Friday, September 18, 2009

21 Million Reasons For Mint To Sell

When I heard about Mint's sale to Intuit for $170 million, I never imagined that it would be controversial. I posted my congratulations to the friends who made money in the deal, and moved on.

It's been a busy week, and I haven't been keeping up with Twitter and RSS, so imagine my surprise to discover that 37signals founder Jason Fried had written an angry post entitled, "The next generation bends over," in which he described the sale as symptomatic of a "VC-induced cancer affecting the industry."

I'm sympathetic to some of Fried's arguments, and in a conversation with my buddy Ramit, we talked about the curious timing of the sale, given Mint's strong growth, and its recent VC round. But I concur with other investors who argued that it's unlikely that the Mint investors were responsible for the sale.

In fact, the difference between VC and founder economics practically ensures that the Mint sale was driven by the founders.

VCs take a porfolio approach to managing risk; individual company is largely irrelevant because of diversification effects. In fact, one of my portfolio companies was once rejected by Sequoia because, "You'll almost certainly build a nice $100 million business. But we'd rather have a riskier investment that either flames out or becomes a $1 billion business." Thus the key metric is expected value.

In contrast, as an entrepreneur, you're stuck with a one-company portfolio. The only way to manage your risk is focus on the risk-adjusted return.

In addition, the utility curve for money is non-linear. That first million dollars makes much more difference in your life than your one hundredth million.

To put it another way, Mint sold for $170 million. The company had raised around $32 million, and probably got participating preferred with a 1X liquidation preference. So the VCs probably got paid their $32 million first, leaving $128 million to be divided up according to the cap table.

Given that Mint had done five rounds of financing, it's likely that the investors owned 2/3rds of the company (take 20% of the company 5 times (0.8 to the 5th power), and you end up with a little over 66%). So the founders and employees had 42 million to divvy up.

If CEO Aaron Patzer owned 50% of that total, that's a cool $21 million.

Now I don't know about you, but I think $21 million is a lot of money. If Mint continued to execute well, got lucky, and ended up selling for $1 billion, Aaron would end up making around $160 million. That is a lot more than $21 million, but how many of us would turn down $21 million in the hand for the potential of $160 million in the bush?

One of my friends turned down a $300 million cash acquisition offer during the first boom. His company filed for bankruptcy 18 months later.

I have a family, with two small children. I have no doubt that were I in Aaron's position, I would take the money, and worry about changing the world with my next startup.

I agree with Jason Fried that Mint had a chance to be something amazing, but I'm afraid my family matters more to me than any vague sense of responsibility to a "new generation of entrepreneurs."

Disclaimer: I have zero inside information on the Mint sale.

2 comments:

Kevin said...

Very well put. I think you have expressed openly what many people were afraid to say.

Gabe said...

perhaps not totally on point to your post but among the things that made Jason's post so bizarre was his contention that Intuit is some sort of horrid corporate dinosaur that makes crappy products that people dread to use...

i dunno... i use turbo tax every year and it's among the most satisfying, easy-to-use web products out there - positively google-y

furthermore, it's a much higher accomplishment to build an easy-to-use web service for the complicated task of tax preparation used by millions of non tech savvy people than it is to build a bunch of task managers for a relatively sophisticated tech audience

imho, intuit is more admirable than 37Signals

congrats to mint!