We partially cashed out in an angel round at Viaweb, and it worked out well for everyone. The investors made a lot of extra money, and we founders were a lot more willing to take risks.
I'd say the scenario is highly dependent on the founders and what they're made of.
This money can go towards a "want" or a "need." Addressing a "want" could create new distractions for the founding team. Addressing a "need" could very well put aside existing distractions (i.e. immediate financial future).
Sounds like a nobleman griping about commoners' ability to crash the party with cash. Venture financing would be a strange animal indeed if there was one true best way to structure every deal for every venture.
If there is a big demand for this, the big boys refuse to serve it, and being funded by the big boys truly increases success probability substantially, some clever Wall Street'er could find a way to buy part of, say a Sequoia funded, founders upside; or at least something somewhat aligned with it. Even if it means working around some legal headaches.
As an aside, these founder liquidity events could be just the ticket for those much maligned 'idea guys':).
After reading Andreessen's blog about the extra money that VCs have because of large endowments' asset allocation, it appears that VC money is less expensive than it used to be.
Ron Conway will just have to live with the fact that his services, and those of VCs, are worth less in this new world than they used to be.
It's not a "cash bonus for going with that VC...a payoff or a bribe...I think payoff is a great word for it.", it is a sound (albeit possibly locally optimized) financial decision.
A partial cash-out helps the founders diversify a bit, which can be good because they can then afford to take big risks.
However, I'm guessing that Ron's concern is that it can also act as a sort of bribe, causing the founders to act not in the best interests of the shareholders (which kind of screws earlier investors).
These third-rate VCs aren't just competing with Sequoia and KP for these investments, they are competing with buyout offers which would make the founders semi-rich. This is very appealing alternative to selling out early when you are a year out of grad school, have never owned a new car, and the $500 plane ticket back to the east coast is keeping you from seeing your ailing great aunt Betty (okay I went a little far with the last point)
We all know VCs worship at the altar of the huge liquidity event, so it's no surprise to hear one speak of cashing out as utter blasphemy. But finger-wagging about "how it's done" and how "everybody benefits" is excess protestation, especially considering the Facebook counterexample.
Investors have to look after their stake and so does every other shareholder. It's not a moral issue whether a VC gets founders to take a Warren Buffett never-cash-out vow or lets them take pre-liquidity money. It's a strategic, market-driven business arrangement made by people whom are accountable to the company's shareholders. If I was Ron, I would try harder to look at "paying off" as an opportunity even if I dismissed it in interviews. I hope he's doing that!
I understand his perspective better and I agree that it's at least an uncomfortable development. I still think that shareholders have every right to look after their stake and investment, though.
A partial cash-out puts founders and VCs on much more equal footing. It's not surprising that bothers him. It is surprising he's so short-sighted and stuck in his ways.
I think the best argument against it is that some founders might stop pushing as hard after becoming mildly rich.
If VCs are half as good at reading and understanding people as they like to think it should be rather trivial for them to filter out these hypothetical slackerpreneurs who give up once a modicum of success is achieved.
"Bribe, payoff...." How disgusting. He seems to feel entitled to ride on the coattails of entrepreneurs and bet on them as if they were racehorses.
It is ridiculous to compare buying part of the company from the entrepreneurs to bribing them. A bribe entails a betrayal of trust. According to Ron, the entrepreneurs are betraying the company by accepting money. But the entrepreneurs are the company and are the shareholders. There is no betrayal of trust.
The entrepreneurs are suddenly getting better offers and "first-tier" VCs can't keep giving them raw deals. So of course Ron is sad. It looks to him as though the good old days are fading away. If this trend continues, the entrepreneurs will be able to get the company to achieve their own, more modest goals. They won't have to strike out when swinging for the fences in order to make VCs happy.
Forgive us for not wanting to be your slaves, Ron.
With a bit of froth forming in the VC market again its no surprise they are using some alternative tactics to land deals. When the situation is right, I think it makes sense to modestly reward the entrepreneur at the funding milestone, especially if they may happen to need to money.
Sometimes it feels like the VC dollar is made out to be so such a huge blessing to the entrep that they should be forever indebted. This puts the VC on this high pedastool when in fact both VC and entrep should be on the same footing, each brings value to the relationship so its a partnership.
I don't think this comment came out as Ron intended.
http://www.paulgraham.com/vcsqueeze.html
We partially cashed out in an angel round at Viaweb, and it worked out well for everyone. The investors made a lot of extra money, and we founders were a lot more willing to take risks.