Series F(*#$ Off)

“If you experience dizzying ecstasy and staggering depression in a very short period of time, there are two possible diagnoses. Either you’re bipolar, or you’ve been dealing with a venture capitalist.”

Tim and Jim sat in TOAD’s offices, both sharing an appearance in everything but attire. Tim was wearing a blazer whose 3 buttons cost about a BMW 3-series a piece; Jim was looking absurdly comfortable in an argyle sweater-vest with no shirt underneath. They had both weathered Ben’s presentation with relatively few questions, and Jacob and Ben waited with bated breath for their response.

Tim unbated his breath first. “This was an impressive pivot plan gentlemen. You slimmed down your operations while uncovering a new product and market opportunity -- all under many sleepless nights, I would assume, given how rapidly you transitioned.” Ben didn’t need to confirm Tim’s suspicions; his scraggly beard had grown unkempt, while the deep bags underneath his eyes betrayed his visible alertness.

Jim unbated next, gesticulating with his sleeveless arms. “We certainly admire your fortitude and effort fellas.” He paused as an unspoken yet easily detectable ‘but’ hung in the air.

Unsurprisingly, Jacob detected the implication, and decided to vocalize it anyway. “But?”

Tim took the reigns. “But...we both have another company in our portfolios that is investing in mobile A/B testing, and they are better connected to Apple; a crucial advantage in this case. You can understand why we wouldn’t want to invest in companies with competing products, no? That would lead to a horrible conflict of interest. Moreover, we made smaller investments, as the overall market for A/B testing is much smaller than the potential for novelty app development.”

Ben’s frown conveyed his disbelief, while Jacob looked slightly bemused. Ben blurted out his first protestation. “But...we embraced the model you wanted. We dropped our core business to ‘fail fast and cheap,’ and discovered a home run product.”

Tim replied as calmly and neutrally as he did during their first meeting. “Do you think you’re the only one that needs to ‘fail fast and cheap?’ We have investors too. There’s little point in being redundant in our portfolio. Moreover, the writing is on the wall and our Limited Partners are demanding progress.”

Jacob interrupted this time. “What do you mean, writing on the wall?”

Jim leaned forward, just enough to make Jacob uncomfortable at the amount of bare chest visible from his loose fitting argyle sweater-vest. “We heard rumors from the employees that haven’t been fired yet that both of you are regularly engaging in disputes. There’s palpable fear in your employees -- they’re all afraid to find themselves under Ben’s cross-hairs.”

Ben looked devastated at that. “That couldn’t be helped; you told us to go lean.”

Jim leaned back for his response, and spoke dismissively. “There are many ways to skin a cat, especially if the cat happens to be a lean startup. You could have salvaged the team culture somehow, even if that meant greater cost. Sometimes being lean means being fat in the short term.”

Jacob’s bemusement turned to bafflement. “Right, well color me confused. First you tell us to go blandly lean, then you tell us to spend frivolously -- should we keep the flavor while we cut the fat? Are we supposed to pivot like a George Foreman Grill?”

Jim chuckled at that, but Tim maintained his composure. The jocularity of JOCK’s partner did little to affect Ben’s inescapable depression. Tim shuffled lightly in his blazer, whose fabric was marginally more expensive per square foot than a beautifully adorned Upper East Side penthouse, which Tim also happened to own.

“Long story short, while we appreciate Tootly’s tenacity, we will not lead investment in a Series B. Or allow you to raise more funding.”

Exhibit: Series A, B, C, etc.

“Series A funding” is a fancy name for the first round of investment in a fledgling startup, while “Series B funding” is a fancy, iterated name for a second round of investment, and so on. Despite its intuitive and easy-to-understand definition, the term “Series A/B/C, etc.” is typically thrown around by the business elite like many of their more obfuscated acronyms; if you hear it and understand it, you’re generally considered “part of the club.” Many startups have multiple rounds of investment; though if you get to Series E, you either have an extraordinarily capital-intensive business or extraordinarily gullible investors.

Both Ben and Jacob could understand why TOAD and JOCK were not going to invest again, but blocking future funding was a surprise. Unexpectedly, Jacob continued pleading instead of Ben. “But we’ll be broke in two months. We need to be able to drum up investment, even if not from you.”

Jim looked at Jacob solemnly. “While we appreciate your desire to save your company, our opinion is that many of Tootly’s resources are not efficiently allocated. For example, your Data Junkies would make an excellent addition to one of our social gaming companies, while your Chief People Person remains useless to you while you’re not exactly hiring...don’t you agree?”

Ben stayed silent and confused, but Jacob was beginning to understand. Their business had no momentum left, and their investors were using their leverage to “strip-mine” Tootly’s employees. They were going to pick Tootly dry.

Tim continued, “Besides, both of you would be better served in other roles. No hard feelings here gentlemen; we were happy to invest in Tootly initially, and we’ve been truly impressed by your drive. We would certainly entertain investing in both of you in the future...when a new fund opens up, of course.” Tim was wearing his signature half-smile at that point.

Jim concluded their meeting by evoking a strange deja-vu, and handed them another feather-thin envelope. “Both TOAD and JOCK are convinced the best path forward is an early liquidation of Tootly; ideally through a sale. We happen to know another mobile app company that’s acquisition-crazy at the moment, and we think their offer is compelling.”

Tim clarified Jim’s subtle encouragement. “Let me make this clear. You accept this offer, and we’re likely to do business again in the future. Everybody’s happy. You decline, on the other hand, and your reputation in the Valley will be forever tarnished. There are many roads to failure, gentlemen, but there's only one path that ends productively. Otherwise, no amount of fart app sales will breathe methane-based life into your entrepreneurial asses.”

They left them there, allowing Ben and Jacob the opportunity to read over the offer. Apparently another company -- which conveniently received initial investment by JOCK and TOAD -- had just received funding from a larger, later-stage venture capitalist, and was interested in acquiring Tootly’s friendly consumer brand; the other intellectual property was just icing on the cake. The company, iLuvMobileApps, would pay Tootly $6 million for a full acquisition...but because of the onerous terms Tim and Jim had negotiated, neither Ben nor Jacob would receive any money. The venture capitalists had sneakily specified a “liquidity preference.”

Exhibit: Liquidity Preference

The equivalent of putting a “minimum amount owed” to a venture capitalist in the event of any acquisition or liquidity event. If the venture capitalist sets a liquidity preference of $6 million, for example, they’d receive $6 million from an acquisition before any other investor receives a cent. It’s meant to “mitigate risk” for the venture capitalist, but typically results in opportunities for über-sketchy financial engineering, as was the case for Tootly.

Jacob remembers his reaction to the proposal as a vivid, inchoate rage. “I was wrong about them strip-mining the company for employees. No, they were engaged in something much more malevolent. They were fucking Madoffing us ever since the downloads stopped. They used their influence in iLuvMobileApps, and the other venture capitalists’ money, to pay themselves back for their investment in Tootly. They invested $5 million in our company, and received $6 million less than a year later for unloading us. iLuvMobileApps, their real horse in the mobile app race, got our brand, our apps, and a nice little unforeseen bonus with our A/B testing product, while TOAD and JOCK walked away with a massive short-term return from our company. I swear, they could have taught Ponzi a thing or two.”

It didn’t take long for Jacob to decide he wouldn’t have any part in iLuvMobileApps, but he wouldn’t stop Ben from approving the acquisition. Jacob knew Ben cared deeply about his reputation, even if it meant stomaching the massive dick moves of greedy, clever investors. “I couldn’t give two Tootly farts about Tim and Jim, but I still cared about Ben. For all our past disagreements, I was still proud of our work together.”

And so, as August of 2009 came to a close, iLuvMobileApps changed its name to Tootly and Ben joined as Chief Product Officer. Before the official acquisition papers were signed, Ben and Jacob met as co-founders for one last cheeseburger at the Counter Burger. They reminisced on the strange occurrences that led to Tootly’s astronomical rise and meteoric fall; despite some prior conflicts, they found common ground on never trusting a venture capitalist ever again. Ben even joked about eventually suing iLuvMobileApps for intellectual property theft (if Tootly’s fart apps ever became popular again, he didn’t like the idea of someone else “making money out the ass from a sound that came out of his ass”), but Jacob convinced him to shelve his half-serious threat.

“As if our company being destroyed wasn’t enough, entertaining that lawsuit would have required re-engaging with the valueless subterranean-sandworms that call themselves corporate lawyers. No, we were finished with lawyers. We were finished with everything, really.”

Copyleft MMXIV Josh Cincinnati