I give Buffer a lot of credit. They seem to deeply internalize the idea of "realistic expectations" and it sounds like the buy-out was a win-win solution where everyone got (mostly) what they wanted.
As he says, the investors might not have been happy about it, but at least he has the backbone to resist trying to squeeze growth out of a market where there's none to be had (in the short term). Most CEOs wouldn't be as courageous, preferring to try to spend like crazy in the search for growth, which just torches investor capital even as it adds little long-term value to the business's equity.
In short, a bold move by a very honest guy who's in it for the long term.
The interesting question, if the intention was to stick it out in the long term, is whether raising VC money in the first place was a good idea. Bootstrapping the business would have probably been closer in line with the vision and allowed him to retain control without eventually souring relationships
Fair play to them. I'd take this any day over "This is an exciting move for customers as we limit what we give them for more money" or the other corporate bollocks that gets spewed on the regular.
I don't think this sounds like a win-win, the founder moved the goalposts and bought the Series A out for the minimum possible (9%) so he could start paying himself.
I read the fluff around core values, but my first thought is that Joel would rather not risk his personal fortune by growing the company further. Better to ride the 25% margin as long as possible, giving himself enough liquidity to retire wealthy, than take a chance on growth.
Maybe I'm too cynical, but I admit I'd be tempted to do the same thing.
So the same company that gave paycuts to their entire staff (except the CEO and Director of People) 8 months ago, has enough money to buy out their investors? Interesting.
Sounds a lot like the CEO gauging the company growth and employee pay in order to build up enough cash to push out investors, get a majority so he could "provide liquidity" for himself.
I can't say if this is close to the mark, but if so it makes perfect sense why the other founders left. Being at the head of a ship with a captain trying to slow down so he can line his own pocket is a special kind of hell.
Most of the staff got a pay increase. A minority were given a pay cut[1]. The Hacker News discussion was based on an incorrect reading of the data posted.
I haven't seen anything concrete about paycuts in that thread. Any what kind of numbers we're talking about? Also surely not everyone got a paycut, right? (Even excluding execs)
Seems like Joel is quite stubborn regarding his values and vision for Buffer, which i believe is a good thing but i can see how it can lead to differences with co-founders and investors once the vision does not align anymore. Felt like it was all over for him when they asked him to eventually step down and from that point he planned to remove them.
In the end it also means that their investors most likely lost their confidence in buffer, otherwise no investor would get out in a deal like that.
It seems to me that the nature of venture funding is such that it would be unusual for the investor and the CEO to be aligned with respect to the company's financial performance. This is true in public companies where activist investors push management to extract more value out of the business even when the CEO feels this will compromise employee morale and customer value.
I have seen companies in the same position described by Joel in this post where they fired the CEO, installed a "seasoned team" to get the numbers up, and then sold the carcass to BigCorp as an acquihire bailout.
So with that experience of one of the other ways this story could play out, I found Joel's story one of "success" in terms of sticking with the plan as opposed to selling out. I certainly respect that and wish him continued success.
Came to the comments to say the exact same thing: this is basically just a vote of no confidence in management.
I can't imagine any employee joining this company from this point forward without demanding all-cash compensation. Management and the investors have effectively set the value of restricted shares at zero.
> $2.5m of $3.5m was for founders and early team [of Series A money]
Terms:
> Series A class of shares included a protective provision which meant that Buffer was unable to offer liquidity for other shareholders
> a return of 9 percent annual interest on their investment at any point
So... the founders raised a series A mostly to give themselves liquidity, at the expense of a high interest loan that also threw their early investors under the bus? Well, they definitely achieved their vision of putting together an atypical round.
Given their lack of interest in going down the VC-startup path (high growth at all costs, keep raising, aim for IPO, etc), it's unclear what their motivations were to raise a VC round in the first place.
How exactly does offering an immediate return to those early investors throw them under the bus? Buffer put together a deal and their investors took it. For them to "buy" their equity, it had to be "for sale", and it turns out it was.
The normal story of what happens when a company takes an investment planning for hypergrowth and that doesn't pan out is that the company "pivots" to some usually-less-promising hypergrowth opportunity and repeats until it dies. The outcome here seems far better for investors, which is presumably why they took advantage of it.
Who feels bad for VCs though?
1. they didn't have to sign the sheet
2. It's really refreshing to see founders and people with vision be in control for once, instead of the opposite
Not everybody is perfect. Sometimes goals change and you realize what you wanted before isn't what you want today. Plus, he did mention his cofounders left, so maybe his ex-cofounders wanted the VC route.
This is an excellent piece and kudos for being transparent. This is possibly a story of virtually every startup that doesn't quite make it to 10X: You get funding and expand team rapidly but then revenues are not keeping up so you cut down and then wonder where you go from here. For many startups there is a path of being sustainable profitable business that perhaps will never become unicorn but then investors aren't happy with that. I think buying out investors is an excellent idea in this situation and every founder should always think about this possibility when signing the term sheets.
One of the under-appreciated facets of SaaS economics is that you have to grow your growth constantly, regardless of whether you're bootstrapped or VC funded.
If you're steadily adding 100 customers/month you might think thats great because of the accumulating nature of subscription revenue - but actually that's a death sentence.
Your churn will grow as your customer base grows.
If you've got a 5% monthly churn rate then at 1000 customers you'll lose 50 customers/month. At 2000 customers you'll be losing 100 customers/month - and all of a sudden your 100 new customers a month will net out to zero. After that point you'll start losing customers.
From a quick look at Buffer's baremetrics board that's what happened here.
You either have to have net negative dollar churn (which is very very hard if you're selling to SMEs) or you have to have an exponential growth rate that means you can escape the churn effect and that almost always require external capital to fuel the growth.
> If you've got a 5% monthly churn rate then at 1000 customers you'll lose 50 customers/month. At 2000 customers you'll be losing 100 customers/month - and all of a sudden your 100 new customers a month will net out to zero. After that point you'll start losing customers.
Actually, in this scenario the number of users will asymptotically grow towards growth/churn = 100/0.05 = 2000 in perpetuity. So it's not a "death sentence" but will lead to growth stagnation.
So investors put $2.3M into the company and got back $3.3M. They essentially have a ROI of 1M over a span of four years. Am I crazy to think that this is a pretty good deal for the investors?! If someone gives me a ~40% return on a crapshoot investments (like how most start ups are), I would be pretty happy!
You are thinking from the perspective of an individual investor. For VCs, this kind of return is abysmal since it won't cover the 7/10 companies that went completely bust. In order to VCs to take high risks on early stage companies, they need the winners to return 100x so the fund even makes financial sense. It's one of the main reasons why VCs constantly push startups for hyper growth.
This is certainly better than losing the investment completely but I can't imagine the investors being too thrilled about this outcome.
Yes, you are slightly crazy. The whole idea of VCs is that while most startups are indeed crapshoot investments, some will make returns in the 100x.
1.5x is sometimes "good enough" but it won't keep a VC afloat if all of its investments go like that. Even 2x means that you only get to invest twice and fail once. And forget about profits or a living wage.
I think when they invested, they expected more less like a triple-triple-double-double growth from 2014 to 2018.
In 2014 their ARR was $4.6M so investors probably expected their revenue to follow the $4.6M -> $13.8M -> $41.4M -> $82.8M -> $165.6M trajectory. Buffer's current ARR is $15M, which although is pretty good, is not enough for it to work well with the VC model.
Buffer seems like a fairly successful startup relative to the average. A roughly 8% return per annum is not a good return for a VC given that many of their investments in a given round will go to zero.
There may be reasons for this going the way it did, but I doubt VCs would be all that happy with this.
The way this company operates is inspiring, but as a recent churned customer, the resulting product is lacking. The web UI mixes up order of operations when dragging posts around and when I looked at implementing an API client for their service, I quickly realized why the UI had out-of-order problems. The API doesn't respects any sort of contract, changes types of responses in inconsistent ways and is basically impossible to implement in a typesafe way. The API used by the UI seems to rely on ordering of events received on their backend, but these events don't seem to be commutative, and each UI update seems to be its own API call...
All this to say, I appreciate the goals of Joel in building a strong culture and strongly support this, but the product itself isn't that great to use as a customer, which is probably why growth isn't what VCs want. And I'm just hypothesizing that a hard look at the tech stack could maybe help.
This is the oft-cited dream of founders that think they’ll just pay back the VC’s if the relationship isn’t working out. The reality is that no investor in their right mind would take that deal if they had any confidence in a more successful outcome down the line.
Any reasonable investor would gladly take that money from Buffer if they believed the money would give them better chances of more return elsewhere. That does not mean Buffer is worthless. It's not black and white.
It's reality if you structure the leverage like the CEO did heading into investment rounds. Not everyone can do this and not everyone will prioritize it either.
"Whereas in the past we’d “had it all” and achieved growth alongside creating a unique culture with a fully remote team and high levels of transparency, it now started to feel like we had to choose between those things. It was suggested that some of the fundamentals that I had come to value could be removed to create a productivity environment that would increase the growth rate. I refused to compromise on the transparency and remote work aspects of our culture, so we started to explore slower growth goals, and what that would mean for the future of Buffer."
I respect the commitment of Joel to all remote and transparency, he's an inspiration. Personally I think that high growth can be compatible with all remote and transparency. For example both us at GitLab and InVision are all remote with high growth rates.
> creating a unique culture with a fully remote team and high levels of transparency, it now started to feel like we had to choose between those things. It was suggested that some of the fundamentals that I had come to value could be removed to create a productivity environment that would increase the growth rate. I refused to compromise on the transparency and remote work aspects of our culture, so we started to explore slower growth goals
In what way did "remote culture" specifically negatively affect productivity? How was this measured against the more traditional way of working? Or was this just a perception/bias issue, like "oh hmm the team is remote, so I guess that can be blamed on slow growth"
When you give someone a pile of money you will always wonder if you get that money back, let alone see a return.
Returning anything to investors should be seen as a positive. If you disagree, go give someone 6+ figures and have them lose it. You're opinion will change rather quick.
otoh me giving someone 6 figures and having them lose it is much more meaningful to me because:
1. It's my money, not money someone has given to me to invest
2. It's a pretty significant part of my net worth. If I was worth $100 million and gave someone $100k and they spent it all without any return, I doubt I'd lose much sleep over it. If I do that now it would be very hard to get over.
I'm not really disagreeing with you here, but the emotions at play are different I think.
> Collaborative Fund suggested that we account for these various paths within the structure of the Series A funding. We added downside protection for the Series A investors, in the form of a right to claim a return of 9 percent annual interest on their investment at any point starting five years after the initial investment. At the time, I didn’t appreciate how important this clause would become. Even our legal counsel commented that this was not something he saw too often.
The wording suggests that this was a decision he regrets / a feature of the agreement he didn't think was important at the time. Is that the case? Would it have been less onerous with a lower rate? In general, I'm curious if / how they would have redone this decision.
I'm not confused as to why he wants to buy back control of the company, but I'm confused why he wants to be so profitable. Does he say somewhere why he isn't reinvesting more of the profits in the company? Why not be a little closer to the line?
Article explains somewhat about the hows but not really the why, other than alluding to “differences in vision.” Maintaining transparency about these things is a bit tricky!
In any other situation it would be the CEO leaving. The investors clearly didn't have enough votes to boot him, and took a cashout to avoid it being a total loss.
This is great news - it sounds like Buffer is a great company to work for and own as an operator. I do think they're a cautionary tale for trying to build a VC backed (in mission and capitalization) company the way they did, but VC backed is not and should not be the norm so that's not a big deal.
He's trying to pass this off as a startup growth post, but it's pretty much a direct response to calm the VCs who made Buffer happen in the first place.
ie. before there were 10M shares outstanding which represents all the shares owned by employees founders investors etc, now (as an example, these are not real numbers) there are 8M shares outstanding because the Series A investors no longer have shares those shares are taken off the market by the cash.
[+] [-] eldavido|7 years ago|reply
I give Buffer a lot of credit. They seem to deeply internalize the idea of "realistic expectations" and it sounds like the buy-out was a win-win solution where everyone got (mostly) what they wanted.
As he says, the investors might not have been happy about it, but at least he has the backbone to resist trying to squeeze growth out of a market where there's none to be had (in the short term). Most CEOs wouldn't be as courageous, preferring to try to spend like crazy in the search for growth, which just torches investor capital even as it adds little long-term value to the business's equity.
In short, a bold move by a very honest guy who's in it for the long term.
[+] [-] paragpatelone|7 years ago|reply
I am seeing a lot of sentiment on HN that feels sorry for VCs. VC already get paid above 200k/year; no need to feel sorry for them.
People should feel sorry for the founders & the employees who did all the work. Now if they get liquidation, then that is good.
[+] [-] TAForObvReasons|7 years ago|reply
[+] [-] gadders|7 years ago|reply
[+] [-] dahdum|7 years ago|reply
I read the fluff around core values, but my first thought is that Joel would rather not risk his personal fortune by growing the company further. Better to ride the 25% margin as long as possible, giving himself enough liquidity to retire wealthy, than take a chance on growth.
Maybe I'm too cynical, but I admit I'd be tempted to do the same thing.
[+] [-] dyeje|7 years ago|reply
Paycut Discussion
https://news.ycombinator.com/item?id=15861043
[+] [-] jVinc|7 years ago|reply
I can't say if this is close to the mark, but if so it makes perfect sense why the other founders left. Being at the head of a ship with a captain trying to slow down so he can line his own pocket is a special kind of hell.
[+] [-] barbegal|7 years ago|reply
[1] http://disq.us/p/13b30h1
[+] [-] dmdque|7 years ago|reply
[+] [-] kayoone|7 years ago|reply
In the end it also means that their investors most likely lost their confidence in buffer, otherwise no investor would get out in a deal like that.
[+] [-] ChuckMcM|7 years ago|reply
I have seen companies in the same position described by Joel in this post where they fired the CEO, installed a "seasoned team" to get the numbers up, and then sold the carcass to BigCorp as an acquihire bailout.
So with that experience of one of the other ways this story could play out, I found Joel's story one of "success" in terms of sticking with the plan as opposed to selling out. I certainly respect that and wish him continued success.
[+] [-] dsl|7 years ago|reply
I can't imagine any employee joining this company from this point forward without demanding all-cash compensation. Management and the investors have effectively set the value of restricted shares at zero.
[+] [-] echan00|7 years ago|reply
[+] [-] sebleon|7 years ago|reply
Terms:
> Series A class of shares included a protective provision which meant that Buffer was unable to offer liquidity for other shareholders
> a return of 9 percent annual interest on their investment at any point
So... the founders raised a series A mostly to give themselves liquidity, at the expense of a high interest loan that also threw their early investors under the bus? Well, they definitely achieved their vision of putting together an atypical round.
Given their lack of interest in going down the VC-startup path (high growth at all costs, keep raising, aim for IPO, etc), it's unclear what their motivations were to raise a VC round in the first place.
[+] [-] tptacek|7 years ago|reply
The normal story of what happens when a company takes an investment planning for hypergrowth and that doesn't pan out is that the company "pivots" to some usually-less-promising hypergrowth opportunity and repeats until it dies. The outcome here seems far better for investors, which is presumably why they took advantage of it.
[+] [-] nichochar|7 years ago|reply
[+] [-] echan00|7 years ago|reply
[+] [-] sytelus|7 years ago|reply
[+] [-] ig1|7 years ago|reply
If you're steadily adding 100 customers/month you might think thats great because of the accumulating nature of subscription revenue - but actually that's a death sentence.
Your churn will grow as your customer base grows.
If you've got a 5% monthly churn rate then at 1000 customers you'll lose 50 customers/month. At 2000 customers you'll be losing 100 customers/month - and all of a sudden your 100 new customers a month will net out to zero. After that point you'll start losing customers.
From a quick look at Buffer's baremetrics board that's what happened here.
You either have to have net negative dollar churn (which is very very hard if you're selling to SMEs) or you have to have an exponential growth rate that means you can escape the churn effect and that almost always require external capital to fuel the growth.
[+] [-] svantana|7 years ago|reply
Actually, in this scenario the number of users will asymptotically grow towards growth/churn = 100/0.05 = 2000 in perpetuity. So it's not a "death sentence" but will lead to growth stagnation.
[+] [-] IMTDb|7 years ago|reply
- Be happy with cash piling up in the bank, and redistribute it to employee/investors/founders.
- Lower the churn.
- Increase your ARPU.
- Use the profits to create anew product/offering that generates new growth.
[+] [-] syntaxing|7 years ago|reply
[+] [-] zminjie|7 years ago|reply
This is certainly better than losing the investment completely but I can't imagine the investors being too thrilled about this outcome.
[+] [-] cycrutchfield|7 years ago|reply
[+] [-] devcpp|7 years ago|reply
1.5x is sometimes "good enough" but it won't keep a VC afloat if all of its investments go like that. Even 2x means that you only get to invest twice and fail once. And forget about profits or a living wage.
[+] [-] mrnobody_67|7 years ago|reply
the math is pretty crazy... even $50m and $100m exits would doom a fund.
[+] [-] icedchai|7 years ago|reply
[+] [-] Kpourdeilami|7 years ago|reply
In 2014 their ARR was $4.6M so investors probably expected their revenue to follow the $4.6M -> $13.8M -> $41.4M -> $82.8M -> $165.6M trajectory. Buffer's current ARR is $15M, which although is pretty good, is not enough for it to work well with the VC model.
[+] [-] glangdale|7 years ago|reply
Buffer seems like a fairly successful startup relative to the average. A roughly 8% return per annum is not a good return for a VC given that many of their investments in a given round will go to zero.
There may be reasons for this going the way it did, but I doubt VCs would be all that happy with this.
[+] [-] tomasien|7 years ago|reply
[+] [-] AYBABTME|7 years ago|reply
All this to say, I appreciate the goals of Joel in building a strong culture and strongly support this, but the product itself isn't that great to use as a customer, which is probably why growth isn't what VCs want. And I'm just hypothesizing that a hard look at the tech stack could maybe help.
[+] [-] goseeastarwar|7 years ago|reply
[+] [-] Ceredron|7 years ago|reply
[+] [-] icelancer|7 years ago|reply
[+] [-] sytse|7 years ago|reply
I respect the commitment of Joel to all remote and transparency, he's an inspiration. Personally I think that high growth can be compatible with all remote and transparency. For example both us at GitLab and InVision are all remote with high growth rates.
[+] [-] lxe|7 years ago|reply
In what way did "remote culture" specifically negatively affect productivity? How was this measured against the more traditional way of working? Or was this just a perception/bias issue, like "oh hmm the team is remote, so I guess that can be blamed on slow growth"
[+] [-] richardlblair|7 years ago|reply
Returning anything to investors should be seen as a positive. If you disagree, go give someone 6+ figures and have them lose it. You're opinion will change rather quick.
[+] [-] jgh|7 years ago|reply
1. It's my money, not money someone has given to me to invest
2. It's a pretty significant part of my net worth. If I was worth $100 million and gave someone $100k and they spent it all without any return, I doubt I'd lose much sleep over it. If I do that now it would be very hard to get over.
I'm not really disagreeing with you here, but the emotions at play are different I think.
[+] [-] wgyn|7 years ago|reply
The wording suggests that this was a decision he regrets / a feature of the agreement he didn't think was important at the time. Is that the case? Would it have been less onerous with a lower rate? In general, I'm curious if / how they would have redone this decision.
[+] [-] jessep|7 years ago|reply
[+] [-] rajacombinator|7 years ago|reply
[+] [-] dsl|7 years ago|reply
[+] [-] samspenc|7 years ago|reply
[+] [-] aj7|7 years ago|reply
[+] [-] tomasien|7 years ago|reply
[+] [-] nvrmor|7 years ago|reply
[+] [-] Kiro|7 years ago|reply
[+] [-] owens99|7 years ago|reply
ie. before there were 10M shares outstanding which represents all the shares owned by employees founders investors etc, now (as an example, these are not real numbers) there are 8M shares outstanding because the Series A investors no longer have shares those shares are taken off the market by the cash.