“Facebook does not track users across the web,” – A Facebook spokesperson on September 25, 2011
and
“Generally, unlike other major Internet companies, we have no interest in tracking people.” – Facebook employee on September 25, 2011
v.
“A method is described for tracking information about the activities of users of a social networking system while on another domain.” – Facebook Patent application dated September 22, 2011
Whoops
My mouth fell open, literally, as I read the extremely private email from investor Chamath Palihapitiya (pictured) to Airbnb CEO Brian Chesky. The message in the email was fine, even reasonable. But the fact that it was leaked to the press, and contained so many incredibly sensitive confidential financial details about Airbnb and its founders, amazed me.
Disclosure: CrunchFund is an investor in Airbnb.
The face that the email was between just two people (meaning very low chance of a random leak) and was written way more carefully than quick communications normally are, led me to immediately assume that Palihapitiya has some kind of crazy agenda to hurt the company.
Mouth still open, I was preparing to write a story about how suicidal this was for Palihapitiya – clearly no startup would ever trust him with confidential information again. They’d fear that if he didn’t like the deal he’d just publish all those details.
Luckily Palihapitiya picked up the phone when I called. He insists it wasn’t a purposeful leak, and he’s horrified that it’s now public. He says that he believes that his assistant forwarded the email to her boyfriend and that it was forwarded from there, directly or indirectly, to Kara Swisher. (we just spoke again, he says he’s fairly certain it wasn’t a leak from his team). He’s still trying to understand exactly what happened, he says. In the meantime, he gave me this statement:
I believe we know the source of the leak and are taking decisive action to address it. I’m very sorry this is being publicly dragged out right now. This really was just an attempt to give Brian private feedback on how to think about these things.
Here’s the original email. Which, again, has reasonable points. But it contained information that Palihapitiya only knew because he was evaluating an investment. The fact that it was made public is a serious problem for him.
Update: It’s worth noting that Swisher has edited the email. In her original post the email showed a “Cc Marc, Reid, my deal team” – I assume that’s Marc Andreessen, Reid Hoffman, etc. It’s interesting that she removed that without noting it. I wonder why…
Update 2: From Chamath’s Facebook profile:
From: Chamath Palihapitiya
Date: Sat, 1 Oct 2011 11:16:05 -0700
To: Brian Chesky
Subject: Airbnb financing…Brian,
Thanks again for giving me the chance to participate in your latest financing. I had a chance to review the docs at length yesterday and I wanted to follow up as, quite honestly, I’ve never seen a deal like this over ~60 investments I’ve done and I’m pretty concerned.
I’m all for getting the best valuation you can, minimizing dilution and maximizing control. We did this brilliantly at Facebook…all of our financings (except our first $$$ from Peter Thiel) were done not out of necessity but opportunity. As such, our investors had virtually no control and it resulted in a much better outcome. As we’ve discussed, I generally don’t believe investors add much to a success story and so minimizing their impact is a great strategy when you are onto something that is working.
This said, while several of these concepts are reflected in the current deal, there is one big thing that I am fundamentally against and violates my principles and will prevent me from participating in your round. When I saw that you guys were taking $31M out of the company, I didn’t think much of it as I just assumed it would entirely be via a secondary sale.
But as I understand the deal, it seems that you are doing only $9.6M in secondary and $22.5M as a dividend to common (of which $21M goes to you and your co-founders). I am really uncomfortable with this and don’t think its in the spirit of building a good, long term business. Effectively, it is a strategy that allows you guys to take money out of the business and not dilute yourself — I’m not sure why this is such a big deal when you guys are almost 90% vested and the financing is at $1.2B where your dilution is marginal. Further, it excludes many of the employees that probably have helped you and your co–founders get the company to this place as most of these folks probably don’t have any stock but have unexercised stock options and thus won’t get a dividend.
My basic principle on this stuff is that if you want liquidity, that’s fine, but you should make it available to everyone. Otherwise, no one should get it. Your current deal is the farthest away from this principle that I’ve seen in a while…this strategy has been done once before — at Groupon. We can see how “well” they are doing and how short term the investor community is now viewing their motives. I really think you can do better than this…and that you are better than this.
Separately, when you look at successful tech companies, it seems that dividends are an approach used by cash rich operations to distribute excess earnings — in fact, the most successful, cash rich tech company in the world, Apple, hasn’t issued a dividend and they have more than $75B in cash! Again, while I think Airbnb will be a good company, this is nowhere near the truth now — you guys still need to scale and build this thing for the future.
I really think you are onto something but I would implore you to not take the easy way out. Treat your employees the same as you’d treat yourself. Do things that you will be proud of and can defend to anyone including your Board, employees, prospective hires etc. In such a competitive hiring market, you are competing with not just your obvious competitors, but also any successful tech company who is also looking for great talent. A principle that treats your employees as well as you’d treat yourself is a huge strategy for differentiation, retention and long term happiness of the exact types of people you will need to be successful. In contrast, if you are viewed as self-dealing and shady, it will only hurt your long term prospects…
In summary, I’m passing on this financing because I strongly disagree with what’s going on. I’m not sure who advocated this approach but I did mention this to Reid [Hoffman, another Airbnb investor via Greylock Partners] last night and he was of a similar mind to myself and surprised this was the approach being taken. If you want some good advice — I would ask that you consider pinging him about different ways to think about going about the liquidity portion.
If you change your mind on how to close this financing, let me know and I’d love to reconsider. Otherwise, good luck and lets keep in touch.
Take care,
Chamath
There are a lot of different kinds of people in this world. I’ve found that I get along best with the ones that are brutally honest.
Earlier this evening I interviewed Vinod Khosla at the jam-packed Startup Weekend Seattle event. We had a long talk – nearly an hour in total, which is a lot longer than most interviews I do and allowed us to take a deep dive on a number of issues important to Vinod. There’s good coverage of the event at Xconomy, GeekWire (again) and AndrewDumont.me.
What strikes me most about the man aren’t his views on technology or venture capital, but his communication style.
During the pre-interview prep I carefully brought up an issue that I’ve heard from a number of people – that Vinod is somewhat “difficult.” “I hear he can be a massive pain in the ass,” someone told me last week while asking if he’d be a good potential investor for their startup.
So I asked Vinod about it, and carefully watched his reaction. I did not want to ask him this on stage if it was going to make everything go sideways. He chuckled, said this was a fine topic to discuss on stage, and asked me if I’d read the quote on the Khosla Ventures site about brutal honesty. I hadn’t, but here’s what it says: “We prefer brutal honesty to hypocritical politeness.”
He told me stories, and then repeated them on stage, about a variety of entrepreneurs he’s been “brutally honest” with. A startup that still had $50 million in the bank when he realized with certainty that they’d fail and suggested they shut down and liquidate. Two years later, he says, they had $3 million left in the bank and sold for $2 million. Yes, I double checked those numbers with him – the company sold for less than the cash they had in the bank (there are a variety of reasons why this can make sense for the sellers).
He talked about passing on investing in Joe Krause’ Jot because it wasn’t, in his opinion, a big enough idea. And he talked about how he gives his brutal, unvarnished opinion to entrepreneurs who seek his attention and money.
VC’s give lots of reasons for turning down a startup, he told me. Things like “it’s too early,” or “it’s too late,” or “I couldn’t get my partners comfortable with it.” Those are the easy ways out, he says. He prefers to give the exact reason. The one he seems to give most often is that the idea simply isn’t big enough to matter.
It’s tough to hear those kinds of things as an entrepreneur, and it’s no wonder some of them pass along their opinion that he’s a “pain in the ass.”
In my world I’ve had to learn about brutal honesty in a couple of different ways. The first is when you first hear a startup pitch and you know it’s not going to make it. I’ve tried the brutal honesty approach in the past, and some percentage of those entrepreneurs become enemies, sometimes lifelong enemies. I’ve tried a softer, more polite approach. In those cases the entrepreneur remains eagerly on the hook. If you don’t respond later, though, you get the same result.
After years of tinkering I’ve found two excellent ways of minimizing the damage from these people. If I’m at a tech event in public I put on my full (invisible) body armor. Smile, shake hands if I must and perform the right type of theatrical engagement. “Amazing. Love to hear more. Do you have a card? I’ll contact you.”
That contact never comes. And for some reason far fewer people ever become upset v. the other ways of handling things.
I really don’t like doing this, but it’s the one thing that keeps me sane and allows me to continue to engage with the community. And every once in a blue moon someone does manage to sneak in past the armor and make a lasting impression on me. Still, I’d rather be more like Vinod in this way, and I’m going to experiment to see if I can make it work.
Here’s the other way brutal honesty works for me – in chasing down a story or interviewing someone. I just ran across this story on VentureBeat this evening from September 16. I believe it gives a good overview of how I conduct myself in interviews. I ask a hard question. I get “bullshit, bullshit, polite nonsense bullshit” in response. I respond that my question wasn’t answered, and ask again. and again. and again. And then, finally, for example, Kevin Rose admits he sold much of his Twitter stock over the summer. Or Matt Cohler, after three tries, simply gives me that look that suggests I stop asking him if he’d invested in Dropbox. Or Carol Bartz gets so frustrated with my attempts to penetrate through the haze of bullshit that she yells “so fuck off!”
I’m not trying to make people uncomfortable on stage. I respect (eventually) their refusal to answer and simply move on. But what drives me crazy are the people who are so politicized and media trained that they can speak for hours about everything in particular but never answer the question I’m putting to them. I appreciate their art, but I don’t respect their unwillingness to engage in the truth.
Bad news, good news, no news, it should all be spread truthfully and succinctly. There are exceptions, but they can usually be dealt with by saying “I’m not going to answer that question,” and we can move on. That’s why I enjoy interviewing certain people more than others.
Doug Leone plays it straight and fears no question. Marissa Mayer is excellent at going deep on issues she likes, and skirting those that she doesn’t. But she doesn’t engage in idle bullshit. Roelof Botha, Ron Conway, Josh Felser, Jeff Clavier, Dave McClure are all straight shooters. Reid Hoffman will talk about anything at all with the innocence of a newborn (he sleeps well at night, I think). Matt Cohler, who was whelped by Hoffman in a previous life at LinkedIn, is much the same way. His trademark move, though, is to simply stare you down silently when you ask something he doesn’t like. It’s direct, communicative and it works. I often simply move on. When I talk to John Doerr, on stage or off, I get the distinct feeling that the man can create matter from the swirls of his words. I don’t know if that’s bullshit or honesty, but it keeps me interested and, I admit, willing to imagine a better world is actually possible.
Sometimes people call me a jerk for the way I interview these people. I get why they think that. But I think I do a good job of showing off the shiny parts of a person’s achievements, and letting them get their words out to the world. When I cut them off, it’s only because I expect more from them. Better. These people keep coming back for interviews year after year, so I know they’re not entirely unpleased with the experience.
Back to Vinod…All this brutal honesty seems to be working out nicely for him. Entrepreneurs come back to him time and time again as they move from one startup to the next. They often take significantly lower valuations to be part of his family. Just this week, in fact, a startup I’ve invested in took a term sheet from Vinod valuing the company at $6 million. Another very good firm was offering $10 million. I asked him why he did that. “Because a startup with Vinod is a lot better than a startup without Vinod,” he said.
Which says it all. Direct, brutal, no frills, awesome, wonderful, honesty. Versus being smile fucked by someone who’s hypocritically polite. I’ll take the honesty any day for the win.
Disclosure: Khosla Ventures is an investor in CrunchFund. I think this is kinda rad.
Uncrunched 