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Above the Crowd By Bill Gurley Grubhub and Seamless: Effecting The Elusive Private-Private Merger – congrats Bill

May 23, 2013 by Steven R. Gerbsman

Above the Crowd

By Bill Gurley

Grubhub and Seamless: Effecting The Elusive Private-Private Merger

May 20, 2013: Today, Seamless and Grubhub announced the signing of a definitive agreement to merge two of the nation’s premier services for ordering takeout online. As Benchmark is a large institutional investor in Grubhub, we were actively involved in the merger process, and we are quite excited about the potential of the two companies coming together. There are many synergies – different geographic strengths, different core customer bases, and different product strengths. And of course, we are afforded the advantage of greater scale.

Despite that there may be many obvious reasons for any two companies to combine, most private-private mergers (where both companies are private entities) never come to fruition. Public-public, and public-private are actually much easier to consummate. There are many reasons why private-private is so difficult, but allow me to highlight three specific challenges that seem quite prevalent.

 1)    Structural Challenges

Private companies typically have capitalization structures that are very complex. There are common stock, common options, and as many as three to five different layers of preferred stock, each with a specific liquidation preference. Finding a way to meld two complex capital structures is non-trivial, and may require compromise from many parties involved. But institutional investors are loath to give up previously negotiated rights, and this can be especially true when the investor in a competitive company is the one bringing the request. Even melding two separate option programs can be challenging. There are numerous techniques for bringing together two such structures, but none of them are remotely elegant, and they all involve spending many, many hours with lawyers. At the end of the day, structure is not a show stopper, but it creates a very high bar for consideration – you have to really want to make it happen to be able to sit down and sort through the complexity.

 2)    People Challenges

Prior to a merger, you have two separate management teams (with two separate cultures), and in order to merge, you have to agree on who is going to do what, and what each executive’s new title will be. It should come as no surprise that executives are fairly sensitive when it comes to topics of reporting structure and titles. Plus, you have the natural tendency to view any discussion as an “us versus them” type argument, which is not a frame of mind that is conducive to collaboration. The bottom line is that it is very hard to merge two management teams, especially when you consider the contracted time window typically associated with such a discussion. It’s speed dating. As a result, only if you have two teams with a shared vision for the future, and minds that are open to compromise could you ever hope to be successful. Some pretty high-profile mergers have fallen apart because of this issue.

3)    Investor/Founder Mindset Challenges

Most founders and investors typically think about their personal stakes in a private company in terms of “ownership percentage.” An investor may say “we own 22% of the company”, or a founder may note, “I still own 31% of my company.” These same constituents think about the overall company value in terms of dollars. As an example you might hear someone say, “we closed the last round at $100 million post.” When two private companies began discussions on merging, these overall corporate values are often debated. I call this the “dueling blowfish” problem. Private company valuation techniques are particularly specious (this contrasts with a public company that every day has a definitive market capitalization). Anyone can create any number they want (within reason), as there is no one specific formula or metric for such work. Most models are also based on forward forecasts, which offers another avenue for inflation. Basically, everyone uses loose finance arguments to over-inflate their own company’s valuation so that they can demand a bigger slice of the pie of the new company.

The only way around this is to reverse your way of thinking. First, you have to focus on the dollar value of your new stake in the combined company instead of focusing on the specific percentage. Even in a 50/50 scenario, each ownership stake is half what it once was. Assuming the deal is accretive, this should be “no-brainer” math; your new stock in the combined company is worth more than it was before. However, the “ownership” focused mind has a real problem with their stake being reduced so dramatically. Second, you need to only negotiate in terms of percentages (versus dollar value). One company will get X% of the combined company, and one company will get 1-X%. Taking this approach is the only way around the dueling blowfish problem. Assuming both sides think the merger is a good idea (and accretive) the future value is obviously going to be higher. The real question is how do we split the company amongst the two players, and focusing on this out of the gate will save an incredible amount of time.

These are just the challenges that you meet on the way to the altar. Many mergers fail not in the deal process but in the implementation process, as integration is very difficult, especially when it’s a merger of equals. And the human and cultural issues outlined above continue to exist as you attempt to merge two companies into one. Getting the “deal done” is only the beginning.

Once again, I am quite excited about the Grubhub/Seamless merger, and tip my hat to Matt Maloney, Mike Evans, Jonathan Zabusky, and both the Grubhub and Seamless management teams. Had they not started from day one of our discussions with a partnership mindset, we would have never have reached this milestone. I look forward to working with them both, as well as the investors and independent directors from both sides to help take the merged company to new heights.

Posted in Benchmark Capital, Bill Gurly, Venture Capital | Tagged , , | Leave a Comment »

Early Tumblr Investor Saw ‘Raw Talent,’ Capital Efficiency – Venture Capital Dispatch HOME PAGE By Russ Garland

May 21, 2013 by Steven R. Gerbsman

Early Tumblr Investor Saw ‘Raw Talent,’ Capital Efficiency

Venture Capital Dispatch HOME PAGE »

By Russ Garland

One of Tumblr’s biggest fans is a venture capitalist who helped steer the blogging service from its earliest days to a deal to be acquired by Yahoo for $1.1 billion in cash.

Spark Capital

Bijan Sabet.

Bijan Sabet, a general partner at Spark Capital who is best known for leading the Boston firm’s investment in Twitter, said he first started using Tumblr when it was just one of several Web applications that founder and Chief Executive David Karp had developed while running a Web consulting company called Davidville.

Karp has “raw talent when it comes to design and user experience, and self-taught technical talent,” Sabet said in an interview Monday. With anything he built, “you could just tell it was a David Karp product.”

But Tumblr was what caught Sabet’s eye and he thought Karp should focus on a single product early on. Starting in the spring of 2007, Karp and Sabet spent several months talking about what it would take to turn Tumblr into a business before Karp, who was happy running his profitable, self-funded consultancy, agreed to go forward.

Spark and Union Square Ventures were among the earliest investors in the company and today are its largest venture shareholders, Sabet said, declining to disclose their ownership stakes. The two firms contributed to a $775,000 round in October 2007 and led a $4.5 million Series B round in December 2008. Tumblr has raised about $125 million from investors, who also include Greylock Partners, Insight Venture Partners, Menlo Ventures and Sequoia Capital. Its last round, in 2011, was said to be at an $800 million valuation.

What marked Tumblr from the start was its capital efficiency, operating with two people for the first 15 to 18 months and then four people for the next year. Karp concentrated on a series of constant improvements to perfect the Tumblr experience, Sabet said. Rather than trying to move the company quickly into the mainstream, the CEO was “more focused on delighting the users he had already signed up.”

Besides its slow, steady approach, another key to Tumblr’s success was its move from the Web, where it started, to mobile devices, Sabet said. “They were able to build a wonderful, compelling mobile experience in the last couple of years.” Well over half Tumblr’s users access the service via its mobile app, Sabet said.

Spark and Union Square, who are both Twitter investors, were in no rush to have Tumblr generate profits, although Sabet acknowledged that obviously is the ultimate goal. “We believe in profitable business models–I am a venture capitalist,” he said. Like Twitter, investors figured, Tumblr should concentrate first on building a big base of users.

“You’ve got to scale first and monetize second,” Sabet said.

The Tumblr acquisition will be Sabet’s second exit in a little over a year. In March 2012, Zynga acquired Spark-backed gaming company Omgpop for about $180 million. The company had raised about $16 million from investors.

Karp was one of the people who introduced Sabet to Omgpop founder Charles Forman. Sabet said the two companies had little in common except that both Karp and Forman have a “strong, strong affinity around design and technology.”

Write to Russ Garland at russell.garland@dowjones.com. Follow him on Twitter at @RussGarland

Posted in Russ Garland, Venture Capital Dispatch | Tagged , , | Leave a Comment »

Canada pitches startups with lower taxes, instant residency by Lauren Hepler- Silicon Valley Business Journal

May 21, 2013 by Steven R. Gerbsman

logo485

powered by the Silicon Valley Business Journal

Canada pitches startups with lower taxes, instant residency

Canada's new immigration-centric pitch to Silicon Valley's many foreign-born entrepreneurs.

Canada’s new immigration-centric pitch to Silicon Valley’s many foreign-born entrepreneurs.
Economic Development Reporter- Silicon Valley Business Journal

Canada is pitching Silicon Valley entrepreneurs on northern migration.

The gist: Easier access to visas for foreign-born entrepreneurs, a growing base of engineering talent, R&D tax credits and lower corporate taxes.

Low-tax U.S. states like Arizona, Nevada and Washington have pitched financial incentives to Silicon Valley companies mulling a move for years (read more about some recent attempts here). But Canada has a leg up on one issue near and dear to many in the Valley tech community – a new Start-Up Visa Program offering permanent residency to foreign entrepreneurs, who often encounter U.S. immigration obstacles when coming to the Valley.

Jason Kenney, Canada’s Minister of Citizenship, Immigration and Multiculturalism, was in Silicon Valley over the weekend to attend the entrepreneurship conference TieCon in Santa Clara. Kenney also spoke at a Silicon Valley Business Journal event on Monday, “Start-up Visa and Doing Business in Canada.”

“We know that there are tens of thousands of brilliant young international workers, typically in the stem industries…who cannot get their immigration status figured out,” Kenney said Monday. “We are prepared to take a risk on risk-takers.”

Kenney jokingly referenced the incongruity with Canada’s reputation for polite conservatism when explaining the play for Silicon Valley entrepreneurs: “I apologize for being uncharacteristically aggressive,” he quipped.

The country recently took out a local billboard ad emblazoned with a slogan highlighting Silicon Valley companies’ difficulty obtaining employer-sponsored H-1B visas. The billboard reads “H-1B problems? Pivot to Canada.”

Posted in Canada startups, Sillicon Valley Business Jouranal, Uncategorized | Tagged , | Leave a Comment »

NVCA: VCs Talk Accelerator Bubbles, Accelerator Success By Lora Kolodny -Venture Capital Dispatch

May 18, 2013 by Steven R. Gerbsman

 

NVCA: VCs Talk Accelerator Bubbles, Accelerator Success

By Lora Kolodny

Brad Feld

Gathering at the National Venture Capital Association’s VentureScape conference this week, venture and corporate investors met with executives leading top startup accelerators in a crowded session to discuss the health of the “startup ecosystem.”

Two main questions on venture investors’ minds: “How do we know if accelerators are succeeding?”  And: “Are we in an accelerator bubble?”

The managing director of Foundry Group and TechStars co-founder Brad Feld said he thinks there is no “accelerator bubble.” In fact, he wants to see an accelerator established in every town with a population of at least 100,000 in the U.S., to foster a healthy, local and national economy.

Posted in Venture Capital, Venture Capital Dispatch, Venture Accelertor | Tagged , , | Leave a Comment »

The Advantages of a “Date-Certain M&A Process” over an “Assignment for the Benefit of Creditors – ABC” by Steven R. Gerbsman, Gerbsman Partners

May 16, 2013 by Steven R. Gerbsman

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San Francisco, May, 2013
The Advantages of a “Date-Certain M&A Process” over an “Assignment for the Benefit of Creditors – ABC”
Apart from a formal bankruptcy (Chapter 7 or Chapter 11) there are two basic approaches to maximizing enterprise value for under-performing and/or under-capitalized technology, life science and medical device companies and their Intellectual Property: a “date-certain” M&A process and an assignment for the benefit of creditors (ABC).

Both of these processes have significant advantages over a formal bankruptcy in terms of speed, cost and flexibility. Gerbsman Partners’ experience in utilizing a “date certain” M&A process has resulted in numerous transactions that have maximized value anywhere from 2-4 times what a normal M&A process would have generated for distressed asset(s). With a date-certain M&A process, the company’s board of directors hires a crisis management/ private investment banking firm (“advisor”) to wind down business operations in an orderly fashion and maximize value of the IP and tangible assets.

The advisor works with the board and corporate management to:

1.  Focus on the control, preservation and forecasting of CASH.
2.  Develop a strategy/action plan and presentation to maximize value of the assets. Including drafting sales materials, preparing information Ïdue diligence war-roomÓ, assembling a list of all possible interested buyers for the IP and assets of the company and identifying and retaining key employees on a go-forward basis.
3.  Stabilize and provide leadership, motivation and morale to all employees,
4.  Communicate with the Board of Directors, senior management, senior lender, creditors, vendors and all stakeholders in interest.
The company’s attorney prepares very simple “as is, where is” asset-sale documents. (“as is, where is- no reps or warranties” agreements is very important as the board of directors, officers and investors typically do not want any additional exposure on the deal). The advisor then contacts and follows-up systematically with all potentially interested parties (to include customers, competitors, strategic partners, vendors and a proprietary distribution list of equity investors) and coordinates their interactions with company personnel, including arranging on-site visits.

Typical terms for a date certain M&A asset sale include no representations and warranties, a sales date typically three to four weeks from the point that sale materials are ready for distribution (based on available CASH), a significant cash deposit in the $100,000 range to bid and a strong preference for cash consideration and the ability to close the deal in 7 business days. Date certain M&A terms can be varied to suit needs unique to a given situation or corporation. For example, the board of directors may choose not to accept any bid or to allow parties to re-bid if there are multiple competitive bids and/or to accept an early bid.

The typical workflow timeline, from hiring an advisor to transaction close and receipt of consideration is four to six weeks, although such timing may be extended if circumstances warrant. Once the consideration is received, the restructuring/insolvency attorney then distributes the consideration to creditors and shareholders (if there is sufficient consideration to satisfy creditors) and takes all necessary steps to wind down the remaining corporate shell, typically with the CFO, including issuing W-2 and 1099 forms, filing final tax returns, shutting down a 401K program and dissolving the corporation etc.

The advantages of this approach include the following:

Speed – The entire process for a date certain M&A process can be concluded in 3 to 6 weeks. Creditors and investors receive their money quickly. The negative public relations impact on investors and board members of a drawn-out process is eliminated. If circumstances require, this timeline can be reduced to as little as two weeks, although a highly abbreviated response time will often impact the final value received during the asset auction.

Reduced Cash Requirements – Given the date certain M&A process compressed turnaround time, there is a significantly reduced requirement for investors to provide cash to support the company during such a process.

Value Maximized – A company in wind-down mode is a rapidly depreciating asset, with management, technical team, customer and creditor relations increasingly strained by fear, uncertainty and doubt. A quick process minimizes this strain and preserves enterprise value. In addition, the fact that an auction will occur on a specified date usually brings all truly interested and qualified parties to the table and quickly flushes out the tire-kickers. In our experience, this process tends to maximize the final value received.

Cost – Advisor fees consist of a retainer plus 10% or an agreed percentage of the sale proceeds. Legal fees are also minimized by the extremely simple deal terms. Fees, therefore, do not consume the entire value received for corporate assets.

Control – At all times, the board of directors retains complete control over the process. For example, the board of directors can modify the auction terms or even discontinue the auction at any point, thus preserving all options for as long as possible.

Public Relations – As the sale process is private, there is no public disclosure. Once closed, the transaction can be portrayed as a sale of the company with all sales terms kept confidential. Thus, for investors, the company can be listed in their portfolio as sold, not as having gone out of business.

Clean Exit – As the sale process is private, there is no public disclosure. Once closed, the transaction can be portrayed as a sale of the company with all sales terms kept confidential. Thus, for investors, the company can be listed in their portfolio as sold, not as having gone out of business.

To this end the insolvency counsel then takes the lead on all orderly shutdown items. In an assignment for the benefit of creditors (ABC), the company (assignor) enters into a contract whereby it transfers all rights, titles, interests, custody and control of all assets to an independent third-party trustee (assignee). The Assignee acts as a fiduciary for the creditors by liquidating all assets and then distributing the proceeds to the creditors. We feel that an ABC is most appropriate in a situation with one or more highly contentious creditors, as it tends to insulate a board of directors from the process. Nevertheless, we have found that most creditors are rational and will support a quick process designed to maximize the value that they receive. A good advisor will manage relationships with creditors and can often successfully convince them that a non-ABC process is more to their advantage. Apart from its one advantage of insulating the board of directors from the process, an ABC has a number of significant disadvantages, including:

Longer Time to Cash – Creditors and investors will not receive proceeds for at least 7 months (more quickly than in a bankruptcy but far slower than with a “date-certain” auction).

Higher Cost – Ultimately, ABCs tend to be more expensive than a date-certain© auction. It is not uncommon for the entire value received from the sale of company assets to be consumed by fees and/or a transaction for maximizing value may not be consummated in a timely fashion.

Loss of Control – Once the assets are assigned to the independent third-party trustee, the board of directors has no further control over the process. It cannot modify the process in any way or discontinue the process. Thus, it is not possible to explore multiple options in parallel.

Higher Public Relations Profile – The longer time frame for the ABC process and the more formal (and public) legal nature of an ABC make it more difficult to put a positive spin on the final outcome.

Messy Exit – Most independent third-party trustees do not perform the services of cleanly shutting down the remaining corporate shell. Thus, investors must either pay another party to do this job or leave it undone, resulting in increased liability.

About Gerbsman Partners

Gerbsman Partners focuses on maximizing enterprise value for stakeholders and shareholders in under-performing, under-capitalized and under-valued companies and their Intellectual Property. In the past 84 months, Gerbsman Partners has been involved in maximizing value for 76 technology, medical device, life science and solar companies and their Intellectual Property and has restructured/terminated over $810 million of real estate executory contracts and equipment lease/sub-debt obligations. Since inception, Gerbsman Partners has been involved in over $2.3 billion of financings, restructurings and M&A transactions.

Gerbsman Partners has offices and strategic alliances in San Francisco, New York, Virginia/Washington DC, Boston, Europe and Israel.

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Email: Steve@GerbsmanPartners.com
Web: www.gerbsmanpartners.com
BLOG of Intellectual Capital: http://blog.gerbsmanpartners.com

Posted in "Date Certain M&A Process", Assignment for the Benefit of Creditors, Distressed Intellectual Property, Distressed IP, Gerbsman Partners, Inetellectual Property | Tagged , , , , | Leave a Comment »

With Square Stand, Jack Dorsey & Co. reimagine the cash register

May 15, 2013 by Steven R. Gerbsman

They say all revolutions start out small. Jack Dorsey’s Square is no different.

It started off with a modest card reader, turned into a little app and now the company has developed and launched Square Stand, a point of sale system that reinvents the idea of cash register with help from Apple’s iPad and Square’s software, allowing the San Francisco-based company to further spread its wings in the payments business. And if there were any doubts that the company was going after payments incumbents such as NCR and Verifone, Square Stand puts it to an end.

SquareStandLaunches

The company announced the Square Stand at an event in a coffee shop near its offices this morning. Square Stand, simply put, is a point of sale system that allows merchants (big and small) to plug in their iPads (2 or 3, but not the 4th generation) into a stand that comes with a swivel base (so they can turn it around for you to sign for your purchase), a credit card reader and a USB hub that can in turn allow merchants to plug in everything from a scanner to a printer (for printing receipts), a cash register (the Square Stand doesn’t hold cash, just works with other devices) and even the backend ordering system into the stand. In February this year, Square introduced its Business-in-a-Box package, but this is a much simpler and is targeted at larger establishments including restaurants.

When asked why the company was making the initial device with support for only the iPad 2 and iPad 3, Dorsey pointed out that a majority of their customers were using these two devices and as a result they had to make sure they provided the biggest support. The support for iPad 4 (the newest model available, sold as just “iPad”) will come in subsequent models. The company had launched Square Register for iPad app in March 2012 and has made subsequent upgrades to the app.

Sexy cash registers?

SquareStand_Swipe_300dpi

“We have taken something that is ugly and mechanical and made it look like a consumer product that is very sexy,” said Dorsey, chief executive of the four-year-old Square, which is based in San Francisco and has raised $340 million in funding from the likes of Khosla Ventures, Citi Ventures, Starbucks, Visa and Chase. The company is part of a growing number of players including eBay and GroupOn that are looking to reinvent the offline retail business.

Square showed off its grander ambitions when it hinted at its desire to take on the likes of Foursquare and Yelp. Square said that as of today it is processing over $15 billion in payments on an annualized basis, excluding Starbucks, up from processing $5 billion on annualized basis a year ago.

Weighing in at about five pounds, the stunningly beautiful device is pristine white and is made of moulded plastic. The USB and other accessories (called the Toolkit) are perfectly matched to the stand. It will used by 13 merchants in 30 locations. The package is going to cost $299 and and is available for pre-order.

When I first saw the Square Stand, it elicited an involuntary gasp. From packaging to the final product, it is something one would expect from the Apple dream factory; but in saying so, I don’t do justice to Dorsey and his design team. While there are many companies who are following the Apple aesthetic, to me Square Stand represents a perfect harmony of hardware, software and service. (For more on beautiful design of connected devices make sure to check out our RoadMap event in November in San Francisco; to get early access to tickets that will go on sale this Summer go here).

Digital receipts and mobile payments are the way of the future, but Square also recognizes that people pay with cash and credit cards, the company said at the press conference Tuesday morning. The support for third party peripherals will make this into an ecosystem. It will be on sale in July at Best Buy and other retailers.

Do small merchants care enought about how their point-of-sale devices look and will they spend money to replace their existing systems? “More important than how it looks is how it works. It is about making it work simply,” Dorsey said Tuesday.

Completing the sale

The Stand has been under development at Square for quite sometime. Dorsey said that reinventing the register and rethinking the whole retail experience has been part of company’s thinking from its earliest days. If the Square’s original card reader made it possible for mom-and-pop businesses to access the credit card payment infrastructure, with the launch of this device, Square can start to look at tapping into the big brick-and-mortar commerce ecosystem.

“Whenever people got Square (Register) on iPad, the first thing they needed was a stand. So we made one, and one that works seamlessly in a way that allows merchants to move people through the queue really quickly,” Dorsey said. “We wanted to build hardware that was high quality.” The speed of processing payments has been a key driving force behind the design of this device, Dorsey explained.

Square is one of the handful of companies that understands that there is a lot of money to be made in building this new kind of retail system. And it might have started out small, but now it doesn’t have much choice to get real big, real fast. After all it has to live up to is massive $3.25 billion valuation.

Posted in Uncategorized | Tagged , , , , | Leave a Comment »

Microsoft Steps Up Its Israel Accelerator by Deborah Gage – Venture Capital Dispatch

May 13, 2013 by Steven R. Gerbsman

 

Microsoft Steps Up Its Israel Accelerator

By Deborah Gage

Microsoft

Microsoft’s accelerator in Israel.

Microsoft this month is introducing the newest graduates of its Israeli Windows Azure accelerator to the U.S. as the startups embark on a U.S. tour seeking prospective investors and customers. Microsoft started the accelerator last year as part of a broad corporate effort to re-ignite interest in its software, which includes the Azure cloud platform. Startups don’t have to use Azure to get accepted.

Israel lately has been a startup machine, with Israeli army veterans using the technical skills they’ve learned in the military to launch companies alongside their friends, and admission to the accelerator is getting more competitive–the company reports 300 applicants for 13 places this time, compared to 100 applicants for 11 places last year.

Posted in Venture Capital Dispatch | Leave a Comment »

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