Stuck without a book on a recent long flight, I ended up reading a bunch of current magazines. Among the articles I read were a number of post-mortems on the Democratic primaries.
Two stories in particular really struck me. The first was the companion piece to Jann Wenner's interview with Obama in Rolling Stone, "Obama's Brain Trust" by Tim Dickinson. The second was Gail Sheehy's look at the Clinton campaign in the most recent Vanity Fair.
A lot has been made about Obama's readiness to govern versus Hillary's experience. But after reading these two articles, which leader seems like the superior executive? Obama comes off as trusting, in control of his team and his message, willing to delegate, willing to try new things, flexible in the face of changing circumstances. Hillary seems manipulative, unable to control her staff, a poor judge of character in hiring (vis Mark Penn), possessing no fiscal discipline, and willing to vary her message based on polling.
I realize that the victors write the history, and we might be seeing a different side of this had, god forbid, Hillary won. However, I recently talked to someone who had lobbied Hillary's senate office on some health care legislation. She said that Hillary's senate office was just as disorganized and arrogant as these articles portray her campaign.
The Dems spent years in the thrall of one of the biggest dumb-asses in American politics, Bob Schrum. This guy had a tin ear for the American Zeitgeist. Total loser. But candidates came back to him again and again because he had experience (Mark Penn, who ran Hillary's campaign, seems cut from the same loser cloth). Experience is not a panacea. It's got to be the right kind of experience.
The Obama folks, on the other hand, are not exactly outsiders -- the prevalence of the Daschle team was news to me -- but they are innovators. On this evidence, you'd have to conclude that Obama would be far more likely to be ready on day one than Hillary. She would have made a terrible chief executive. I'll take his execution over her experience, any day of the week.
Saturday, July 12, 2008
Wednesday, July 9, 2008
Why no IPO?
My partner, Bill Gurley, wrote an interesting post in his Above the Crowd blog, responding to Matt Richtel's piece about the dearth of venture-backed IPO's in the quarter. To summarize, Matt's contention is that the IPO drought was caused by lack of demand (e.g., Wall Street doesn't like what Sand Hill Road is selling); Bill's contention is that the drought was caused by lack of supply (e.g., CEO's don't want to be public). Bill is right.
Why don't CEO's want to be public? The usual explanations relate to the perceived public and governmental hostility towards public companies and their CEO's. Sarbanes-Oxley. Reg FD. FAS 123. Shareholder derivative litigation. I was a public company CEO under this legal regime, and I can attest to the fact that it well and truly sucks. Sarbox compliance costs a fortune (particularly for a smaller company) and creates a climate of fear in the management ranks. Reg FD turns the CEO into a stump-speech politician and raises the spectre of litigation every time you open your mouth (although, the incarceration of career criminals like Bill Lerach and his cohorts will reduce this a bit). FAS 123 has created a culture of financial obfuscation, in which most companies keep two sets of books, reducing the very transparency the rules sought to foster.
But I think there is a simpler reason why nobody wants to go public: greed. Historically, the IPO was the rocket sled to huge wealth creation for the CEO. This was further reinforced during the bubble. This is, however, no longer the case -- selling your company for cash is far more expedient, unless you are fortunate enough to be the CEO of Google.
My experience is a case in point. I was able to sell around 7% of my JAMDAT stock into the IPO (and this, even grudgingly, as the investment bankers were worried that too much "secondary selling" would look bad to investors). I was advised to sell no more than 15-20% of my holdings annually through a 10b5 programmed selling plan -- I sold a couple of thousand shares, weekly, at whatever price the stock opened at Tuesday morning. And some brain dead short would post a comment on the Yahoo message boards every time a Form 4 hit the internet, saying, "Lasky is selling, the company must be tanking!"
After 18 months, I had put away a decent amount of money in human terms, but not that much at all in modern CEO terms (I recognize that the waterline for CEO comp has risen dramatically over the last 40 years, and that is certainly part of the problem; but in the era of outrageous income inequality in which we live, you measure success against your peers, not your father's peers). Then, suddenly, EA bought JAMDAT for cash, and I got a check for 6X the money I had dribbled into my bank account over the previous year and a half, in one day. The discounted present value of the stream of programmed sales I had teed up for the next 5 years made this cash sale even more valuable to me -- depending on the discount rate and the risk of my programmed sales occurring at or above the $27 per share price EA paid, you could argue it was worth almost twice as much to me to get the money all at once, up front.
Going public is risky. You have intense quarterly pressure to make revenue and earnings numbers. The market is brutally efficient at pricing your stock, and brutally efficient at sending it into free fall when they think something may be wrong. Everything you do is scrutinized and criticized. The SEC is just waiting for you to slip up -- you are essentially presumed guilty until proven innocent. The legal and regulatory regime is a bitch to navigate. And, on top of it all, everyone in the process begrudges the founder/CEO who takes money off the table -- it's perceived as a sign of weakness. The Street wants you to buy more of the stock in which you often have 100% of your net worth tied up.
Nevertheless, I wouldn't give back the seven quarters that I got to sit in that chair. It was exhilarating. I commanded the bully pulpit for my fledgling industry. I made many deserving employees and investors tons of money. I had a powerful currency, which I put to work. It was awesome.
But if we, as venture capitalists, want to create incentives for our CEO's to take their companies public, we have to solve the greed problem. We can't have the trade sale be so vastly more attractive than the IPO. Part of this is about reducing personal risk and regulatory pain, but it's also about structuring compensation to help foster the IPO as a result.
Why don't CEO's want to be public? The usual explanations relate to the perceived public and governmental hostility towards public companies and their CEO's. Sarbanes-Oxley. Reg FD. FAS 123. Shareholder derivative litigation. I was a public company CEO under this legal regime, and I can attest to the fact that it well and truly sucks. Sarbox compliance costs a fortune (particularly for a smaller company) and creates a climate of fear in the management ranks. Reg FD turns the CEO into a stump-speech politician and raises the spectre of litigation every time you open your mouth (although, the incarceration of career criminals like Bill Lerach and his cohorts will reduce this a bit). FAS 123 has created a culture of financial obfuscation, in which most companies keep two sets of books, reducing the very transparency the rules sought to foster.
But I think there is a simpler reason why nobody wants to go public: greed. Historically, the IPO was the rocket sled to huge wealth creation for the CEO. This was further reinforced during the bubble. This is, however, no longer the case -- selling your company for cash is far more expedient, unless you are fortunate enough to be the CEO of Google.
My experience is a case in point. I was able to sell around 7% of my JAMDAT stock into the IPO (and this, even grudgingly, as the investment bankers were worried that too much "secondary selling" would look bad to investors). I was advised to sell no more than 15-20% of my holdings annually through a 10b5 programmed selling plan -- I sold a couple of thousand shares, weekly, at whatever price the stock opened at Tuesday morning. And some brain dead short would post a comment on the Yahoo message boards every time a Form 4 hit the internet, saying, "Lasky is selling, the company must be tanking!"
After 18 months, I had put away a decent amount of money in human terms, but not that much at all in modern CEO terms (I recognize that the waterline for CEO comp has risen dramatically over the last 40 years, and that is certainly part of the problem; but in the era of outrageous income inequality in which we live, you measure success against your peers, not your father's peers). Then, suddenly, EA bought JAMDAT for cash, and I got a check for 6X the money I had dribbled into my bank account over the previous year and a half, in one day. The discounted present value of the stream of programmed sales I had teed up for the next 5 years made this cash sale even more valuable to me -- depending on the discount rate and the risk of my programmed sales occurring at or above the $27 per share price EA paid, you could argue it was worth almost twice as much to me to get the money all at once, up front.
Going public is risky. You have intense quarterly pressure to make revenue and earnings numbers. The market is brutally efficient at pricing your stock, and brutally efficient at sending it into free fall when they think something may be wrong. Everything you do is scrutinized and criticized. The SEC is just waiting for you to slip up -- you are essentially presumed guilty until proven innocent. The legal and regulatory regime is a bitch to navigate. And, on top of it all, everyone in the process begrudges the founder/CEO who takes money off the table -- it's perceived as a sign of weakness. The Street wants you to buy more of the stock in which you often have 100% of your net worth tied up.
Nevertheless, I wouldn't give back the seven quarters that I got to sit in that chair. It was exhilarating. I commanded the bully pulpit for my fledgling industry. I made many deserving employees and investors tons of money. I had a powerful currency, which I put to work. It was awesome.
But if we, as venture capitalists, want to create incentives for our CEO's to take their companies public, we have to solve the greed problem. We can't have the trade sale be so vastly more attractive than the IPO. Part of this is about reducing personal risk and regulatory pain, but it's also about structuring compensation to help foster the IPO as a result.
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