By guest authors Irina Patterson and Candice Arnold
Ho: Certainly, dividends are one way, but you could also do shareholder buybacks. Public companies do this all the time. They do a stock buyback program if they think that their stock is relatively undervalued, or they think that’s a good use of capital. The board of directors can set the valuation for the offer to buy stock, or you have an independent third party set it. Any shareholder who wants to cash out can cash out.
Look at a company like UPS, which was private for about 90 years before they went public. They created billions of dollars of shareholder value without ever being a public company, and it was not all in dividends. It was mostly through shareholder buybacks. If you were a truck driver for UPS and you retired, you had your pension plan with a lot of UPS stock in it. The board of UPS set a price every quarter. The company kept growing and profits kept growing, so the price of the stock in their pension plans kept growing in value; a lot of truck drivers became millionaires in that company long before it went public.
There are multiple ways of achieving liquidity – shareholder buybacks, dividends, and secondary sales. The company could buy your shares, but it could also be third parties that buy your shares.
Ho: When you have a really attractive company, there are lots of investors who always want to invest. Facebook is a good example. They sold shares in the most recent round to an investor, but they also purchased shares from employees.
Craigslist is another example . . . one of the early employees wanted some liquidity. Craigslist is a private company. It wasn’t going to buy his shares, so he sold them to eBay. That’s how eBay got a hold of Craigslist shares. So, if you hold stock in a hot company, there are lots of people who would love to buy some or all of your shares.
The most important thing is not to think about liquidity and an IPO or exit. Focus on building a great company. And if you do, there are going to be people lining up outside your door wanting to buy your shares.
There’s another company that you’ve probably never heard about called Asurion, and they’ve done multiple recaps over the years with existing shareholders making money each time.
I don’t know what they’re most recent valuation is but they’ve had it be as high as $4 billion. Of course, that’s how growth equity players cash out founders. They act as the third parties coming in – and we’ve done that multiple times at some of our other companies as well where we would sell shares as an existing shareholder to another investor. We have also purchased shares from other shareholders as the new investor.
One of our companies, Vesta, has done that. Vesta has had liquidity through dividends, shareholder buybacks, and third-party sales. We’re about to do a third-party sale for one of our other companies right now, one of our older portfolio companies.
There are lots of people who have ve been calling the company, wanting to invest. The company doesn’t need any cash, but there are some shareholders who are interested in cashing out some of their shares, so we’re making that happen. So there are many, many paths to liquidity; that has been our experience.
As far as holding period, again, we will hold on to companies for a long period. But along the way, because we recognize our LPs need liquidity, we will try to find different ways to liquidate.
If we end up selling the whole company or take the company public and distributing shares, that’s great but that’s not the only way of getting liquidity.
Irina: In what stage of a business’s development do you usually like to invest?
Ho: We’ll invest anywhere from concept stage to all the way to bootstrapped, profitable businesses. So, really we’re somewhat stage agnostic. The only requirement is that the company didn’t have a lot of capital going in beforehand, and usually no venture investments before we’ve come in.
A lot of them have had some angel investments when we invest. As for true incubations, we’ll do about one of those a year. We’ve done, I think in the history of the firm, maybe about 12 or 13 of those.