Tag Archives: Dot-com bubble

True Story: Why We Bought Out Our VC Investors

It started in 1999. We had already grown Palo Alto Software from zero to more than $5 million in annual sales in five years, without investment. But valuations had gone crazy, and our bplans.com site was already getting millions of visits every month. So we decided to look for venture capital to grow the company and sell it.

The boom seemed temporary, and we decided to take advantage before it waned. We had a sense of a very large open window that was going to close.

But we were too late. We signed a deal early in 2000, just a few weeks before the dot-com bubble burst. Very quickly we saw our web properties, which had been worth tens of millions of dollars, settle into more realistic valuations. And more realistic wasn’t interesting to us. We didn’t want to sell the company for what it was worth in 2001, based on sales multiples. We had wanted to sell it in 1999, when valuations were based on website traffic.

Which left us and our investors with incompatible goals. They wanted to flip the company, while we wanted to build it, grow it, and keep it.

We liked our investors. They believed in us, wanted the same thing we did, and offered useful suggestions. They were smart, honest, and respectful. But we ended up with minority owners who wanted only to sell the company, and we no longer wanted to. So we negotiated a deal, and bought their share back from them. That was in 2002.

The buy-back deal wasn’t easy because we’d spent the money to grow and didn’t keep it liquid. But we didn’t want minority investors to be trapped in our company with no hope of a near-term liquidity event.

It all worked out. We still see them on occasion, and they are still friends. But it is one good example of a case in which you don’t want incompatible goals in the ownership of your company.

True Story: Dollars vs. Eyeballs in Business Valuation

It was a warm late-spring day in 1999. I sat in my office with a venture capitalist, my lawyer, and my son. The sun beamed in the patio outside my office. We talked about Palo Alto Software and its web subsidiary bplans.com. At one point the VC said:

You wouldn’t be an attractive investment for VCs. You’re too profitable.

I chuckled. I thought it was a joke. We’d grown sales in four years from less than $1 million to more than $5 million annual sales. We had to be profitable because we had no outside money.

He said:

That’s no joke. It’s like the Oklahoma gold rush, a land grab, and the assumption is that if you’re profitable, you’ve stopped too soon. You should be spending more to build traffic.

Those were strange times.

(Image: iDesign/Shutterstock)