Monthly Archives: April 2015

Liquidation preferences

Startups are receiving ever higher valuations. Some of this has to do with fundamental reasons pertaining to the startup’s successful execution. However, part of it is simply financial engineering.

When a startup and an investor can’t agree on a valuation, the right action is to simply walk away. There may be another investor willing to pay the requested price, or if the startup needs money to survive it will be forced to lower its expectations across time. However, rather than simply walk away, I’m increasingly seeing investors offer startups the headline valuation that they want coupled with a high liquidation preference multiple in order to bridge the gap.

This is how it works in practice. If a company is raising $5M and believes that they should be valued at $15M pre-money, but an investor is only willing to value them at $10M pre-money, the investor simply requests a liquidation preference multiple of 2X. This figure is hypothetical to show the directional effects of liquidation preference multiples greater than 1X. The actual figure will depend on the investor’s assessment of the probabilities of the startup achieving different exit outcomes.

So rather than get $5M / ($10M + $5M) = 33% ownership, the investor accepts $5M / ($15M + $5M) = 25% ownership while guaranteeing themselves a minimum 2X * $5M = $10M exit value before any other shareholders receive exit proceeds.

If the company is sold for more than $10M / 25% = $40M, this doesn’t make a difference. The investor gets at least 25% * $40M = $10M so the liquidation preference doesn’t come into play.

However, if the company is sold for less than $40M, say $20M, then the investor gets their $10M liquidation preference rather than 25% * $20M = $5M. This leaves the remaining $10M for other shareholders rather than $15M.

We can appreciate the full risks of such an approach by taking an extreme example. If you apply a 100X liquidation preference multiple on a specified valuation, since very few companies are actually going to produce a 100X return on a given entry valuation, this effectively gives the investor 100% of the economic value of the shares of the company. In other words, it doesn’t matter what the actual headline valuation is or what the actual cap table looks like.

Our startups have received offers with liquidation preference multiples ranging from 2X to 5X. We strongly oppose such offers which boost a startup’s short term ego while damaging their long term cap table. It’s much healthier to accept a realistic valuation with a 1X liquidation preference which is necessary for the reasons outlined in my earlier post.

Startups should focus on building a valuable business, not financial engineering. Whenever an investor proposes such complex structures that distort a startup’s cap table, startups should recognize that agreeing to play this game will place them at a competitive disadvantage.

Although you could model out your returns in the presence of a high liquidation preference multiple based on the probability which you assign to different expected outcomes, setting out on this path is likely to only serve to help you justify gambling your startup’s future. Your startup’s future is your future.

Project Fi

Google recently launched Project Fi. Basically, this makes Google a mobile operator like Verizon Wireless and AT&T.

However, there’s an important difference between Google and other mobile operators. Rather than build out its own network infrastructure and license its own spectrum, which would be very expensive, Google is offering wireless coverage over the existing networks of T-Mobile and Sprint. In addition, it’s using existing free WiFi networks where available. This is key as it reveals Google’s long term strategy.

Imagine if everyone made their WiFi network freely available for the use of others. Users wouldn’t need to pay for wireless coverage. We could simply hop onto existing WiFi networks at no cost.

Other companies have tried to make this happen in the past. However, they haven’t been successful. The problem is that you’ll only make your WiFi available to others if they do the same for you. As a result no one does it.

Project Fi is Google’s attempt to solve this problem. Although Project Fi is limited to Nexus6 smartphone owners right now, its low subscription prices relative to mobile operator plans clearly signal Google’s end goal. Google believes that voice and data plans should be free for all mobile users and is taking steps to make this happen. By showing Project Fi subscribers that the more free WiFi networks are available on the platform the lower their subscription prices will be, it hopes to get more people to freely share their WiFi networks with others.

Because of the big risk that Project Fi presents to mobile operator revenues, Verizon Wireless and AT&T, the two largest mobile operators in the US, are not participating in the project. They have little to gain in terms of new subscribers and a lot to lose from their existing subscribers switching away to lower priced plans. T-Mobile and Sprint, the smaller operators, are participating because they believe that Project Fi will help hem acquire new customers. In the short run, this is true.

However, if Project Fi is successful in giving T-Mobile and Sprint new customers, it will also have been successful in showing Project Fi subscribers the value of free WiFi networks as an enabler of lower priced voice and data plans. The number of people making their WiFi freely available to others will increase and this will hurt all mobile operators. In their search for a short-term win, T-Mobile and Sprint are gambling with their long-term future. is a series of video chats on tech entrepreneurship and venture capital in Turkey. The biweekly episodes feature entrepreneurs and investors who share their experiences with viewers in a live 1 to 2 hour episode every other Tuesday night at 9PM Istanbul time. You can also watch recordings of each episode on’s YouTube channel.

The program is hosted by food ordering marketplace Yemeksepeti‘s co-founder and angel investor Melih Odemis, and investors Elbruz Yilmaz from 3TS, Ali Karabey and Numan Numan from 212, and Omer Hiziroglu from DCP. Past guests include personalized gifts marketplace BuldumBuldum‘s founder Guclu Gokozan, short term home rentals platform Hemenkiralik and gaming company Peak Games‘ co-founder Rina Onur, and hand-crafted design marketplace Zet‘s co-founder Can Turanli.

The show is a great resource for current and aspiring entrepreneurs and investors in Turkey’s tech ecosystem. I congratulate the hosts for their initiative in launching the program and recommend you to tune in to their next episode. It takes place tonight at 9PM Istanbul time and features Murat Ihlamur, co-CTO of enterprise SaaS provider Logo, and Altay Tinar, co-founder of doctor reservation platform Eniyihekim.

Making fun of yourself

The White House Correspondents’ dinner is an annual gathering between the President of the United States and the journalists that cover him and the White House. Below is President Barack Obama’s speech from this year’s dinner.

There is arguably no role with more power and responsibility than that of the US President. Yet, even in such a serious role, Obama shows the importance of not taking yourself too seriously. Despite the stresses and struggles he faces, he makes fun of those around him, and makes even more fun of himself.

If the US President can laugh at the people who criticize him, his administration, and himself, then so can everyone else. Being able to poke fun at yourself shows that you acknowledge your fallibility, and this is among the first steps to being a great leader.

The Information

The commoditization of online news is a topic that’s been covered at length by people much more knowledgeable about the topic than me. I’m not going to rehash all their arguments here.

The punch line is that the internet has reduced the cost of distributing content to zero. For example, it wouldn’t make much sense for me to write this blog if the internet didn’t exist because I wouldn’t have a way to get it to readers. However, with the internet it’s available for everyone’s viewing at no cost to me.

As a result, there are orders of magnitude more content creators now than in the past. This explosion in content has made most content a commodity. Content creators are rarely able to charge readers for the content they produce because it’s likely available in similar form on another platform.

Until the beginning of this year, I hadn’t paid for any form of online content over the last 4 years. The last paid content I consumed was from The Economist in 2011. I stopped paying for their content because I find that similar analyses are now available for free on other platforms.

However, after a 4 year break, in the beginning of 2015 I paid for The Information. The Information covers the global technology industry and I’ve found that it offers a unique insider perspective not available on other platforms. It also offers well reasoned analysis of emerging tech business models that help me better structure my thoughts on the future of the sector. At a $600 annual fee, it’s not cheap. But I think it’s worth it.

Let’s see if the content available on The Information will also be commoditized similar to The Economist, or if it will be able to retain its subscription revenue model for a longer time.

Cap tables

I recently read Fred Wilson‘s blog post on Union Square Ventures’ company eShares.  Basically, eShares is a platform which allows companies to manage their cap tables online. Companies can issue shares and options, manage secondaries, and perform other cap table related actions through a centralized online platform accessible to all the parties involved in the company.

Working with over 60 companies, it takes a lot of time for me to keep each company’s cap table updated. Each time a primary or secondary transaction takes place, or an employee receives equity or options, these cap tables need to be updated. They then need to be shared with all other parties. The current way this happens is through tens of emails exchanged among founders, employees, investors, and lawyers. Very often one party doesn’t have the latest version of the cap table and this creates a lot of confusion.

I then saw the Twitter exchange below between Cem and Fred. I hope that eShares starts supporting companies outside of the US soon. We would be among the first users in Turkey.

Children’s Day

Yesterday was National Sovereignty and Children’s Day in Turkey.

As a kid, I remember looking forward to this day each year. We recognize moms and dads with their own days so why not children as well? I’m surprised how few countries do so.

Children are the future of our world and it’s important to help them understand this at an early age. Doing so contributes to their sense of self-worth while also preparing them to take on their future responsibility to make the world a better place.

My wife and I decided to celebrate the holiday abroad and to bridge it with the weekend. We flew to Malta yesterday afternoon and had a great dinner before heading off to sleep.

Here’s a picture of the view. It’s going to be a lovely day.

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When a VC is interested

I recently came across the following Twitter reply by Semil Shah, an investor in companies like Instacart, DoorDash, and Navdy.

Semil points out that if an entrepreneur is unsure about whether a VC is interested in their startup, the reality is that the VC isn’t interested. I fully agree.

One note is that this assessment is valid pre-investment, but may not be true post-investment. We have some portfolio startups I really like that I haven’t spoken to in over a month. There are two reasons for this. The first is our very large portfolio of over 60 investments and the second is that I don’t want to touch what’s not broken. I believe that when a startup is doing very well on its own, an investor can do more harm than good by being intimately involved.

In the pre-investment phase, if a VC is interested in your startup, the signals will be pretty obvious. We’ll fly to another city to meet you on short notice. We’ll be fully focused and prepared for our meeting and hone in to get your views on each of the key questions that will determine the success of your startup. We’ll ask how we can help out and even if you don’t have a specific request we’ll find a way to offer help. We’ll get back to you with an investment decision within a week of our meeting.

If we’re interested, you’ll know.

The Startup of You

I was fortunate to meet Ben Casnocha yesterday.

Ben is the co-author of The Startup of You together with LinkedIn co-founder Reid Hoffman and he was visiting Istanbul for vacation. I noticed that he was in Istanbul when seeing his name pop up in the Twitter stream of Cem Sertoglu. Cem kindly introduced us and Ben made himself available for us to chat on short notice. We had a fun and insightful 90 minute talk.

I read the Startup of You back in 2011 and it was a career defining book for me. The book’s key takeaway is that you need to treat your career like a flexible startup. Just like a startup navigates to find product market fit, you’re looking to find something that you’re good at, that you enjoy doing, and that fills a market need. As Ben explained during our chat, it’s tough to find a role that aces each of these dimensions. One or two dimensions will likely be more heavily weighted in any specific role. You’re very lucky if you happen to meet all three.

The book helped me crystallize my desire to pursue a long term career in venture capital because it’s something that I seem to be good at (time will tell how good) and enjoy doing, while also bringing Turkey into the picture of my career as there’s a much greater gap (market need) for VC funding in Turkey than in the US. I’m very lucky.

I strongly recommend the book to anyone thinking about their career and how they can make it rewarding on a personal and societal level. Thanks for writing it Ben.


Bip is the new messaging app of Turkcell, Turkey’s largest mobile operator. I came across ads for the app on several online and offline channels and decided to check it out.

Bip is a cross between WhatsApp and Snapchat with additional emoticons specific to the Turkish market. It allows you to send messages to people on your phone’s contact list who have Bip installed, just like on Whatsapp. But you can also add a timer to your message so that it disappears after a certain time like on Snapchat. Snapchat messages are set to disappear after between 1 and 10 seconds while messages on Bip can be set to disappear after 3, 5, 10, or 60 seconds.

Bip also features local emoticons with Turkish text and images specific to Turkish culture. I liked these.

The app’s data usage is free for Turkcell subscribers but not subscribers of other operators. This gives it an advantage over other messaging apps for Turkcell subscribers.

Bip is a strong attempt by a mobile operator to lure smartphone users away from third party apps to their own communication platforms. It adds a nice local touch to competitors like Whatsapp and Snapchat, and I look forward to following its progress over the coming months.