You may have read Hodinkee’s big announcement: the website raised $40 million in venture capital and hired a new CEO. Given The Truth About Watches’ combative nature, you might be expecting another screed about Hodinkee founder Ben Clymer and his dark side combination of commerce and “journalism.” I come neither to praise nor bury Hodinkee, but to do the math. Let’s start with a couple of basics . . .
Forbes reports that the new investors set a valuation of “around $100 million” for Hodinkee. As is generally accepted for these kinds of things, Hodinkee did not publicly announce their valuation; they gave a heads-up to a favored media outlet to maintain plausible deniability. This, dear readers, is too cute by half.
Regardless of the messaging, the valuation has very little to do with what Hodinkee is going to do with the money. It has everything to do with the how existing shareholders got diluted – how much of the company stockholders gave up to investors to get the cash. After they write the check, everyone who had stock before now owns less of the company.
We’ll get to the math about the dilution. Before that, read the watchpro.com interview with Mr. Clymer. It’s a classic example of the mutual satisfaction genre – especially Hodinkee founder Ben Clymer’s declaration that mixing sales and editorial is a “non-issue.” What’s interesting to me: what isn’t said.
Hodinkee founder Ben Clymer says his brainchild’s going to use the money to build out, expand, blah blah blah. And hey! Hodinkee’s profitable. Contrary to public opinion, established profitability and venture capital funding are not mutually exclusive. Many profitable businesses raise money to accelerate growth, to invest more and faster than they could otherwise.
Clymer takes this a step further. He claims Hodinkee could have achieved all their expansion goals without raising additional capital. If you believe that I’ve got an authentic panda-faced Rolex Daytona for sale for $2000. Back to the crux of the matter: Hodinkee’s stock dilution . . .
When you talk about raising capital, there are two types of valuations: pre-money and post-money. Pre-money refers to a company’s valuation before you add the cash raised to the balance sheet. Post-money refers to the valuation after the money hits the bank account. It’s a very simple equation: pre-money valuation + investment = post-money valuation.
Journalists tend to publicize a company’s post-money valuation. It’s the bigger, more exciting number. In my world, the pre-money valuation is the money shot. That’s a businesses’ “true” value. A business worth $100m pre-money doesn’t suddenly become worth more once additional funds sit on the balance sheet.
I’m going to give credence to the more generous version of the story. I’m going to assume that the Forbes number of $100m is actually a pre-money valuation, yielding a $140m post-money value.
A $40m equity stake on a $140m valuation works out to about a 28.6% share (40/140). If accurate, Hodinkee founder Clymer gave away nearly a third of his company. I looked around for some comps: profitable eCommerce companies that raised venture capital.
I had difficulty finding this level of fundraising at this level of dilution. Rent the Runway, for example, did a $50M round at a $600m valuation, AllBird’s Series C was $50m @ $1.4b, and Warby Parker’s B was $37m @ $291m. Bottom line: the Hodinkee deal created a lot of stock dilution.
Then there is the CEO (Chief Executive Officer) issue . .
The general rule of thumb: a successful company founder doesn’t bring on a new CEO unless the founder is unwilling or unable to take the company to the next level. As Hodinkee’s “Executive Chairman,” Mr. Clymer won’t be involved in the website’s day-to-day operations. I’m not dissing Hodinkee’s Ben Clymer; I’m sure he’s a perfectly nice guy and a shrewd businessperson. But I don’t think he’s still at Hodinkee’s helm.
I also would be surprised if new CEO Toby Bateman wanted $40m in additional capital – that much dilution – before he started work. The cash brings new board members and investors that will want their voices heard. The new venture partners (True Ventures and GV) expect a significant return on their investment, as quickly as possible. They will use their leverage to steer Hodinkee in that direction. Which is why I don’t think Hodinkee raised $40m.
I believe Hodinkee received maybe $20m in primary funding (preferred shares issued by the company) and somebody sold another $20m of their personal shares to the investor pool. (Called a secondary: non-dilutive because the shares already exist; they’re just trading hands.)
My take: Hodinkee founder Ben Clymer cashed out. And rightly so. No self-respecting CEO wants a cashed-out founder looking over their shoulder.
Good for Mr. Clymer! I hope he doesn’t squander his money on ridiculously rare watches, and enjoys his post-Hodinkee career in good health. As for Hodinkee’s future, expect more of the same only more so. Hodinkee’s completely commercialized content will be the same as it ever was. A non-issue.
“No self-respecting CEO wants a cashed-out founder looking over their shoulder.”
Is this sentence or my comprehension wrong? I’d figure the founder with held assets would be the hound, as he has more skin in the game.
I have no idea what led any investors to think that more monetization could be milked from them, but I may have underestimated the capacty for hucksterism yet to come.
When I sold The Truth About Cars, I was told I’d be running the business for a year, on salary. And so I was – right until they got a new CEO. Then I had no say.
When I sold the Truth About Guns, I was told my editorial content would be most welcome. Editor-at-large and all that. The new Managing Editor had other ideas.
When you sell a business, you trade cash for control, no matter how much you sell it for. You can only hope that the buyers see that the culture and ethos you created are what made the brand successful in the first place. The way of the world.
And when a VC buys part of your business? Assuming full control is job one. They have unlimited legal resources, no morals to speak of, plenty of experience and lots of time. They’ll do all sorts of horrible things to kick the owner to the curb. Sometimes leaving him or her with nothing.
Can confirm as both a VC and a founder. But some not as bad.
Dan Zimmerman screwed you at TTAG? It’s pretty bad now. TTAC is, um, well, nothing.
Like what Robert said, but in reverse, from the CEO’s perspective. If you’re coming in from the outside to have full control of a company, having another “voice in the room” from a founder, who has less of a stake in the whole thing is going to be a recipe for fights about what makes sense, etc. You want to report to the board, not the board and some guy who is mostly paying attention to his yacht.
Thanks for the explanations. I misinterpreted this to mean that the legacy leader’s amount of investment was a critical distinction. It’s just one string attached or not and nothing more, which can presumably make a difference.
The amount of a founder’s financial stake IS a major factor. In my experience (and others’), as soon as a company’s founder lets the barbarians in the gates, the founder’s days are numbered, even if they have a controlling interest.
And of course, Joseph is right: no CEO needs or wants a founder riding shotgun. There are too many ways the founder’s influence can screw up the CEO’s plans. Remembering that most people who start a business are not financially motivated. They don’t know how to think about maximizing short-term profits – which is the goal of any major investor in any company.
If the pertinence is just that a founder as shareholder has more skin in the game for immediate gains, then I understand. Otherwise, I’m clearly a bit slow today.
Hey Joseph.
Thanks for the read.
Firstly, what’s your PayPal account so I can take that Daytona off your hands for 2K?
Secondly Rob,is there a way to buy into TTAW?
Have a good weekend.
I have been brain-picking into the VC scene lately, and there is a fundamental difference here: early-state businesses need money to scale up and dominate the market, so the VC invests basically into a possibility. Later-state businesses have already been there, done that. They could expand, but it is rathger difficult that they could scale up by doing something more/different than what they are already doing.
This means that while a VC would have all the interest to leave the CEO/owner at the helm of a budding business, it won’t be so in the second case, where the CEO/former owner has a fat bank account and looks forward to his next Caribbean cruise. Thank you, Mr. X, but we are calling the shots from now onwards.
Exactly, The question is always “can the founder push the company to the next level?” Early in the lifecycle, the answer better be yes. Later on…If they can, great. If they can’t, you bring someone else in and pay out the founder. No shame in either!
It depends here. As later rounds of investment occur, it’s no longer really about growth, but achieving a quick return or the investment firm can obtain excellent alphas. Depending on the tech, the company needs to keep the founder because it’s either advanced, bio or other engineering and the founder the is the brains of the product. Since Hodinkee is an ecommerce store, finding appropriate talent is far easier and the founder is more expendable.
[…] boy are you wrong. We’ve pointed this out error many times before, most recently when founder Ben Clymer sold a third of his company to investors and stepped aside for Mr. Pret a Porter to run the show. HoDinkee is a watch sales site with sales […]
[…] enterprise, boy are you wrong. We’ve pointed this out error many times before, most recently when founder Ben Clymer sold a third of his company to investors, stepping aside for Mr. Pret a Porter to run the show from London. HoDinkee is a watch sales site […]