Startups ‘are staying private way too long’ says Marc Benioff | Hacker News Reader

Startups ‘are staying private way too long’ says Marc Benioff

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62 pointshugs89 comments

I remember the YC startup school at De Anza many years ago, when Andrew Mason, of Groupon, was one of the guest speakers and he basically said that the worst mistake he made was going public.[0]

And basically what had happened was that post IPO Groupon's accounting irregularities, which were earlier hidden, became public and the company fell from grace.

Same thing happened recently with WeWork and there have been numerous other companies.

Basically, while private, startups are able to engage in practices that don't survive under public scrutiny. No wonder startups, especially ones on shaky foundation, are remaining private longer.

[0] https://genius.com/Andrew-mason-andrew-mason-at-startup-scho...

So Groupon's CEO mistake was that other people DISCOVERED his fraudulent activities? That's a great learning LMAO. It sounds very much he hasn't learned a thing.

He also railed against companies with unsustainable business models. And someone asked him why he went public, if going public was the worst thing he ever did. His reply was that because of how Groupon was financed, it was basically forced to go public.

It was very odd. I got the sense that he got frustrated with all his business ideas failing, ran with the one business idea that actually could succeed (which was basically a pyramid scheme dressed up as marketing), but never really got comfortable in his own head with running a pyramid scheme, so all sorts of psychological defense mechanisms come out when he talks about it. His other actions (like introducing Progressive Equity [1], and his subsequent startups Detour and Descript having legit if less successful business models) also suggest this.

[1] https://medium.com/detour-dot-com/introducing-progressive-eq...

My accounting professor used Groupon as an example of a company that was aware it's business model was unsustainable. Basically, their domestic churn is remarkably high because businesses realize after a couple campaigns on Groupon that they're actually losing money. So, Groupon decides to tap international markets. This does nothing to reduce churn, so it's just a matter of how long it takes before they run out of new businesses to bring into the fold.

Isn't he the one that started Lightbank VC fund - which offers $100k funding for 50% of your company? [1]

Anyone who offers a deal like that can't be very ethical.

[1] https://www.quora.com/When-is-lightbank-starts-100k-for-50-a...

He got rich. His own reputation pretty much stays intact as genius visionary founder.

It's not much of a learning experience if all you get is rewards. Even if he's bitter that the rewards weren't as much as he wanted.

Then there's the continual pressure of trying to serve two masters: your original customers vs shareholders. Often it's the latter that takes precedence when they go public. What would FB or Goog be like if they were still private?

Larry and Sergey still have >50% of the voting power. Zuckerberg has >60% of the voting power.

Do you really think these companies are just following what shareholders are telling them?

Also they’re special cases where the founders’ visions have created so much shareholder value that there hasn’t been much for the shareholder to say anyway...

They ARE following the shareholder. The founders are the shareholders. The minority shareholders are just along for the ride.

ideally there Is a trade off between staying private to have more control and hopefully make better decisions that aren’t quarterly-focused, vs having more capital. In practice it seems like a game of “how long can we get away with cutting corners until we are big enough that going public won’t ruin us entirely”

I agree, but think its a shame the game has become so common place in this era. Hopeful that we’ll see more players emerge who are focused on a strategy of sustainability and ethics.

One of the big challenges is the asymmetry in when to go public relative to your competitors. If you go public too soon, you're competitors get the upper hand because they can spend more freely on growth without oversight and that lets them suck investment dollars out of the market like fire consumes oxygen. If you go public too late, then you learn no discipline with how you spend and the market recoils in horror and you burn out before getting costs under control before running out of runway. Blitzscaling has really changed things.

Worst mistake he made was not just taking the money from google.

It is shocking, and kind of infuriating, that he whines about going public being his biggest mistake when the only reason it was a problem was because of his companies questionable behaviour.

Palantir, 16 years and counting ...

https://en.wikipedia.org/wiki/Palantir_Technologies

What is the life expectancy of a unicorn anyway?

That's because it was founded by billionaires and funded by the DoD...if you have infinite money, you can stay private for as long as you'd like.

Palantir isn't a startup, it's a defense company.

Valve (maker of Steam) is another company that has been private since 1996.

But Valve never was a startup. It was entierely self-funded by Newell and Harrington who had become rich after working from Microsoft.

Benioff remarks about governance don't really apply to Valve because even if Valve was poorly managed it would pretty much be Newell misusing its own money.

> because even if Valve was poorly managed

based on their culture deck it doesn't seem great.

Purely from the standpoint of maximizing value I mean.

Most people wouldn't consider Valve a startup because they haven't taken outside investment. They're just a private company.

Let me rephrase this: private equity is extracting too much value out of early stage companies and left nothing for the public market.

Private equity funds do not invest in early stage companies; perhaps you mean venture capital funds?

Otoh, VC's can't really "extract value" ; they can only sell share to the public or to other VC's.

Venture capital is a form of private equity.

We are, in fact, conversing on a website owned by a private equity firm.

VC can extract value by selling it on at an inflated valuation.

That's what SoftBank tried to do with WeWork. The company is worth 10 billion (or less) and they tried to sell it to the public markets at 40 billion. Had the public markets not noticed the weird shit going on inside the company and actually bought it at 40+ billion then SoftBank would've made a lot of money. The stock would then most likely decrease over the following years costing those that bought it in the IPO money.

This is why it's so important that public markets are strictly regulated and the SEC forces companies to publish all kinds of things before IPO.

Private equity and VC are generally interchangeable terms in that context. There's a difference between a VC that privately invites certain investors to invest, versus a publicly open mutual fund that anyone can buy into.

And to complicate matters even more, there are publicly traded private equity partnerships (Blackrock, etc).

tldr, jargon sucks

There are a lot of disadvantages to going public and very few advantages. Most companies these days don't need the money because private money is willing to pour billions in, and it's pretty cheap to run a company now if you're just software.

That's pretty much the only advantage, other than liquidity for early employees, which most companies don't really seem to care about, since many of the early employees have left by the IPO, and the ones that are sticking around for their payout are probably just coasting anyway.

But the disadvantages are numerous. You have to tell your competitors about your profit and loss. You have to hire a bunch of auditors to make sure you follow all the SEC regulations. You can't do any long term bets because the market will skewer you and make it hard to hire. Your every action is up for public scrutiny. Your valuation is no longer flexible when you want to make acquisitions with stock.

> private money is willing to pour billions in

That private money needs to return to its LPs, it's not an unlimited term investment.

> You have to hire a bunch of auditors to make sure you follow all the SEC regulations

Following the law is just so onerous and painful.

Sunlight is a wonderful antiseptic.

It IS painful. Today's laws reflect the misdeeds of the last 100 years. Compliance is incredibly expensive and slows down everything. I don't think its a bad thing at all, but most people don't understand the scope of the legal burden of being a public company. As a private citizen, I have a legal obligation to not murder people. As a public company, analogously, one would have to file a report every few months detailing how many people you didn't murder. Please indulge my terrible analogy.

I'm with Mr. Benioff on the point that private companies can harbor a lot of decay, while over-concentrating wealth. However, data shows that small-firm IPOs are simply not very profitable, and acquisition can be much more attractive: https://www.sec.gov/info/smallbus/acsec/acsec-090712-ritter-...

I work at a publicly traded company and deal with compliance and audit teams on a regular basis. It's not the end of the world. It's not overly costly. It's a good check and balance to ensure things are on the up and up.

As companies get larger, the risk for fraud and misdeeds increases. Kickbacks, payoffs, etc. Compliance and auditors are a good thing. Trust but verify.

That’s not at all what that means. Lots of companies follow the law. But when they go public they have to hire expensive auditors to prove it every quarter and it’s a drag on the business. A drag on both profits and productivity because you need to use up a whole bunch of staff time to interface with the auditors.

> it’s a drag on the business. A drag on both profits and productivity <

They have to hire accountants and lawyers, too. What a drag! Things would be better off with only engineers and designers! Oh that drasted HR to make sure we don't discriminate. Drags.

I interface with auditor and compliance teams. I'm an engineering manager. It doesn't consume 100% of my time, nor is it a waste.

You're speaking in hyperboles and extremes. What you're saying just isn't true.

I've worked with compliance teams too. It used up 50% of the time of three engineers, plus three people whose full time job was interfacing with compliance. And this was just in the InfoSec group. So that's four and half FTEs averaging at the time about $100K a year (probably now $200K). So today that would be a million dollars expended dealing with compliance.

And do you know what value compliance brought to us? Nothing. We were already doing all the necessary things. All we were spending our time on was proving that we were already doing all the required things.

what the commentor said, may not be true, but you didn't actually make an argument or at least back it up with anything.

as far as I can tell, your comment boils down to 'hiring internal compliance employees/consultants is not a waste.'

but you didn't say anything to back up that the money going to compliance is not a drag. What value does it add to the business? It seems it just prevents catastrophe (legal problems) and has its own costs (termed 'drag') but doesn't add business value as it does not contribute to the USP of product/service to the customer.

Even in your own case, if compliance takes any % of time there is an opportunity cost: you can't work on something that adds to the product/service because that time is spent on compliance.

Does your comment aim to disagree with that?

If you could just not do something to not need lawyers and accountants, then yes, the same logic would apply. You can obviate the need for the compliances required of a public company by not becoming a public company.

Admittedly I don't particularly follow Marc Benioff and / or Salesforce in the news much, but is his advocacy for privacy laws generally considered be an attempt towards regulatory capture?

Relevant quote: “We need a national privacy law,” he said. “Otherwise you’re going to get a patchwork of privacy laws. We have to get our privacy and data locked down so we know where we’re going. [Regulators] need to be stepping in now and they should be working hard to make those changes.”

If anyone, a large actor like Salesforce would be more equipped to handle a patchwork of laws than smaller competitors. A patchwork of laws is a pain in the ass for large companies, but it’s a barrier to entry for small ones.

Yes, most of his recent rhetoric is.

> “And if your orientation is just about making money, I don’t think you’re going to hang out very long as a CEO or a founder of a company.”

If you're a competent CEO, don't expect to be a CEO for very long...what a time to be alive.

"Competent CEO" and "making money" aren't the same thing. Hewlett Packard has had numerous CEOs that just slashed jobs en masse to make the bottom line look better. Nokia's CEO slashed jobs as well, took up with Microsoft, and now the company exists as a burned out shell of its former self, selling boring telecom and software IP like Blackberry and Ericsson. The then-CEO Stephen Elop is long gone with a nice golden parachute.

CEOs are supposed to be there for the long haul and drive real vision for the product. They're not supposed to be emergency stopgaps parachuted in to calm everyone's tempers because the last guy screwed up one too many times.

Yup. Plus, that's an easy prognostication for him to make because he's already on top.

If you aren't just about making money in the early days, you're not going to be CEO very long either. The key is figuring out when your company is big enough that you need to pay attention to things other than making money, or at least good enough as signaling/feigning that you care about things other than making money.

Says a man with billions in the bank...

Startups stay private because the regulatory burden of being public is so great. Want to change behavior? Change incentives. It’s simple math.

Or, rephrased, "They become really expensive for me to acquire and add to my crappy pile of product spaghetti in a monopolistic fashion! It would be much better if they went public when the were still cheap."

Huh? It is much cheaper to buy a company before it IPOs. That’s why you see things like Cisco acquiring AppDynamics five days before its scheduled IPO.

It's much easier to buy a public company than a private one (in a "hostile" or undesired situation), so if a company becomes public at a lower valuation, it's cheaper for Salesforce to acquire them and eliminate the competition.

It'll be interesting to see how this'll affect startups down the line. If employees aren't cashing out in a reasonable amount of time (or at all), will the majority of startups suffer a brain drain of top talent? Will startups need to come up with a new way of compensation beyond just equity?

I think that's already happening to some degree, though it's not a "new way" exactly. Totally anecdotal, of course, but based on watching people move between jobs in my professional circle, it seems like experienced people are no longer willing to take nearly as much of a salary cut for the sake of equity as they used to. A startup that doesn't offer competitive salary and equity will have a pretty tough time hiring the most in-demand employees.

On the flip side, it seems there's still an endless pool of less-experienced people who are chomping at the bit to work at startups. There's a reason startups recruit primarily people in their 20s.

Can't private companies give out equity just fine?

Yes? But if there is no intention of an IPO, where an early employee has a reasonably easy path to liquidate their stock/options, what is the benefit of owning equity in a private company when there may be a limited/non-existent market for said equity?

Potentially entitled to a percentage of quarterly profits, among other things. Draft whatever terms you'd like.

Startups these days eschew profits for "reinvesting in the bueiness." Heck, many publicly traded companies do this, too.

Also, let's be realistic in what you're asking for here.

Well when you have

- Founders getting to take cash out earlier

- employees with golden handcuffs that could last forever

- Questionable to outright illegal behavior being completely okay in the private market

- Insane levels of founder control

- massive VC firms willing to pump in enough late money to take pressure off earlier VCs

Then why go public? Especially if a lot of companies seemingly can't survive the IPO completely intact. Just look at WeWork

Eh. I don’t think it’s a good idea for a startup still going through rapid change (whether releasing new product lines, entering new markets, testing new pricing) to go public, since as soon as you do it’s hard to be “experimental.”

There are, however, private companies whose business models have largely stabilized like Airbnb and Stripe that I agree should’ve gone public already.

Curious why you think they should have gone public? What advantages does an IPO offer these stable businesses? Is it a belief that all stable business at a certain scale have a obligation to enter public markets? Genuinely curious

You need to provide liquidity to your shareholders at some point, so yes. Investors and employees have been waiting 10 years to cash out. They helped build the business and deserve to be rewarded at a certain point. A decade is stretching it IMO.

The old fashioned way shareholders would receive liquidity was through distributed earnings aka profit sharing; this is still a viable option. Employees receive a salary and shoulder little risk relative to shareholders/investors so I'm not sure I agree they "deserve" to be rewarded in the same way.

So you’ve given me compensation (equity stake) that I can’t sell, ever, effectively making it worthless. Borderline fraud. If I want cash flow, give me liquidity and I’ll go buy a public dividend fund.

My time is worth more risk wise then some investors bottomless pit of fund dollars (cough SoftBank cough).

I agree with you, though. I think employees want stock options without understanding their drawbacks and limitations. Receiving stock options sounds sexy and is motivated by social factors that may not be as beneficial now as they were several decades ago. But employees need to take personal responsibility for the offers they accept and if they feel under valued, they can leave at any time. I would personally opt for the cash flow route as well.

I think that stock options (and the eventual shares realized through option exercise) are a legitimate method for a cash constrained startup to offer deferred comp to early employees (as well as meaningful ongoing ownership in the business if done properly), but that additional government regulation is required to tip the power balance away from the employer/option grantor. I don’t disagree with social factors, but I think even today employees want upside exposure you can only obtain with options (or other equity instruments). Hustle has a cost.

If you want to issue options, no right of first refusal. You have to allow the transfer of your shares on a secondary market for accredited investors. You have to provide a cap table to all shareholders, as well as dilution and preferred share info. You have to hand over a 409A valuation annually to all shareholders.

You don’t have to go to the public markets, but you also don’t get to treat common shareholders (usually employees granted ISOs) as second class citizens. If private markets are the new public markets, we still regulate the private markets, just a bit less so.

</soapbox>

Employees are shareholders, too.

If they do not own shares, no, they are not a shareholder. Companies want employees to feel like shareholders as it should increase productivity.

Upon vesting, any employee can exercise one share and become a stockholder. It's a great way to see the books, too.

But your tone in treating employees and shareholders was very antagonistic. The vibe in startups has always been "we're in this together." Not, "I'm the boss/investor and you're the cog."

Not trying to be antagonistic, but precise. You say "upon vesting" which makes the assumption all employees are granted options. This is not the case. I don't see anything wrong with simply being a payed employee, receiving a fair salary for the work performed. If someone wants to be guaranteed a shareholder position, they absolutely can! By starting a company of their own. That is the beauty of our economic system. Not everyone is entitled to ownership at their place of work, nor should they be.

Most full time employees at VC backed companies will receive stock comp as part of their compensation.

you make a good point.

I think the 'vibe' is part of the problem. It's somewhat dishonest.

Why do all companies need to be 'family?' Can't we just respect each other as we get the job done and go home to our actual families? The 'company culture' is a ruse to get employees to have loyalty where the company does not reciprocate.

reminds me a bit of the blog post: <https://www.yegor256.com/2015/10/06/how-to-be-good-office-sl...

Im a complete newb to this. Can someone not sell their shares freely, regardless of public staus, if they do their own marketing?

Many companies have right of first refusal on any private share transfers. You need to offer the shares back to the company at whatever sales price you agreed to with a third party. Most times, the company can just sit on the offer and never actually respond. There are no timeliness clauses or guarantees when evaluating the offer.

Notoriously, this happens with companies like Uber. If you were friends with Travis, you could sell. If not, you'll go pound sand.

Investors also want to see the books and numbers. Not everyone can sell on hype alone. Even leaked numbers from Uber were taken with huge grains of salt.

Over the counter arrangements and warrants are on dubious legal standings with regards to transfer-controlled private "stock units". Actual shares are a different story, but everyone gives out "stock units" and not shares. It might seem pedantic, but there's a gulf of difference while the company is still private.

Shares can be bought and sold privately. They don't need to be publicly listed to cash out.

In theory, sure, but almost every startup I’ve seen makes board approval a requirement of the transfer.

Why do they "deserve" to? I fail to see how they're owed anything (that wasn't in their contract); it's business, and venture capitalists aren't innocent when it comes to harming businesses due to greed.

Because they built the business? Just because something’s in a contract doesn’t mean it’s not exploitative.

Being cynical, it makes the most sense to go public when you yourself don't believe in much growth anymore, but can still sell it to the unsophisticated public investor. Otherwise you keep running and pumping up the valuation.

>“I really strongly believe that capitalism as we know it is dead… that we’re going to see a new kind of capitalism and that new kind of capitalism that’s going to emerge is not the Milton Friedman capitalism that’s just about making money,” said Benioff. “And if your orientation is just about making money, I don’t think you’re going to hang out very long as a CEO or a founder of a company.”

This is like simple minded Darwinism where nature is red in tooth and claw. That perspective was not very good at explaining more complex behavior like altruism. All compatible in a neo Darwinian model. Simple minded capitalism is no different but who really believes in simple minded capitalism? This is a strawman.

Overfitting at its finest

> I think in a lot of private companies these days, we’re seeing governance issues all over the place,”

But not with public companies?

It's an opinion, I'd ask for some data.

I personally don't think the public market cares much about things like privacy and governance. If it were, Facebook would have neither investors nor users. Same goes for so many others.

He then goes into talking about salesforce going public as if it were an exampl. But definitely privacy and governance are not the same for b2b and b2c.

I have been with two startups that got public way too quick, when half of what you're doing is for PR effects in preparing to bring new investors, you forget about the customer. One of them is dead, the other survived after being bought out by a private equity firm. Going public is such a burden for the representation aspect of it that expecting _this_ to br a regulatory practice is delusional. (imo)

> I personally don't think the public market cares much about things like privacy and governance. If it were, Facebook would have neither investors nor users. Same goes for so many others.

This is a silly take. Data privacy is a completely separate issue from corporate governance, and by most analysts who cover it Facebook is considered a particularly well-governed company.

A company whose founder/CEO is the only person who can remove him(self) is well governed?

The way analysts are probably looking at it: Governance in the letter of laws/regulations : We'll give it a B- , invest and make $$

They are probably smart/cynical enough to know that governance in the spirit of laws/regulations is an F

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