20th June, 2021
Week 25/52
Photo: World Trade Center, by Brian Kyed on Unsplash
😅 Busy
Don’t say you're busy, say you’re getting lots done.
If the latter isn’t true, the former is irrelevant.
🔁 Trade
Let’s dig into one of the ideas that I mentioned in passing last week, which seems to cause a lot of confusion...
A start-up is created to develop a new product (or service). The goal is to eventually sell that product for more than it costs to make.
But the more fundamental (and in some ways more important) product of many start-ups is the company itself.1 The goal is the same: to sell that product for more than it costs to make.
This is a challenging idea for a few different reasons:
Firstly, not every startup is built to be sold.
For example, consider the Nishiyama Onsen Keiunkan in Hayakawa in Japan, which was a start-up in the year 706 and is still operated today by the same family. There have been 52 generations of owners. So far none of them have considered an exit strategy their end goal.
Natasha Lampard wrote an excellent article about this: 2
I imagine they focused, not on an exit strategy, but on an exist strategy, a strategy built on sticking around; a strategy not for a buy-out, but for a handing down, a passing along.
I wonder what decisions we would make differently if we inherited the work we do?
I wonder what decisions we would make differently if our duty was to pass on the work we do?
Those are great questions. What does it mean to be a good ancestor? There are different ways to create value in the long term, and one of them is to be an owner rather than a trader.
Secondly, very few start-ups are able to be sold.
In fact, it’s a mistake to think that a founder can just choose to sell their company on demand, at anything more than a fire sale price. That’s not normally how it works in my experience: companies are bought. It’s hard to create a product or service that anybody want to buy and, likewise, it’s hard to build a company that anybody wants to buy. If you are able to create a company that is growing fast enough and/or making enough profit then it’s likely you can find somebody who will be interested in owning a piece of it, if and when you choose to look.3 But, only if!
Thirdly, we seem to get very confused about how to feel about local companies that are sold to international buyers …
Exit == Investment
It’s useful to remember that every sale is also a purchase. 4
For every founder or investor you hear describing their “exit” there is another founder or investor on the other side of that transaction making a purchase.
Sometimes the thing being sold is the whole company. Sometimes it's only a portion of the company (what we more commonly call: capital raising). In both cases the existing owners are trading shares in the start-up for capital. In both cases the company is being sold. The only real difference is where the new capital ends up - when taking investment the money is typically invested in the company itself to fund future growth, but when a company is acquired the capital is paid directly to the founders and investors and in many cases to the wider team involved as well.
In this way it makes no sense for us to celebrate when start-ups raise capital from international investors but worry about companies being “lost” to overseas owners when start-ups are sold outright. Those are two versions of the same transaction.
However, despite this, we tend to be quite absolutist: we consider a company started in New Zealand a local company, right up until the day it is acquired, at which point it becomes a foreign company.
(See also my previous post that asks: What is a New Zealand company?)
Perhaps some examples would help to demonstrate the flaws in this?
Consider Vend and Seequent, who each announced their acquisitions on the same day earlier this year.
The first time a share of Vend was sold to an international buyer was in 2011, when Point Nine (based in Berlin in Germany) led the first substantial investment round. This pattern was repeated multiple times, as over the years Square Peg (based in Melbourne in Australia), Valar Ventures (based in San Francisco in the USA) and Qualgro (based in Singapore) all led subsequent investment rounds. And those are only the lead investors, there were many other smaller investors based all around the world (including some in New Zealand!) who contributed the more than $70 million of capital that was invested in Vend over these years to fuel the growth (which is a fancy way of saying: paid for payroll and rent). By my rough calculations at the time of the “sale” to Lightspeed just over 50% of the shareholders by value were based in New Zealand.
So, when was Vend sold? 🤔
I wasn't an investor in Seequent, so don't know their story so well, but did note that at the time of their acquisition the NZ Herald reported they were 75% owned by Accel KKR (a private equity fund based in the US), who announced their investment in 2018. Seequent started with one employee in 2004, and grew to over 430 employees by the time it was acquired, with ~170 of those positions based in New Zealand.
So, when was Seequent “lost” to New Zealand? 5
The important number in each of these stories is not the headline sale price, or even the portion of capital that was returned to New Zealanders, but rather the gains or difference between the amount invested and the amount returned. That’s much more difficult to calculate from the outside looking in, so it is very rarely reported.
But, if our goal is to recycle capital then we should probably be more accurate in how we think about that flow of capital.
It takes a village to raise a child
Perhaps part of the reason we feel conflicted in these situations is that we're all naturally proud when a company started in New Zealand grows to be successful. We enjoy being part of the same ecosystem.
We feel a wide and collective ownership of these companies that do well, even though actually the ownership of each individual company is limited and private.
We are seemingly happy to gift public money to help companies grow, but when a company is acquired the value created from that growth flows mostly to the private owners.
Recall my question from last week: What do we want from the ecosystem?
As we saw, there are a number of different and in some cases contradictory answers to this. That in itself is not surprising - there are a range of stakeholders who want to see a thriving ecosystem and their “why” will differ depending on how they think they will benefit from it.
However, if those who provide that public funding to companies on behalf of all of us are not able to clearly define a “why” from their (our!) perspective, then it makes it very difficult (probably impossible) for us to measure the impact and performance of that funding.
Don’t pass it, kick it
All of this assumes we are always the sellers.
Maybe the biggest challenge to how we think and feel about this question will be when companies that we consider to be local companies start acquiring rather than being acquired.
Actually, this has already happened. 😀
Earlier this year Xero announced two international acquisitions in quick succession - firstly Planday based in Denmark and then Tickstar based in Sweden.
What do these transactions mean for the tech ecosystems in Denmark and Sweden? Did they lose? Did we win? What was the transfer of value in these transactions (in total Xero paid ~NZ$285million for these two companies + possibly another NZ$46million based on future performance)? Did either of these start-ups become a New Zealand company following their acquisition? What about Xero? Does the fact they now have some of their team based in Scandinavia make them more or less of a New Zealand company?
When we find “ourselves” on the other side of the transaction like this the weakness of our thinking about sales is exposed.
(I put “ourselves” in scare quotes there, because of course Xero itself is partly owned by shareholders based all over the world, so thinking of them as a 100% Pure New Zealand company is also flawed)
When a company is sold, in part or in full, it is just a trade. As a country that is entirely dependant on trade for our prosperity we should be able to get our heads around this idea.
Some rare companies, like the onsen in Hayakawa, are family heirlooms. Some other start-ups are pets: we enjoy their company and they make us happy. But, many others are livestock that are raised for a purpose. That's fine. We don't need to feel bad about being the farmers in this metaphor. What we sell is not a rare and scarce resource, like land. We retain the expertise to make more! What we receive is one of the inputs we need to continue to farm. Repeated over multiple generations it has the potential to contribute significantly to our collective wellbeing. We're already seeing evidence of this.
It’s actually quite a simple choice we have:
Continue to grow the ecosystem by trading companies for capital, and encourage more serial founders and investors to recycle the money and expertise that is created in the process; or
Discourage successful founders from taking offshore investment or selling to offshore buyers.
Choose one.
☔️ Blame
“Most people don’t want accurate information, they want validating information. Growth requires you to be open to unlearning ideas that previously served you.”
— James Clear
I'm not too proud to admit it: I was a Milli Vanilli fan in the 90s.
The nostalgia in that video is thick. Right down to the Roland D-50 keyboard. I used to play one of those, back when I was an aspiring rock star. I may even have had braids at one point, although thankfully there are not many photos surviving to serve as evidence of that. 😳
I definitely purchased their album (okay, honestly, their cassette!)
I certainly wasn't the only one.
Maybe your memory of them is not so positive?
Most likely the mental association you have is something like “controversy”, “fraud”,
”lip-synching” or “disgraced”.
In either case, I strongly recommend this excellent two-part Slate Hit Parade podcast by Chris Molanphy:
Between 1989 and 1991 Milli Vanilli released five singles. All five of those made it to at least #5 on the US Billiboard Hot 100 chart, and three of them were #1.
As he explains:
“This is an exceptional hit making ratio. To issue only five songs ever in a career and have all five reach the top five is some kind of record. There have been plenty of acts with just a single top ten, top five or #1 hit who never release anything again. There are also a small number of acts who released only two charting singles total and saw both of them reach the top ten (like Ugly Kid Joe) or the top five (like Jesus Jones). But five singles, each of them a top five hit... this makes Milli Vanilli the John Cazale of pop. Cazale, whose acting career was cut short when he tragically died of cancer at age 42 in 1978 had only ever acted in five feature films and all five were Best Picture Oscar nominees. Milli Vanilli had a similarly abnormally short career and an unusually consistent chart streak. So at the risk of insulting a great actor whose work was far, far better than a Milli Vanilli record, the German pop act and the Italian American actor had a similarly perfect batting average”
Seriously, listen to the whole thing. It might make you think differently about something you thought you understood already.
Which leads to an interesting general question…
What important thing have you changed your mind about recently? 🤔
If your answer is “nothing” then that's a bad sign.
It's always good to ask yourself: What did you learn today? What do you believe now that you didn't believe this morning? Who changed your mind? How did they change your mind?
Is it possible that the things you believe today are just default opinions you've inherited from the people around you? Or timeless advice that is actually no longer relevant?
(For example, one of the things I find frustrating is when people look for a specific formula for success from companies like Trade Me or Xero or Vend or Timely, when every single one of those were relics of their era and couldn't be replicated starting now even if you had the detailed instructions to follow)
It's not that surprising if we don't get everything right first time. Maybe the key is just to find something to blame it on when we need to change our minds?
The rain don't mind. The rain don't care.
— Milli Vanilli (or was it?!)
In other recent news from the music department...
Shout out to one of the original #QuietOnes Joel Little on his recent “exit”:
Joel Little sells catalogue to London-based Hipgnosis Song Fund
The catalogue includes songs he’s written with Taylor Swift, Khalid, Imagine Dragons and Lorde. I wonder if it also includes one of my all time favourites, by Kids of 88?
According to Billboard his catalogue generated revenue of US$4.32 million in 2019, with 30% of that revenue from streaming (his songs have been streamed over 15 billion times). It was sold for an “undisclosed sum”.
Did I mention that if you create a business that is growing fast enough and/or making enough profit then it’s likely you can find somebody who will be interested in owning a piece of it?
This one aged well. 2014 yo!
Top Three is a weekly collection of things I notice in 2021. I’m writing it for myself, and will include a lot of half-formed work-in-progress, but please feel free to follow along and share it if it’s interesting to you.
Credit to Nat Torkington for being the first person I saw to put that collection of words together in that particular order. It’s an obvious idea, as soon as you hear it.
She also delivered a wonderful version of this at Webstock in 2015, but sadly the video of that seems to no longer be available? 😢
Entire PhDs could be written in the definition of “enough” in this context, so I won’t get bogged down by that at this stage. But for reference I’ve written previously about how to think about valuing your start-up in an investment round, which may be useful.
Something that always makes me laugh is when a share price drop on the public markets is described as a “sell off”. There is no warehouse where shares that are sold are kept waiting to find a buyer - every share sold is bought by somebody else.
See also my previous post about the language we use when describing these things: lost vs found.