That’s one of the most annoying phrases you can hear as an entrepreneur. Just because they are good problems, doesn’t make them any less serious, he argues.
One of Evernote’s good problems to have for a while now has been how well it’s doing and the ramifications that’s had on fundraising, valuations, liquidity expectations, and everything else that comes with success.
Rather than optimizing for everything, Libin has structured the company’s entire financial history to optimize for just one thing: Building a company that can last 100 years. He’s never had the highest valuations. He’s never had the most marquee investors. He hasn’t raised the most money he could. He’s only focused on financing that gets the most long term money into the company possible.
He’s announcing another move in this strategy today with an $85 million fundraising, rapidly on the heels of a $70 million round raised just last May. The investors include London-based AGC Equity Partners/m8 Capital, Valiant Capital Partners and existing investors including funds and accounts managed by T.Rowe Price Associates, Inc.
In a blog post today, Libin isn’t coy with what’s going on here. The $70 million round went to growing the company. This $85 million round is primarily going towards cashing out early investors and insiders. “On the day we go public, I want to make sure that any shareholder who is going to sell on that day has already had a chance to sell before,” he said in an interview this morning. “I want to rotate out anyone with a short term horizon. I want those people out. I want only shareholders who will hold us indefinitely.”
“There’s nothing wrong with them,” the noted nice-guy Libin hastens to add about those with a shorter term investment horizon and pressure to deliver returns to LPs. “I just want them out.”
This big of a secondary round is a ballsy thing to do, given the widespread criticism of CEOs and insiders who have used venture cash to take money off the table, before passing companies out into the public market. When Groupon did it, it was widely viewed as a sign of immense greed. But then again, Groupon’s cash-out round was close to $1 billion, and it was just before the IPO.
Evernote is in a different situation. Despite all the press saying at the time of the May round that Evernote was “prepping to go public,” Libin says the company is three years away from that at the earliest.
In the meantime, he wants to decouple liquidity from that IPO as much as possible. This isn’t too different from what Facebook did, and Libin credits Yuri Milner and Mark Zuckerberg for really pioneering this. “They really did a big service to the startup community everywhere,” he says.
While a lot of those early pre-IPO cash-outs were blamed for mercenary cultures at startups, Libin isn’t doing this to cow to employees’ or investors’ demands. He’s doing it to make himself happy in 2015, or whenever he seeks to take Evernote public. From now until then, he wants to give investors every opportunity to cash out whenever they want to, while he continues to focus on building the company. “There’s a fundamental incompatibility between tech companies and the public markets,” he says. “You can’t have a short term technology company. There’s no such thing.”
Even in conversations with later-stage private investors, Libin has been stunned at how many times investors suggest that his product is “baked,” and surely he can cut all those R&D resources and focus on selling. “Of course we’re not done with it,” Libin says. “We’ll never be done with it. If anything, we’re going to spend more on it over time. There is no steady state. That concept is second nature to tech investors, but it’s still alien to a lot of other people.”
These conversations have given him pause to consider just how dicey this goal of building a company that can last for a 100 years will be. Just taking money from the wrong person could derail it, as misaligned expectations and tensions compound year after year. “It would be so easy to make a mistake and get involved with people who don’t have this understanding,” he says. “You get careless once, and you pay for the next 100 years.”
He can’t emphasize enough how much he is not going public before 2015, although he keeps having to. Thanks to all those press reports that he was “prepping” for an IPO back in May, bankers flooded his office in the wake of the Facebook debacle. Each had charts and PowerPoints and were feverishly explaining why the IPO wasn’t their fault. “They all showed up uninvited and were all just blaming each other and the Nasdaq,” he says. “I was like, ‘Okay, I never actually asked, and I don’t really care, but thanks for proactively coming in and telling me it wasn’t your fault.’”
Thanks guys, but that’s all information he doesn’t need for a few years. People will see this insistence as an about face somehow, given Libin’s recent comments about how awful running a public company is in the wake of Facebook’s struggles. But I’ve been talking to Libin about his macro fundraising strategy for years now, and his message is remarkably consistent.
Back when he raised $50 million in 2011, he was in clear contrast to a company like Dropbox which was absolutely maximizing for valuation. Libin did an inside round well under the $1 billion price tag his company probably could have commanded at the time. When I asked him why, he gave the same answer he’d give in May or today: When you are building a company for the next 100 years, the valuation today doesn’t matter. You don’t want a spike, you want a gradual incline.
To that point, this round has a modest step up from May’s valuation of $1 billion to $1.1 billion. Libin knows that people are going to make a big deal about it not being higher, and he sort of laughed and groaned at the same time when I asked him about it. But he thinks it’s a fair price for the company right now.
He also points out that it is an increase, if you consider the type of stock being sold. The previous round was all for preferred stock. This is for a mix of preferred and common, because it is cashing out early insiders. “That’s a pretty big difference,” he says. “I think it’s impressive that investors are paying a slightly higher price for common as they paid for preferred a few months ago.”
“I have short term goals too,” he says when I tease him about the 100-year thing. “I want to be on whiskey billboards in Japan. That’s not a joke: I actually want to advertise Japanese whiskey. I am working on it. That’s really more of a medium term goal.”
Well, congrats Phil, because at least on PandoDaily, Hallie Bateman has made that dream come true. I won’t be happy until I see it on Highway 101.