Weekly musings from @profgalloway
Last Exit to Brooklyn
We sold L2, the firm I founded in 2010, today to Gartner (NYSE: IT). The transaction is, undeniably, a good / great thing for the employees and shareholders of L2 and should / will be a win for Gartner. Some thoughts four hours post-closing.
Deals are hard to get done. Really. Fucking. Hard. We had substantial interest from several suitors, yet closing the deal felt similar to landing an F-15, low on fuel, on an aircraft carrier, at night, in stormy seas. My job was to get the plane on the flat top (close the deal) while others kept the carrier (business) moving, and the plane kept getting waved off. Deal people (high-priced bankers, lawyers, private equity) are rich for a reason, as it takes skills, perseverance, and an iron stomach. I haven’t felt this stressed since the financial crisis. This was a better flavor of stress — fear of something great not happening — whereas the stress I felt in 2008 was just fear. But still, stress.
Kids in my classes were most interested in knowing why sell now. Few things:
i) One of my biggest mistakes as an entrepreneur has been selling too late. When things are going well, your bias is to hold on, and when things get wobbly, to sell. The opposite is true — you should sell when things are firing on all cylinders. Acquirers are smart and can smell success, or lack thereof.
Promise is worth more than profits in this market. A firm doing well, that’s growing and differentiated, gets a multiple of revenues. A firm that’s not growing fast, or doesn’t offer anything that unique, trades at a multiple of profits (performance).
ii) Market dynamics trump firm performance. In 1999, the first firm I founded, Prophet, was offered $55mm, 11x revenues. However, it was the go-go years, and I was stupid and wouldn’t entertain the offer. Three years later, after the market had rationalized, we sold for 2.3x revenues. Given current market dynamics, this may not be the best time to sell, but I know it’s not a bad time to sell. Markets are at all-time highs.
iii) There are well-publicized stories of people, like Zuckerberg and Spiegel, who refused to sell and made billions holding on. However, the ability to get your employees liquidity / significant ROI should always be seriously evaluated. As a founder you are a fiduciary for your employees, and getting a bunch of young people some liquidity (most of whom have never had a payday like this before) is your responsibility. Our society creates a gestalt that favors people who are already rich espousing that “shareholders should come first.” Your venture capitalist is already rich, and you should be focused on putting employees first. None of our employees, especially those who had little to no money in the bank, felt, like our VCs, that we were selling too early. Fortunately, our VCs were unique and had empathy for the employees, and deferred to management.
The most rewarding part of the experience was, after we signed, sitting down with L2 employees and telling them what it meant for them. They all received a transaction bonus, and many had ownership via options. I sat in meetings with 21 people, and seven cried. Their emotion was a mix of excitement about the victory / validation, happiness for me and other early employees, and a sense of relief and joy at the economic bump and freedom this money would provide them.
Humans are transistors for others. We don’t register deep emotion until we can share things with other people and validate our reaction with theirs. Funerals / weddings are sad / joyous occasions, as we feed off of each other’s feelings. I feel less of a sense of accomplishment these days, as nobody in my life beams with pride at these victories the way my mom did. However, seeing a half dozen of these kids (and most are kids) overwhelmed with emotion helped me register how wonderful this is.
The people who got the most from the deal (millions or tens of millions), senior management and investors, were generally supportive, expectant, and managed to talk themselves into believing it wasn’t a great deal for them.
And What About the Money?
People don’t talk much about money after the deal, though it’s typically the primary motivation for giving up control to someone else. I don’t want a bigger house, and think (like millennials) cars are sort of yesterday. I’d like a plane, as they have always been an object of fascination, and one of the few negatives in my life is I spend way too much time being molested by a guy name Roy from the TSA, and in airports in general. However, it’s not likely.
I’m giving a bunch of money to universities — yes, a (not-so) humblebrag. However, it’s more consumption than philanthropy, as giving to my alma maters and NYU makes me feel relevant and patriotic — both things I aspire to. I’ve spent the first 50 years of my life believing I’m a good person. However, reality is I haven’t done that much real good. As Cindy Gallop says, the most underutilized resource on the planet is people’s good intentions. It’s pretty much been all about me, all the fucking time. Intent on fixing that.
I’m giving decent sums to UCLA and NYU, and 6x that amount to Berkeley. NYU, especially our dean, has been supportive of me, and I’ve made some great friends there. In addition, teaching has been immensely rewarding. However, it’s been a relatively fair trade (I add decent value there), and my boss (department chair) is a unique mix of mediocrity and stridence (extreme confidence despite her mediocrity), which has turned me off the place. Tenure is the business equivalent of precancerous cells metastasizing — but that’s another post.
UCLA is a great institution, but I was 18 and didn’t get much of an education (my fault). The biggest gift is going to Berkeley, as I got my shit together there. Again, not their fault… just the age when you’re in grad school. Cal will graduate more kids from low-income households this year than the entire Ivy League combined. The gift will be designated for the financial support of kids who, like me, are children of immigrants. The big hand of government (state-sponsored education) saved my ass — I’m hoping this helps keep it extended.
It’s 2 am, and the deal coming to a close has given me some clarity on my blessings and what’s next. I am the son of a superhero (single mom) and the product of big government (UCLA/Cal). I had the chance to see seven inspiring young women and men cry with joy this week, and want to start being the man my kids think I am.
Life is so rich,
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