One of the more interesting startup stories of the last few weeks has been the rise & fall of Hopin, a virtual events platform. After having raised more than $1Bn from the likes of a16z, General Catalyst, Tiger & Coatue, who valued the company at close to $7.7Bn as recently as 2021, Hopin’s core assets were recently acquired by RingCentral for a paltry $15Mn upfront consideration (+ another $35Mn contingent consideration, based on performance targets to be met in future).
Now here’s the most interesting part of the story – while the company has seen a drastic reversal in fortunes, the Hopin founder has already netted ~$195Mn personally by selling his shares in secondary transactions. With the company’s recent subpar exit, the issue of founders making life-changing money before investors & other shareholders have made any returns is now attracting serious attention.
These developments got me reflecting on some interesting learnings from this story for founders, investors, and employees. Here are some real-time thoughts running through my head:
1/ Market peaks can get wildly irrational – the last few cycles indicate that peaks in asset prices tend to typically happen every 7-8 years, perhaps even 10 years. Clearly, they aren’t frequent and one would expect to catch only 2-3 at best during the core years of any career.
But when the peaks do happen, they are wild! The dot-com bubble saw sub-scale companies with no business models go IPO within a few years of starting up. During the housing bubble of ’07-’08, both individual investors & Wall Street assumed that house prices would keep going up forever, with banks engaging in rampant sub-prime lending & their investment banking arms trading complex derivatives that they themselves struggled to fully understand (remember the jenga scene from the movie ‘The Big Short’?)
Similarly, 2021 was the peak of a post-Covid, liquidity-fueled mania. Crypto shitcoins, ape NFTs, meme stocks, IPOs of unbaked tech companies, and real estate boom in as far as Denver & Raleigh, there was literally no asset class that was untouched by super-inflated valuations & crazy investor behavior.
One of my favorite lines is – “crowds have short financial memories”. As a full generational cohort turns over every 7-10 years & new blood comes in, it tends to underestimate how high the market peaks can really go. To truly appreciate this, one has to live through at least one such peak, & be both old enough to participate in it as well as mature enough to assimilate learnings from it.
2/ Sow for many years, and then sell “high” – to make the most upside over a career, one has to be well-positioned on the sell side when the market peaks. These peaks are getting higher & wilder with each new cycle, therefore turning out to be generational selling opportunities.
Framing this idea in a more interesting way:
During market peaks, buy-side is the patsy while sell-side is the baller.
How does one ensure you are the baller when the next peak comes around? That’s where executing with persistence during tough times becomes critical. When times are hard and one has to be a price-taker (like the current funding environment), that’s precisely when founders should be heads-down in the “sow” mode, laying a solid foundation for the business & being as capital efficient as possible. So when the peak is around the corner, the business is well-positioned to be in a “reap” mode.
Btw, this advice applies to all asset classes & includes careers too. Peaks are the best times to get that coveted CXO role, get quicker promotions, and sell RSUs at a massive premium. But, being firmly positioned to reap these benefits requires many years of upfront sowing.
3/ Leverage diversity to avoid being the patsy – inspired by that famous line from Mike Tyson – “everyone has a plan until they get punched in the mouth”, I have my own version of it for investor behavior during peaks:
Everyone is rational until they experience a bull run.
Greed & fear are two core driving emotions of human behavior. The job of a professional investor is to manage these emotions & hold on to the fundamentals of doing business during both good & bad times. Unfortunately, as the Hopin example shows, this is easier said than done. Case in point: even the best VCs neglected to do basic due diligence while investing in FTX.
I was thinking hard about what investors can do to avoid becoming the patsy. One word that kept coming up in my mind is “diversity”. Building a diverse team that brings together both the optimism of youth as well as the battle scars of experience across multiple cycles, could be a good way to provide behavioral checks and balances. Of course, merely assembling diversity isn’t enough. Empowering everyone equally so each person has a voice at the table is critical to leverage this diversity.
While the best option is “direct” diversity in the team, investors can also utilize “indirect” diversity – surrounding the team with investment committees & advisory boards that can step up at the right time to provide battle-hardened inputs. Again, it’s vital to ensure that these roles don’t end up as rubber stamps. Instead, they need to be staffed with people who have the stature & credibility to ask the tough questions & play devil’s advocate when required.
Overall, it’s important to set up mechanisms that can create behavioral balance within the firm – naturally introduce a bit of fear when greed is rampant in the market, & bring back some greed when everyone else is fearful.
Be greedy when others are fearful.Warren Buffet
Closing out with my 2 cents on founders doing secondary sales – founders take extraordinary risks, sacrifice immensely & literally go through the fire for years, sometimes decades, before seeing any payout. If there are willing buyers for some of their stake, I see no reason why they should be admonished for selling, unless there is something unethical or illegal about it.
Investors hedge their bets across a diversified portfolio while founders put all their life’s eggs in one basket. A majority of them draw below-market salaries for several years and don’t see a significant financial outcome for ages. A large proportion of them never see a commensurate payout at all, courtesy of the VC preference stake. When no one really sheds a tear for these struggles, often framing them as “a typical price every founder pays”, people shouldn’t be complaining when some of them get the opportunity to make some early money during market peaks.
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