Thread
1/ How a company I co-founded (TrialPay) once exited the Catch 22 of “can’t raise cash without growth; can’t grow without raising cash” which is potentially the most “unsolvable” (Kobayashi Maru) situation a VC-backed company can face
2/ First, a refresher. There are basically three outcomes for a VC-backed company:
-go public/get bought
-go out of business
-become a zombie
Let me explain the third one…because you might be thinking “wait, you mean become marginally profitable forever? That’s good!”
-go public/get bought
-go out of business
-become a zombie
Let me explain the third one…because you might be thinking “wait, you mean become marginally profitable forever? That’s good!”
3/ Most businesses generate profits + are valued at the present value of those future profits. VC businesses: more valued as call options — “if this thing works, it could be huge!” — which is why a day 0 company with just a PowerPoint presentation is “worth” $50M sometimes
4/ Once things go south, a doom loop can happen:
-best employees don’t believe in the equity and leave
-you need to pay people more to stay, amplifying burn
-customers get nervous
-AND company with immature product can’t (always) cut to profitability…so still burning money
-best employees don’t believe in the equity and leave
-you need to pay people more to stay, amplifying burn
-customers get nervous
-AND company with immature product can’t (always) cut to profitability…so still burning money
5/ And again, cutting to profitability with almost zero cash cushion might mean never being able to restart growth (esp having lost the best talent in the co), and then the opportunity costs of the founders kick in…why stay? Particularly with albatross of a “stale” cap table
6/ Now to my story re TrialPay. As a payment company servicing digital goods, it was pretty bad when all of the major platforms (eg Facebook, Apple etc) decided to “own” payments. We went from $25M revs (2010)->$70M (‘11)->$77M (‘12)…to $55M (‘13). Not good, esp when market⬆️
7/ Many of our most talented people started leaving. We had gone through M&A conversations with every major strategic buyer and twice been left at the altar — very hard to come back once you have that Scarlet letter. We executed a big RIF, downsized office space, etc…the usual.
8/ But we did three unorthodox things that uniquely turned things around and yielded a 9-figure exit:
A. Promoted aggressively from within
B. Spun-out a company (dividended it out to shareholders) which later had its own exit
C. Sold some of our IP
A. Promoted aggressively from within
B. Spun-out a company (dividended it out to shareholders) which later had its own exit
C. Sold some of our IP
9/ Promoted from within: companies compensate people with cash, equity, and title/responsibility. We were low on cash, nobody believed in our equity, so we started taking junior people and making them VPs+ — a huge amount of responsibility they wouldn’t and couldn’t get elsewhere
10/ Generally speaking, people want career/title progression, and don’t like leaving a company to take a “lower” job elsewhere…which is a nice realization if you are bleeding talent. Responsibility can really motivate fresh people.
11/ next: Spinning out a company. We did an IRS Section 355 tax free spin out — which basically means we took one product, wrapped it into a new company, mirrored the cap table but flattened preference stack and removed most liq pref, added a new big option pool, and spun it out
12/ This was almost alchemy. On one hand we had people who wanted to stay at the mothership if they had more title/responsibility; on the other were engineers and product people who wanted a true high growth startup again, not a colossal shrinking turnaround
13/ At TrialPay we had this $6M/year project/team to build an “offline affiliate network” using credit card rails which TrialPay could then use for offers (eg “get Zynga coins for free if you shop at Starbucks”). It was a great idea but only yielding cost, no revenue
14/ So this is what we spun out.
But with lower cost because we gave people big equity packages at an exciting new startup with a very low valuation and no preference overhang.
But with lower cost because we gave people big equity packages at an exciting new startup with a very low valuation and no preference overhang.
15/ So it was better than zero sum: we reduced burn at TrialPay (costs spun out), implemented more startup-like packages at our spin-out (less cash, more equity — with an easier path to exit for that equity) — so the burn of NewCo was lower than the same team had been at TrialPay
16/ Sure enough, within ~6 months a company (Coupons Inc) bought our spin-out for $30M, and there was lots of interest since it was a lean engineering-centric organization. It wasn’t a home run but everyone (including TrialPay employees, since we mirrored cap table) made money
17/ Many of the would-be acquirers had passed on buying TrialPay since we were losing too much money and were too big with too many things (they wanted us for X, not X + Y + Z). But spinning off a key strategic asset changed that.
17/ Finally, at TrialPay we sold a license to our core software to Visa, an existing investor in the biz. This provided a meaningful amount of cash to TrialPay (we turned a profit that year), further shoring up our balance sheet, and a small team went to Visa to help implement
18/ This gave birth to the Visa Commerce Network, but since it was still reliant on many parts of TrialPay, Visa decided to buy the whole company of TrialPay later that year, ending a daunting 2 year battle of “can’t grow without capital; can’t raise capital without growth”
19/ It was a very trying experience, and I distinctly remember @bhorowitz taking the time (as a non-investor who barely knew me in 2013!) to give my co-founders and me guidance and counsel as we navigated between rocks and hard places. Hope this helps others in the same boat. FIN
