Overplanning is bad. So is underplanning. But if you have smart employees that are empowered and know the true north of the organization, underplanning is much preferred to overplanning.
The only way you can be successful while underplanning is if your employees are empowered. What happens in some start-ups is that they both underplan and the CEO insists s/he needs to review everything. That is the worst of all worlds because the CEO becomes the gate to getting anything done because one person can only do so much. If the CEO needs to make all big decisions, then you need to make fewer decisions (this is where planning is so important).
At SafeGraph, I try to deliberately make as few decisions as possible. I deem it a failure if I need to make a decision … because that means we are moving slower in that area. That does not mean I don’t make any decisions — I do. But those are failures I hope to improve upon in the future.
Additionally, you don’t want the management team making all the decisions. For instance, your VP Engineering should not be making most of the engineering decisions. The vast majority of engineering decisions should be made by the engineers (working with product and the other internal colleagues). Same thing with every department in the company. And again, that does not mean that the VP Engineering makes no decisions … but ideally she is only making decisions that only she can make.
Pace, pace, pace.
Increasing tempo is hard because it means sometimes you have to trade-off doing things right for doing things fast. It also means you need to trade-off features on things you don’t think are as important — and it is hard to make those trade-offs while moving lightning fast.
“Culture” is what makes a company look strange to others from the outside. It’s a combination of all the quirks, traditions, and personalities that make it unique. Ultimately, culture is defined by how your company is different from all the others, not how it’s the same.
A company’s culture should be like an Indian wedding.
If you’re American and have never experienced an Indian wedding, it will seem very strange at first. They are colorful, elaborate celebrations that can last multiple days. From choreographed dances during the Sangeet (the pre-wedding party) to the groom riding in on a horse, to the bride’s vibrant-colored Sari (there’s no white dress), they can feel otherworldly.
The traditions are so specific at an Indian wedding that you find out quickly whether you like or dislike the cultural experience (I love it). This isn’t a comment on whether Indian weddings are better or worse than other kinds of weddings – they are just unabashedly different.
Company cultures should be like Indian weddings. They need to have key elements that make them distinctly different from other companies.
All the way back in 2008, I wrote a piece about why economic downturns are good for innovators and bad for pretty much everyone else.
As we face a recession in 2020 due to COVID-19, this is still true. The pressures of an economic slowdown actually benefit certain innovative companies that had trouble getting wide-spread adoption before the recession.
When the economy is booming, little pressure is put on expenses. Large organizations often penalized innovators…[and] companies are ok with spending more money on the same software, the same hardware, and the same advertising mix.
But…economic downturns force companies to reevaluate how they spend money. Companies need to cut expenditures dramatically yet are expected to have the same level of service as when times were good. This forces firms to look for alternatives to what they are doing.
Revenue pressure forces large companies to get creative. And it’s those smaller companies that are already innovating or can pivot quickly that take advantage. This was true in the Great Recession of 2008 and will be true in the recession forming in 2020. The only difference is where the innovation is taking place.
I recently wrote about why hiring is harder in a recession than it is during an economic expansion. But, just because it’s hard (it is always hard) doesn’t mean you shouldn’t try. You should always be looking for A-Players to bring onto your team.
Hiring obvious A-Players is really hard because everyone else knows they are obvious and they will be extremely sought over (and very expensive). That doesn’t change in a recession.
So, if you want to find the A-Players that are available, you can’t look for the obvious ones. You have to find the diamonds in the rough who don’t look like precious stones.
To find A-Players in a downturn, look for people that other people in Silicon Valley would discriminate against.
You want to find people that were passed over by other tech companies for reasons other than their talent and give them a chance.
You can start with women and minorities. They are still very much discriminated against. Of course, few people in Silicon Valley will outwardly state that they want to discriminate against women and minorities. And many companies even have active programs to reach out to them. You might not have an advantage in landing female and minority A-Players because there are a lot of other companies competing for this talent pool.
In addition to women and under-represented minorities, there are a lot of other categories of people who are actively discriminated against in Silicon Valley including:
Boomer generation (people born 1946-1964)
People that went to third-tier universities
Religious people (even slightly religious people)
People who are politically conservative
People with thick accents
People who are overweight
People who smoke cigarettes
People who are socially awkward
Let’s take a closer look at each of these categories.
Hire people over 55.
Tech companies tend to be extremely biased against people with grey hair. This is especially true of older people who are seen as “past their prime” or recently part of a company that crashed and burned. It is extremely rare for a tech company to hire an individual contributor that is over 45. And this trend is likely more pronounced during an economic downturn.
There are plenty of people who, in 2008, ended up taking the Director-level job at Digg instead of at Facebook (even though they had job offers at both). The ones who went to Digg are seen as past their prime and the ones that went to Facebook are living on their own private island and serving on the boards of directors of hot start-ups. Just because the person made a wrong financial choice 12 years ago does not mean they cannot add immensely to your company.
Hiring is always hard. And if you want to hire someone that is super talented, hiring is always really, really hard. And the stakes are high because the employees are the lifeblood of the business. They are what allows the business to compete. To improve. To grow.
Some people think that hiring and recruiting in a recession is easier than during an economic boom. But it might actually be harder.
Here are 5 reasons why hiring in a recession is harder than you think:
1. A-Players are harder to find because there are more C-Players looking for jobs.
While every employee is vulnerable in a downturn, companies usually let go of their C-Players to save money.
C-Players are the least-productive employees at the company and companies generally let them go in the first round of lay-offs.
A-Players – those employees who are 5-10x more effective than the average employee – are rarely let go during a recession. They are the company’s best employees. Management should be willing to do anything to keep them around (and if a company does lay-off their A-Players, it has made a huge error and will not thrive in the recession).
So, with a mass exodus of C-Players from employment and about the same number of A-Players available, the talent pool gets diluted. You are going to get a lot more C-Player resumes in proportion to A-Players than you would during an economic expansion. This makes it harder to identify and hire the A-Players that are available.
SafeGraph is in a fortunate position entering this recession (we are still hiring and were profitable in 2019). So we will not have to go through the grueling pain of letting our colleagues go (but I have been there before in past companies). However, many of the 100+ of the companies I am an investor in had to do layoffs in the last month and I wrote this piece for them.
There is no good way to lay-off employees during an economic downturn. But some ways are better than others.
Here are some rules and tips for those companies falling on hard times during a recession…
Never, ever, lay off your A-Players.
This may seem obvious (why would any company ask its best people to leave?), but countless companies tell their highest performing people to go. This is really, really bad.
If a company lays off just a few A-Players, first, it loses all of their contributions. Great employees are great because they bring a lot more value than average employees.
But there are second-order consequences too. The remaining high performers will become fearful for their job when they see A-Players let go and will start looking for work. And once your high performers are looking for jobs, they are not going to be focused on helping the company.
A company that is experiencing hard times and distress needs all its amazing people focused on making the company better. Never lay off your A-players.
And even if your A-Players are in an area of the company that you need to lay-off (like maybe you need to cut your restaurant marketing team), keep the A-Player and move them to another team to make a contribution.
It is April of 2020 and we’re entering a significant recession. As they say, winter is here. 🥶
While each downturn is different, there are common ideas and practices that have been proven to work from one recession to the next.
Here are some of my thoughts from a geezer that has scars from the crashes of 2000 and 2008. Some of these are obvious and some are non-obvious but hopefully, they will help you manage your business successfully and grow while others merely try to survive.
Get the CFO on your side.
The CFO has much more power in downturns than you think — do everything you can to get her on your side. If you are selling to a company, see if you can sell to the CFO. 💸
If your product can save the company money, they are going to be much more interested in using your services. In a recession, finding cost savings becomes very attractive. If the CFO is your advocate based on the numbers, you are going to have a much easier time selling. 🤑
For example, open-source solutions (starting with LINUX) really took off following the dot-com crash. This is because companies realized that they could replace super-expensive SUN boxes with cheaper (yet still powerful) LINUX units. Many for-profit companies benefited from this trend.
If you are a SaaS company, prioritize customers that are doing what you are doing in-house. Often you can find companies that are paying over $1 million dollars a year to do what your software does for $60k. And yes, your software might only do 80% of what their in-house solution does… but is that extra 20% really worth $900k+/year? Probably not.
This is also true in the B2C world — in downturns consumers look to save money. Groupon was the breakout company of 2009 because they rallied around saving groups of people money. Sometimes capital constraints can spur innovation.
If you can find a way to save your clients’ money and get CFOs on your side, you can grow your business during a recession.
“Crazy thought experiment: Imagine a new type of company that decided to only do what it was really good at and essentially outsourced everything else.”
Because revenues of private companies tend to be secret, most venture-backed companies have historically bragged about how many employees they have. A CEO will say: “we went from 100 to 200 employees last year” as if fast employee growth is always a good thing.
But this is changing: there is a new status game brewing between companies concerning who has the fewest number of employees, centered around who is engineering greater amounts output with less staff. Indeed, the freedom to iterate quickly is status. More resources along with lower headcount means that they can dominate new markets. This is because they are tripling down on their strengths.
In the future, those who achieve the greatest results with the least number of employees will be admired above all others; the key statistic to look at is the go-forward net revenues per employee because it best encompasses the company’s leverage. What matters is each employee’s productivity and how the business itself can scale?
This statistic doesn’t just ring true for the technology space, rather any business should be aiming to maximize that metric. By doing so, every employee feels and acts like Warren Buffet; they’re investing their capital (time and skill) into the company. Every good CEO should be spending time trying to increase their employees’ productivity, which is the strongest form of leverage the company retains.
Since publishing yesterday, I got a ton of inbound from other CEOs and founders talking about what they do and also asking about how we do things at SafeGraph. We still have a ways to go at SafeGraph to be great at Exit Transparency (it is very aspirational) but we have made a lot of strides to be better at it.
Exit Transparency is about starting employment with the end in mind. When the employee eventually leaves the company (as all employees eventually do), what do they want to achieve and how to they want to grow.