Manning up in Silicon Valley

September 23, 2011

— Connie Loizos is a contributor for PE Hub, a Thomson Reuters publication. This article originally appeared here. The views expressed are her own. —

This week, Marc Andreessen announced that Ning, the social networking platform company he co-founded in 2004 and that went on to raise nearly $120 million, had “agreed to merge” with the lifestyle blog network Glam Media. Yet few believe it will be a marriage of equals.

“Merger” was almost uniformly put in wink-wink quotations in press accounts of the deal. Outside investors didn’t buy it, either. “My guess is that Glam thinks it is gaining some credibility by adding Andreessen to its board, and in return Glam is putting Ning out of its misery,” said one VC who asked not to be named.

Andreessen seemed further undermined – if unintentionally so — by Ning’s CEO Jason Rosenthal, who published his own announcement at Ning’s site, writing that Ning had “signed an agreement to be acquired” by Glam.

If Andreessen gussied up the deal a bit, can anyone really hold it against him? Andreessen clearly wanted to be respectful of Rosenthal and Ning’s founding team. He had investors to consider, particularly Ning’s later-stage investors, who bought into Ning’s $750-plus million valuation just 26 months ago. (The company is reportedly selling for $150 million in Glam stock.) And certainly, Andreessen wouldn’t be first in putting a positive spin on a less-than-sunny situation.

Still, even slight exaggeration – which runs rampant in Silicon Valley – can erode trust between entrepreneurs and investors, between investors and their limited partners, and between the larger startup community and the press.

Just one example of how centers on asset sales, or transactions in which an acquirer purchases the assets of a company, limiting its exposure to unknown, future liabilities. There are numerous advantages to the sales, including lower legal fees and potentially higher payment prices, as acquirers don’t have to worry about maintaining a reserve to protect themselves. But in Quadrus’ clubby confines, asset sales are largely anathema, viewed like some kind of high tech “repo.” In fact, investors were once “very antagonistic” about them, said Bob Latta, a partner at Wilson Sonsini Goodrich & Rosati who works on venture capital financings and M&A.

Attitudes began to change a few years ago, said Latta, when VCs began to, well, exaggerate. ”Around 2008, VCs figured out they could use the word ‘acquisition’ for their marketing purposes,” he said. “There’s no doubt that (asset sales) deals are getting spun (so that) people are left to assume these are stock acquisitions.” (After all, only a handful of people ever see the legal papers specifying how a company is acquired.)

Yet many entrepreneurs still regard asset sales as a black mark against their reputation. Latta told me of one entrepreneur who was recently in talks to sell his company. Latta believed strongly that an asset sale made more sense than a stock trade. The startup was several years old, and it might have unforeseen liabilities that the buyer didn’t need to assume. More, because the company would be selling for less than it had raised, an asset sale was also more tax-efficient. But the entrepreneur refused to even consider it: in his mind, an asset sale represented failure.

Latta thinks that in this economy, the founder may ultimately shake more money out of his VC backers, too, and that that would be a shame.

The vast majority of startups do not work out longer term, and acknowledging as much is “no assault on (a founders’) manhood,” said Latta. It’s just the simple truth.

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