Exits

Salonie: Hi, and welcome back to Matrix Moments. This is Salonie. And today’s episode is about how to think about exits, to sell or not to sell. Joining us to discuss this today is Avnish Bajaj, Founder & Managing Director, Matrix Partners India.

Avnish, you have been through this before with your Baazee journey wherein Baazee was acquired by eBay which was subsequently then acquired by Flipkart. In retrospect, what would have done differently?

Avnish: Thank you, Salonie. Good to be back for another Matrix Moment. Look, the history is that if Suvir and I hadn’t exited Baazee at that time, we would have probably - I don’t if we would competed with Flipkart. The journey could have been very different, and we could be billionaires today. Who knows? If we had lasted it out.

With hindsight what would I do differently? Probably not much else because I would argue it was a thoughtful decision. And in a subsequent episode, we will chat about passion, skill set, opportunity, framework. And that is something I had applied. But, we will come to that in that context. But let me tell you in this context at least how I thought about it and I would argue even Suvir even thought about it.

So we thought about who are key stakeholders. And we need to rewind and see what the journey was. I have written or spoken earlier about the fact that my motivation to start Baazee was no more complicated than getting rich quick. And it turned out to be not very quick. Then, the whole dot-com bubble burst. It was actually an excruciatingly painful journey. I would argue that as a company it was an outstanding journey because we managed to build what seems to have been a really special culture and everybody kind of stuck it out.

But from an achievement standpoint and the classic markers of success one would have liked to see, it was very painful. It took very long. It doesn’t sound long now. But when you don’t have a market, it seems very long. So, I would argue the fact that if you looked at the stakeholders, we had investors; I would argue they were tired because a lot of the venture capitalists who started in ‘99 - 2000, actually went out of business themselves during the bust period. So, the investors we had eight or nine, most of them are very supportive but I could tell that they were tired.

Then if I looked at the employees, as it turned out post the sale when eBay did a benchmarking of the compensation, it turned out that Baazee was paying about 30 to 40% below market. Yet, people were there which was why I am very grateful for the kind of culture we had.

So employees I would argue, it was very clear that as part of a global company, people would make some money in the sale. And we had given equity options very deeply that they would benefit. So that was clear that those stakeholders would benefit. Investors would benefit. Then there were our consumers. I mean eBay has always been a very community driven site and so was Baazee. And eBay had done the best job globally in that regard. So, with better tools with more investment of technology, some of that didn’t quite play out the way one expected. But, it seemed like it would great for the buyers and sellers on the site.

Then it came down to the founders. Founders would make more than what kind of we had thought when we had started the company, our threshold was very low. I always talk about - maybe a separate topic, but money is the gap between your needs and your means, and wants start becoming like needs. And I would say at that stage, we were both fairly modest in our aspirations. There is this saying that the first million is a million that people make probably most short-term decisions for. Could have been that for us.

And that was kind of the framework, but I would have also - I will also tell you that as I think about it since your question is about what we have done differently. We actually did think we had other investors coming to the office and saying, we will give you new money. And what that would have meant is a moral contract, which we have talked about in different episode, which would mean signing up for another three to five to seven years of the journey. And I would argue that if you were to say the reward that was right in front of you or us with the money as well as all the stakeholders being happy versus the risk of making more money, continuing for a while, and also the fact of the historical context that it had been a very, very tiring journey, I think that’s where we realized that we would tip over into the side of selling.

And I would say little bit of that passion to keep running it, dulled - just a little bit but only in the context of this reward. So, I think that’s how we finally came to this decision.

Salonie: Okay, so viewing exits from a VC’s lens versus a founder lens are two very different things. What should founders be mindful of when dealing with multiple investors? And is there a playbook to follow for this?

Avnish: There’s never a playbook. Let’s make some first principles statements. First is: VCs are in the business of exits. VCs have a portfolio. Founders have a portfolio of one. So, when one is thinking through these things, one has to contextualize that by definition the incentives are not the same - by definition, right? So the incentive for a VC is to continue to exit businesses within five, seven, eight years. And there’s nothing wrong with it. That’s a business choice that one has made. And, within the context of the ecosystem - and we have spoken in a different episode about the nature of the contract between a founder and a VC, I mean this normal.

So I think it is played out a bit more as VC versus founder whereas the right context is VC and founder. And, how do you help each other achieve your objectives. I mean we talk about foundersfirst! But when starting this business, the Founder of Matrix, US, Paul Ferri made this statement that when in doubt err on the side of Founder. And it’s kind of the underlying founding principle behind our statement of foundersfirst!

So, I would say let’s recognize one is the business of exiting in five, six, seven years, the other has to decide what they want to do.I believe speaking to the moral contract earlier, it is the founder’s responsibility to take on the VC’s exit as their own responsibility. It is the VC’s obligation to not override the founder’s desires with their own exit needs.

How you converge all of this is the art in this business. I think the right intent, the right moral contract with the right understanding of each other’s needs, desires all of that, I think it’s possible to converge. I think founders need to think of the VC’s exit needs like I said as their own. Founder should realize that ultimately, it’s a reputation business. Somebody is giving them money, and it’s their responsibility to be great custodians of that money.

I think that’s the context of the framework. Now if you bring it down to brass tacks like what do you actually do? I think the founders should ask themselves whether this is a business they want to run for the next decade. And increasingly in India, founders are asking themselves that question. And it’s a very easy answer today. Yes, because the market is deepening, the businesses are happening. It’s very exciting.

So, if you look at Google, the founders are still in charge after close to 20 years. If you look at Zuckerberg at Facebook, he is still in-charge after 12 - 15 years. Steve Jobs came back. AMAZON, Jeff Bezos. It is increasingly becoming a world of founder-led businesses.

Now does that mean that the founders, the investors have not exited? Of course, they have exited. So what happens is if the founder takes it on as a responsibility, see the ultimate exit is for the company to go public. And then you are set. People can buy and sell stock, or they can exit in the IPO. The trickier piece is along the journey: how do you do it. And I would say the best founders continue to realize that it’s their responsibility, so they say, hey, I want to run this company for the next decade or maybe for my lifetime. I have a responsibility to the investors who came in earlier. I will get them exits.

And by the way today as the market is deepening, there are plenty of exit options. And so, you basically end up selling as an investor to maybe another investor who will then ride it to the next phase. I think the key here is the recognition of the responsibility and the moral contract to say, hey, me the VC, you the founder, if you are wanting to run this as a public company, I am going to be supportive of that. I am not going to push you to sell the company, and recognize that they have a portfolio one and they have put their life in it.

And conversely, the founder to say, hey, the VC, you helped me get started. You have helped me along the journey. I owe you the responsibility to get you an exit on certain terms that would work for you. And I think the convergence of this is increasingly happening in India and would likely continue to only increase, but even IPO will start showing up as exit options.

Salonie: Right. And lastly, how does a founder know that is the right time to sell?

Avnish: I think part of it we covered in the previous question of saying do you see yourself doing this for the next 10 years, for the next 15 years, for the next 20 years. And we will also talk a little bit in the context of different episode the passion, skill set, opportunity. My two-cent advice is very simple, ultimately in life if you are going to putting your blood, sweat, and tears, and money and wealth into something, it has to pass the shower test. It has to pass the passion test. And if you wake up every morning passionate to go into work - I don’t know if it’s Warren Buffet’s book or somebody’s book that says Tap Dancing to Work. If you are tap dancing to work - and it’s your company, you should keep running it. The day you don’t feel that, by the way even then you don’t have to sell the company. You may choose to actually take a little bit of a backseat and bring in a CEO because your wealth creation as we have seen with - look at the top companies that have become 800 to a billion, trillion dollars in the last decade. Apple of course has been a comeback story with the founder at the helm. But Amazon, Google, Facebook, these are all massive wealth creation opportunities.

As a founder, you don’t have to sell. You may just say, okay, if I am not tap dancing to work, if I am not feeling excited, I may bring in somebody else. So that’s how I would think about it.

Salonie: Thanks Avnish. Thank you for listening. And you can find the transcribed version of this podcast on matrixpartners.in. You can also follow us on Twitter and LinkedIn for more updates.