WTF! We Just Got Funded And Everyone is Quitting!

VC funding is not necessarily a good thing!

 

“We just closed a $50 million VC funding round and a bunch of our very best engineers quit. Who would quit when we just received a multi-million-dollar endorsement from an obviously talented, insightful VC?”

This past month, I received calls from some pretty well-known DevOps companies in San Francisco where some of their best and brightest engineers were looking for references or telling me they were on the way out the door.

My first reaction was that these companies, with about $235,000,000 – $300,000,000 in previous alphabet rounds (Series A, B, …..G) just could not get funded so these smart people were getting out when the time was right.

Then a few days later, “we got funded!” A $50 million round probably for growth or acquisitions. Bet it was an E, F or G round. That’s usually what they call it when a company has about zero chance of ever dominating a market. $50 million is life support for 2 years, maybe 3 for an indolent management team with nowhere else to go who has not made any money in 10 years of existence.

These are the living dead in the DevOps, CRM, non-SQL space and have not made a dime of profit in 10 years, sometimes more. They are on their 4th or 5th sales VP, founders long gone, the stock options virtually worthless before this investment and clearly so afterward.

Their cost of sales can be over 50% of revenue. In one case, it was over 100%, paid for by almost free venture capital money. Almost free unless one considers the lost value of the stock option pool for employees. That part was not so free.

Another received $50 million a bit earlier, and to my surprise, some of their talent was exiting as well. WTF? Why is it always $50 million? Why not $30 million?

What does it mean when you get a $50 million funding round and your best engineers leave in droves? Well, it means these engineers can add, divide, multiply and subtract. Especially subtract. Stock options are a meaningful part of compensation – meaningful to the employee, not the company unfortunately.

They looked at the $235,000,000 – $300,000,000 or so they estimated is invested in early multiple rounds. Then they added the $50 million from the newest investor. That came up to $285,000,000, perhaps a bunch more. And they can read so they looked at what a typical SaaS company gets sold for and that is around 5 to 6 times invested capital – worst case. They actually want 10x.

Wow. 5 times $285,000,000 is $1.4 BILLION! Holy cow, we are rich!

Perils of VC Funding

Not so fast said these engineers. They looked around at the hapless CEO, soft spoken and always so sensitive while he leaves the real dirty work to the next echelon. They appeared to have lost trust in the guy, although for others it was a woman. For another, it was the founder who now seemed to be on the other team, the VC team.

Nothing gender specific here, all of these VC funded types act the same.

These types never made any money in these gigs in years so who thinks any of them are going to get 1.4 billion bucks for these almost dead companies. Ever wonder why so many VC funded CEOs go from one company to another, never with a great exit for the employees. Check Puppet. Check Chef. Check XebiaLabs. Then move to the CRM space and you will see them showing up again.

They looked at the sales VP, another in a long line of transaction sales nomads going from Chef, to Puppet, to XebiaLabs, to Dev-Whatever and on and on never getting a place sold and never making the option holders achieve even minimal levels of wealth. After all these landings, one would think one of them would have become liquid for the employee stock holders.

They looked at the marketing team delivering SPAM-generated “leads” from people with 20-character last names who only use Hotmail or Gmail to respond. They know the sales team who is fighting every quarter, usually under immense pressure, just to hit minimal growth targets.

Does this sound like a place that is going to be sold for $1.4 billion?

And these engineers know that software and SaaS companies are never sold, they are bought.

And “bought” means “demand” and who would want to pay this kind of money for what these engineers see when they looked around at a company meeting. This management team never made any real money getting their previous companies sold, and they are doubtful to get this one sold – and certainly nobody would pay anything close to $1.4 billion.

Apparently, these engineers are not drinking the happy face Kool-Aid served daily from the Vice President of People and Culture, or some other Orwellian title that entirely obfuscates their real role in life – insuring that employees never find out just how screwed they are from their stock options. They have been pretty much outed as frauds who hold weekly company meetings with free lunches and logo-wear while they never discuss the dilution from this last round.

And they screw departing employees on their last expenses as many have attested.

Some culture!

As I spoke with these engineers and some sales reps, they said their stock, which they knew should be about 35% or more of a 4-year compensation package, was worthless. They were insightful enough to realize they would be stupid to work at a place where anyone would take a 35% screwing and think the logo-wear and free lunches were fitting substitutes for lost potential wealth.

An observation several of them made was not who else was leaving, and there were several, rather who was staying. They saw the BOZO Explosion had kicked in where C and D level players were hiring E and F level talent.

After all, “A players” like engineers and sales people do not hang around places where the numbers pretty starkly show no financial tomorrow with useless stock options in an otherwise hot employment market.

They understand what is around the next corner when one has to deal with D and E level players who thrive in these unhealthy situations. These are the leaches with nowhere else to go. They do not add value but consume the corpse of a SaaS company with enough money to stay alive but not enough money or market momentum to explode in valuation.

Everyone knows the place will never amount to anything substantial. That possibility is long gone. There is no path to employee stock option wealth for many. This is the VC-funded, 10+ year old, “nice-to-have” CRM, DevOps, non-SQL database category.

The CEO typically distracts the board by comparing with the valuations of competitors who are doing much better. Often these did not take in early venture capital, so often leading to this level of dilution. Their life is different.

Life where profit comes before an E Round is different.

He or she will typically pitch a nonsensical acquisition like Screener.io or TestingWhatever.com or Semaphoreci.com to make it look like something big is afoot. Check out any of these companies’ last acquisition worked out. Google it. See if it drove what was written in the press release. Usually not so good.

All too often, an acquisition is more about buying time than adding value when there is a desperate need for ongoing funding from lower and lower tier VCs.

These typical CEOs, he or she, will desperately try to find a buyer who will pay him or her something for their worthless options – something not often, if ever shared with employees.

But when you have nowhere else to go as a D level player, you play along, wear the logo hoodie, post pictures with balloons in LinkedIn and hope something will come along before the place finally runs out of dough from bottom-feeder VCs whose name nobody recognizes.

In these situations, you have seen them dear reader, office politics rules because it is what the D and E level players do to survive. And they are pretty good at it. It is their game and the A player engineers, sales reps are just not that good at it. They don’t have the time to practice.

After the E or F Round the politics becomes insufferable confirming more talent departs and the talentless remain, like the firmly attached barnacles on a rusting ship.

This is the life of the SaaS living dead. We have commented on them many times before on www.ContingencySales.com. They are the exemplars of what happens if one takes in EARLY venture capital. They cannot help themselves, this is how it works.

There are scores of them in San Francisco alone. There may be a hundred or more in major cities in the U.S. They are in Dallas, New York, Austin, Seattle.

They inhabit the DevOps space and the CRM space, the space of the “nice-to-have” products without enough differentiation to break out. They are all over the non-SQL database world. Recently, the ETL world has seen its share, a category one thought was dead 25 years ago.

They use MEDDICC sales metrics to drive activity, any kind of activity, just so it can be measured.

They are often 7 to 14 years old. They are on their E, F, G X funding rounds. They have CEOs who are on their Nth gig, never successful. They SPAM, drive sales metrics over imagination, flog DiscoverOrg lists every competitor uses.

This is their story – as those of you who have been at several have attested. It is not one company, it is an entire category of VC-funded zombies with not enough energy or momentum to dominate a market but enough invested cash to almost never die.

You cannot distinguish one from another. They are the Everyman of venture funded “startups” if a 10+ year old thing can be called a startup.

This is the over-funded, VC led company. They are everywhere. They are the rule, not the exception.

Do you work there? Is this you?

If it is, think long and hard, if you are an engineer or top sales person, do you want to give up 35% of your 4 year comp for a hoodie and free lunches.

Maybe it is a great hoodie – but really?

If you are dialing for dollars, doing account based marketing, clothing the planet in your company’s logo-wear, building SPAM-sending programs you call marketing, it is probably a good place for you if you just keep your head down. No hot tech firm fights to meet you.

Pass the Kool-Aid.

Take what you hear, dear reader, from that CEO or wretched VP of People and Culture at the weekly company meeting, and compare it with this article in Forbes:

https://www.forbes.com/sites/valleyvoices/2017/10/23/when-100-million-is-not-enough/

It isn’t me saying it, the article comes from a top tier, later stage investment house. This is their opinion.

There is good news in the story however. The good news is that economic forces move to an equilibrium.

The really talented depart and continue to abandon these DevOps, CRM, non-SQL and other companies who just got funded (again) by VCs nobody recognizes. Funding from a bottom feeder is never a positive sign.

Those left behind, with nowhere else to go, have a corpse to gnaw on for a few years until someone buys the company like they did Perfecto – a once quite valuable company with $100 million in revenues.

Perfecto was bought for scrap – about $200 million. Their hapless CEO predicted industry dominance a year or two earlier. How did that work out?

Perfecto and others pretty much set the bar for this “nice-to-have” sector so divide the number of shares into $200 million, tops, and well, now you see how screwed you are. The engineers and sales reps did the math.

And that will happen in these CRM, DevOps, non-SQL firms as there is no alternative scenario. There are just too many of them; their stuff is bought by people who are not at high levels, and the cost of sales eventually eats them alive.

CA, the fountain of really stupid investments is gone. HP, who bought another DevOps type company, Mercury, learned its lesson with a write down so substantial they had to buy ink by the barrel just to report it.

Equilibrium is where this is going.

The A players, the talent seek a place where their skills can be rewarded.

The barnacles adhere to that rusty ship in the murky harbor.

Even a rusty ship is better for the barnacles than letting go.

You cannot let go if there is nowhere else for you to land.