SOFT LANDINGS FOR VENTURE ORPHANS. ANY DO THIS?

https://www.vernehq.com/post/soft-landings-for-venture-orphans

New podcast! Colin and Brent discuss stepping off the VC treadmill, the Micro-PE course production and dealing with lawyers.

Colin Keeley: [00:00:00] . Hello and welcome back. This is Colin Keeley here,

Brent Sanders: [00:00:02] And I'm Brent Sanders.

Colin Keeley: [00:00:04] and we are two guys buying and building wonderful internet companies.

Brent Sanders: [00:00:07] Yeah, And this week , some interesting stuff came up. We've been looking at , a term you've coined. For what do you call it? Venture orphans, basically these venture backed companies that are, in year eight and stringing along with high burn and in some form of recurring revenue.

But , they don't look like they have that IPO insight anymore. So like, how did you come across these companies? It is a category of things. It's like an asset class in a sense of businesses.

Colin Keeley: [00:00:34] Yeah, I called it all different things. I don't know if I take credit for quoting these terms or if I saw them somewhere else and don't remember, but yeah, like venture orphans or third core tile, VC backed companies. So you think first and second, they're growing fast enough to go on to raise more money a fourth, it's just dead.

It didn't work out, but this core tile or venture orphans that maybe we're just not a good fit for VC or like they have a great product and used by loyal customers, but they're either breakeven, which is rare or they're just, losing a lot of money because they have a way bloated overhead because they're on this grow , grow path.

And I think there's an opportunity to come in and be like a soft landing for all these. No products or services , in different forms. I really don't want to be a hatchet, man. Cause you do have to clean this up, right? It's way nicer to be like buy from a one person company. That's just making a million dollars in give a bootstrapper a dream exit.

So that would be my preference, but there is a lot of these venture orphans out there.

Brent Sanders: [00:01:34] Yeah, so it's usually either just a, somebody raises around maybe of these companies, like they've been through a series a and it's they couldn't get to B or they couldn't get beyond that as a, typically a seed or an, a round that just, didn't come to fruition.

Colin Keeley: [00:01:49] Yeah, pretty much. If you're hitting like 500 K a million ARR, that's like you are at the stage of ready to raise a series a or something, but you just. You don't have the growth rate to justify it. Like it's becoming more and more clear that maybe venture is not the right path for you. And so if you are making 500 K a year, but you're also burning like a hundred thousand dollars a month, you are going out of business, like pretty quickly here.

And often that's you're looking at a Aqua hire or you just, set the whole thing down. So I think we offer like a. And exit on the highway to Hey, you can continue on this legacy and everything could go well, and definitely with more calm goals in mind.

Brent Sanders: [00:02:32] Yeah. I think you're going to really be competing with corporations, right? So is that coming from venture for this third core tile, if you want to call it that? I think that the typical acquire is there's a, either another venture backed company that's further along than you or an established corporation.

That's Hey. We want to do innovation and we're going to basically buy this innovation by picking up some more novel startup or something where it's more advanced. And I think of the world of corporate innovation, which w what do people call it? Innovation theater, where they have a innovation department and they come up with ideas and they see it in it's it very seldom goes well.

Sometimes it does work, so I don't want to shut on it entirely, but we've seen a lot of these. Companies that, during certain seasons of their , their lifetime , they try to, Hey, what are we going to do in 10 years, 20 years? How are we going to, be evolving our business and acquisition is probably a good outcome for this.

Looking at these businesses, it's again, I'd much rather be going after bootstrappers because the payout will be easier. There'll be something that I think would have a little bit more. Loving care to it, not to say that, people in venture backed companies don't love and care about their businesses, but it tends to be a little bit more stable growth.

And there's less of a mess to deal with. And tech debt is probably a big piece of that. And that's what I would be the most concerned with is how much time has passed since you started this? How many times have you pivoted? And that usually is. Leaves a nice nasty mark on code or whatever the infrastructure looks like.

More over going back to from the sale price perspective is like , how do you think about this? Cause right. You pay off a founder, who's bootstrap and you give them, half a million dollars. And he's like, all right, great. The time was worth it. I made a nice little chunk of change.

It's a great , I'm walking away with a bunch of money in my pocket, but. For a VC backed company, that's only worth a half million. That's raised a million. The way that they've raised the money they've gotten from VC firms, they've basically written off the investment. And now you have some really , upset founders.

I would probably guess you're going to, would this be considering you're not recapping the company? You're just, everyone's walking away with nothing in a sense, right?

Colin Keeley: [00:04:38] Yeah. So it's definitely not a great financial outcome. I would view the alternative is you're going under that's the path you're on. Like you're, it's a sinking ship and we can rescue the product and save, the customers that are really happy with the product and put it on a different path is more of what.

This is offering it. So we haven't really talked about it, but how we value companies is based on cash flow and these companies have wildly negative cashflow. So you have to come up with some , I don't know, some like new model of what you think this business could do with a more rational team and there like a rational approach, but it is very different to what we're doing.

And it's like definitely more work, which is why I think most people would just keep their hands off and let it die.

Brent Sanders: [00:05:21] Yeah. I think there's also this idea of, you can keep your hands off, let it die. And then at the very last minute, Acquire the assets for pennies on the dollar, which is hatchet man job. So I'm familiar with a lot, I being in venture for what four years or so being close to, and these are companies that completed a seed raise, maybe got an, a done, and then are fledgling and or a small, a round done.

Couldn't really. You always hear the term. We have several bridge rounds, Right. These are companies that they diminishing. I wouldn't call them down rounds because a lot of people say, oh , it's not an act for, I was just a braid frown. We didn't really raise money, but you did. You got 50, a hundred thousand dollars to cover payroll and during some awful season.

And So I guess the profile and trying to think of what's the mind state of. The founder, it's probably number one, try to save the jobs, save the team. Cause you've probably been spending two years or some amount of time promising people that there's going to be a payout. There's going to be some and yourself.

Like you get up every morning, get trying to get excited about a sinking ship. It's hard. And I'm sure that there's a mental toll that takes so. As we're talking about all this, I don't want to diminish the fact that these are like people's lives and they spend years on these businesses and a lot of blood, sweat, and tears.

But the reality is that most of them fail. That's the venture game. That's like the numbers are that the majority fail and there are some huge winners and the investors know that, and they're, these are calculated risks, but for the players , for the employees, they. Are promised and maybe not promise, they don't get involved and take a pay cut because they think , just for the fun of it, they're getting sold.

Hey, this equity is going to be worth something. Your options are going to grow with this business. So when it doesn't go to plan and you're not taking the people with you, it's like, where do you slot in to have that conversation? So it's a tough one. I can't see this working great.

I've I haven't really seen it work we've we did it at our old firm. Where incubated businesses and the founders had, the lion share of the equity and then they would abandoned something like after a year or two , they tried to run it. And then we would at the last minute, maybe take something over or try to salvage the IP from it, just in case, we, we would warehouse and say, Hey, we'll keep the site running.

We'll pay for hosting. It's up and running. But a lot of these businesses were also kind of service oriented. They weren't a hundred percent tech.

Colin Keeley: [00:07:43] So service business would just die, right? If people stopped running it, but there is like SaaS business could continue running with one employee indefinitely and there's value there. So this is to me, more salvaging people's hard work instead of shutting everything off. It's he worked really hard on this for, five years.

Let us continue it and continue on your legacy. Even if the reality is if it's making a million dollars, like you could save some of the employees. If it's making, 200, $300,000, there's almost no situation where you're able to keep all these employees on full-time or even a few of them.

Brent Sanders: [00:08:15] Yeah. Yeah. It's tough. It's tough. It's a heartbreaking situation that you're coming into. It does feel like you're, a little bit of an ambulance change chaser. In, in a certain element, but at the same time, people are putting this work into it because that's probably the other conversation, which I haven't been a part of that one, but it's like the everyone's gotten those emails, we're shutting down this business.

I know you've been using it for free or whatever for however long. And that's the reason we're shutting it down. But there, there tends to be these shutdowns that happen, some are higher profile than others that you are letting your users down at the same time of Hey, we. We rolled this service out in, I've been here before with starting businesses where we refer friends to it, and then they shut down at six months and they're like, thanks.

So it's one of those things where I've stopped doing it. I stopped doing it when we're in the venture firm where it was like, these are very early stage and don't get too used to it, but please try it out. It's like trying to preface. Cause it, it's just the nature of the game.

Colin Keeley: [00:09:10] Yeah. So I'm seeing more of a, more of , I have a lot of friends in VC that are sending these companies to me. So we're going to have a lot of these discussions , either way. I think there's just a lot of them out there that happen not to be a great fit for VC. So I think we'll probably end up doing a few of them, but I am definitely a conflicted about it a little bit.

Brent Sanders: [00:09:27] so one company that comes to mind that was also pretty publicly , Disclosed by the founder. And this was interesting. I'm trying to remember the neat shit. What is the name of the businesses? Josh Pigford on Twitter, he had the , bare metrics. That's the name of the company and he he exited, so he sold the business and he had raised, I think, a seed or an, a round or something where he got.

Essentially the VC firm that gave him his initial funding. And I think to the tune of, in the millions, maybe I could, and I don't want to misspeak, but a fair amount of money that I think was pretty noble of them to let the founders have his payday. Cause they could have said, Hey, we want to get liquidated first.

And I don't think it would have eclipsed the sale price. I don't know actually, but I thought that was an interesting outcome where, he sold his business, he did raise some money and it, the run rate was good, but it wasn't good enough to, he wasn't IPO or something where the outcome would have mattered to the venture firm anyways.

So they wrote it off. Didn't take their piece, let him have the payday in. And , he passed off this software to the acquirer. So I think that's probably a good profile to look after. I just don't know how many VC firms would do that. Where it's Hey,

Colin Keeley: [00:10:41] I just found it. So bare metrics , sold for 4 million. He got to walk away with a 3.7 million and the team got 300 K. Which I don't know how much of a team he had or if his Mullica solo thing. And so he had raised an $800,000 investment in 2014 and general catalyst and Bessemer just wrote it off. So they said, Hey, you take your money.

Yeah. And so some VCs will hide behind this, we have a fiduciary duty to our shareholders. Like we have to get every little job, but I actually think this is the best founder-friendly thing, general catalyst and Bessemer could ever have done. Like it's so cheap relative to their huge funds.

And now they have this like great PR thing forever.

Brent Sanders: [00:11:25] Yeah. It's worth its weight in gold. So the Goodwill that you earn and cause 800,000, excuse me, it's just not going to move the needle at all for them, I don't know what the size funds are, but I'd imagine in the hundreds of million, low hundreds of millions is a guess ,

If not greater.

And why not have that sort of earned , earned Goodwill, but yeah, that's a good profile to maybe go after him. And he had a. I appreciate his transparency when he did this, which is, I feel like people were shitting on him for oh, that's all you got after all this time. It's three and a half millions.

Pretty fucking great man. It's, that's nothing to , to sneeze at. And so a big fan of his on the Twitters. There's very few people I think that would be willing to. Expose the numbers and I think that's a great move on, on the VC firm, but yeah, I think of it this way. You have these companies that are raising, they're not doing great.

The chances that they're raising from a Bessemer or general catalyst are probably. Less high, and then they have like family and friends rounds, and then they have to explain to their family and friends that they're not going to get paid back. It's there's just tons of potholes along this road.

So I'm not a huge fan, but , I'm not writing it off. I still want to look at this stuff. It's interesting enough,

Colin Keeley: [00:12:37] for sure. Yeah. We'll be seeing more of it and we can talk about it on the podcast. As soon as the deals like aren't live anymore.

Brent Sanders: [00:12:44] right? Yeah. What else has been going on?

Colin Keeley: [00:12:46] So I've been taught. So I'm doing all these guests , lectures , the course which I've been working on pretty hard this week, I made a lot of progress. I'll probably open up. Pre-orders in a a couple of weeks here since I'm traveling most of the next week. And document the lawyers is always so funny.

Like I see opportunity and they see risk. So I want to provide like templates because a lot of people just don't know like how it actually transact on these deals. And there's a lot of legal questions around it. So I'd like to provide like generic legal templates and they're like, we can't provide generic legal advice.

We need a hundred page APHS I asked the purchase agreements and it's going to be a lot of work. I was like, these side projects, they're transacting for a thousand dollars. And people are just basically Venmo in each other. So this is like a huge step up. No, one's doing a hundred page APA to do these transactions.

And they're like basically said, we don't think you should do it. We think it's super legally risky. And I'm like , I'm going to do it. And they're like, we don't think you should. It's pretty risky. And I was like, yeah, I'm definitely doing it. Would you like to be part of it?

And so they have to go take it to their , the head of the firm, but yeah, they're going to help and do a few guest lectures, which should be super valuable.

Brent Sanders: [00:13:59] that's great. Yeah. I'm a big fan of , can we talk about them? We talked about the name of the company.

Colin Keeley: [00:14:04] I would like to, after they

Brent Sanders: [00:14:06] Yeah, true. Anyways. They're super speaking of founder friendly. They're very , They've done all the legal work for, my stuff. And it's always been super, I've worked with one really big law firm when I sold my agency. And it was not a great experience in working with them as they're a little more , business minded or I should say small business minded, so big fans of theirs, but , yeah, it's weird.

I'm wondering when you look at like the ORIC guide, which, Stripe Atlas uses and all this boiler plate start-up , purchase agreement and , Comstock purchase agreement they probably. They were the first ones to do it in my understanding. And I think the attitude of that they took, which is Hey, we just want to make this standardize and it's better for everybody.



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