VC wants to influence the venture company's decision on the power of Silicon Valley

In recent days, foreign media wrote that Silicon Valley is staging a "power struggle" around corporate control, and venture capitalists are constantly pressuring start-ups to give up more voting rights in the financing process, which will have a certain impact on the future decisions of these companies. But the founders did not submit, but the waiting for the fight in this game to get a bigger say, as for its follow-up development, we will wait and see.

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The principle of subversive investment

In the past two years, as one of Silicon Valley's most influential venture capitalists, Anderson-Horowitz Andreessen Horowitz has completely subverted the long-established principles of venture capital investment. The company will tell the founders bluntly that it is more interested in founders-controlled start-ups, citing the company's better resistance to outside interference and its focus on developing innovative products.

Anderson-Horowitz, which manages 2.7 billion of billions of dollars, invests in the hottest companies in Silicon Valley, such as Facebook, Zynga and Groupon. Given this investment principle, Anderson-Horowitz naturally won the support of entrepreneurs, and Jeson Goldberg (Jason Goldberg) was one of them. He is co-founder and CEO of Fab.com, a creative flash-purchase website. Last December, fab.com raised 40 million dollars in a round of funding led by Anderson-Horowitz.

However, Anderson-Horowitz's investment philosophy has also been debated in Silicon Valley. There, many young, inexperienced entrepreneurs are firmly in control of their fast-growing companies. For now, venture capitalists are relatively happy with the investment model, and they are making a full profit. But the industry is increasingly concerned that the CEO of start-up companies too large, once the operation of problems, investors may face significant losses.

Craig Walker, co-founder and CEO of the Cregg Walker, said he felt it was not normal for a senior executive to have too much voting power. He explained: "This is also the reason for the company to set up a board of directors, if the two sides work together, can achieve a win." ”

Helpless to give up the right to vote

In the early years of venture capital industry, entrepreneurs often give up control of the company in exchange for their first investment because of the difficulty in financing. In 1957, for example, digital equipment, a computer maker, was willing to give up 70% of the vote in an effort to get 70,000 of billions of dollars in venture capital and 30,000 of billions of dollars of loans from early venture Anglo &development.

In the the 1990s, as the internet ushered in a boom era and the market was flush with liquidity, the founders had more control over start-ups, but before IPOs, professional managers tended to replace founders as CEO managers.

At present, the entrepreneurs of technology enterprises are more confident. Facebook issued two types of shares this May, making founder and CEO Mark Zuckerberg Zuckerberg about 57% of the vote, even though he has only about 28% per cent. The social game development giant Zynga released three types of shares last December, while Groupon issued two types of shares last November when it launched its IPO.

Double shareholding Structure

The current trend has been opened by Google, which adopted a dual-equity structure before its IPO in 2004. Google's two co-founder Larry Page and Sergey (Sergey Brin) and executive chairman Eric Schmidt now control nearly 66% of the voting rights. Last month, Google was given approval by the shareholder meeting to launch a third category of shares-a stock without voting rights.

According to Jay R. Ritter, a professor of business school at the University of Florida, about 14% of all the technology companies that Jay Li Te the IPO between January 2011 and June 2012 used a dual-equity structure, compared with 6.4% in 1999 and 2000.

Mark Siegel, executive director of Menlo Ventures, a venture capital company, said the equity structure was linked to market supply and demand. He said the founders of startups had more leverage in the game with venture capital companies because of the large sums of money chasing popular IPO deals. Menlo Ventures, founded in 1976, manages more than $4 billion trillion in capital.

While this practice allows entrepreneurs to concentrate on developing innovative products without having to bear the pressure of profitability, he says, the balance is tilted too far into management, making it harder for the CEO to make changes if it is not conducive to the company's development. "This is why companies set up boards, and most people want management to accept the oversight they deserve," he said. ”

Winner Take All

Venture capital is increasingly becoming a "winner take all" industry. According to Dow Jones VentureSource, a research firm based in News Corp, the 10-strong wind companies in Silicon Valley accounted for 69% of the financing in the first half of 2012. For VCs, investing in popular companies like Facebook is so unusual that they are under pressure to compete for the hottest deals.

When looking for new investments, the founders will bargain with VCs, hoping to gain more control over their investments and give the company greater value. Part of the reason why Anderson-Horowitz was able to quickly become a top VC in 2009 was that it was generous in both respects. "We encourage all our companies to invest in a dual-equity structure when they are listed," said Markendersen, general partner of Anderson-Horowitz, Marc Andreessen. ”

Anderson-Horowitz has invested 156 tech companies in the past three years. Anderson says he is used to looking at the problem from different angles. His involvement in the creation of Netscape and Opsware was listed in 1995 and 2001 respectively, with two companies using a single-tier equity structure. But as a result of the rise of activist hedge funds, as well as the pressure of short sellers and the risk of hostile takeovers, Anderson has gradually changed his mind.

"Today, it is not safe for companies to go public without a double shareholding structure," he said. Ben Horowitz, another founder of Anderson-Horowitz, said that when the company was investing in a technology company that was founded as CEO, "I would feel better if the founder's position was strong." Ben Hollowitz ”

Endanger the interests of shareholders

While critics often share this view, they also warn that the dual-equity structure would allow management to act against shareholders in the face of major issues such as acquisitions, because high-level and investor interests may not be perfectly equal at this time. "We have seen the loss of this shareholding structure," said Anne Sheehan, head of corporate governance at the California Teacher Pension Fund, the second-largest pension fund Annie Hien. ”

Greg McAdoo, Sequoia Capital Partner, Gregg Macadou that the succession dispute will be another area in which corporate CEOs and shareholders are in conflict. "In a more traditional capital structure, voting rights can give shareholders considerable protection in the face of conflict with management," he said. Even if the dual-equity structure does not completely eliminate this protection for shareholders, it will be greatly weakened. ”

Goldberg currently does not have control of the company, but he is currently in consultation with investors to obtain this right. Fab.com is about to refinance again, and Goldberg says the investors, including Anderson-Horowitz, are in favour of creating a new dual-equity structure that will allow him to control fab.com after this round of financing until he resigns his post as CEO. "We have reached an agreement with investors that they will support us in creating a dual-equity structure," Goldberg said. ”

Still need to practice test

The founders could not ask the investors to make such compromises unless they had a decent business. Fab.com is a typical example of the online operation in a short span of a year, the flash site users close to 5 million people, as of June this year, product sales reached 1.8 million, this year's sales are expected to exceed 140 million U.S. dollars.

But not all of Anderson's Horowitz investors want to create a dual-equity structure. Aaron Levie, founder and CEO of online storage provider Box Inc., said he Allen Levi the shareholding structure but would not be a priority for the company's listing. Last October, Box Inc announced that it would raise $81 million from VC companies including Anderson-Horowitz.

Levy thinks that dual-ownership structure is not a good idea, in the industry is the public to say, the woman is reasonable. Although in theory, the founder of the control of the enterprise can greatly improve the efficiency of decision-making, but once they make mistakes, investors will face a significant loss of risk. "I think it is only through constant testing in practice that we can see the real value of this equity structure," said Levy. ”