A little Darwin Now And Then

Recently people have been asking me a bunch of questions about Lightbank and why we buy or sell stock in various companies, and there seems to be a great deal of confusion about what we do, why we do it, and how we do it.
 
Brad Keywell and I have been partners since the mid 90’s.  We found our way to technology in 1999, after one of our off-line businesses failed, and have been building technology companies ever since.  Typically we are founders of the businesses we have built.  We founded Starbelly in 1999, I founded Innerworkings in 2001, Brad and I founded Echo and Mediabank in 2005 and 2006, and we co-founded and invested in Groupon with Andrew Mason in 2007 (when it was actually called ThePoint).
 
The confusion stems from the fact that while we “found” these businesses, meaning we are there at the beginning and help start them, we don’t always think of the idea and we absolutely don’t behave like typical founders.
 
Typical founders have incredible passion around the businesses they build and often spend years or even a lifetime building them.   They are driven by an idea that is larger than life and consumes them.  They have a vision and they work tirelessly toward it.  Monetary success is an afterthought and the attachment they develop toward the company they have built is often personal, no different than a parent’s attachment to a child.
 
We're different.  We don’t build one company, we build lots of them and we do it, more like investors, to make money.  It’s our job, just like it’s Sequoia’s job, or KKR's job, and just about every other VC or private equity firm in the world’s job.  We want the companies we help start to get bigger, to make money, to have a positive lasting impact on the world, and to be worth more, so we can eventually sell our stock and buy stuff.   
 
We currently have 14 companies that we have either started or have invested in at an early stage.  4 of them are bigger: InnerWorkings, Echo, MediaBank, and Groupon.  10 of them are smaller: Poggled, Whereivebeen, Sproutsocial, Watermelon Express, Pawncho, Obaz, Lightswitch, Gtrot, Betterfly, and 60mo.    We’re adding another company to our portfolio almost every month.
 
So here’s the problem.   If we keep adding companies to our portfolio and we never sell stock in any of the ones we own, by the time we’re 86 we’ll own 650 companies and we’ll have to spend 305% of each work day in board meetings.   But that’s not the real problem.  The real problem is that we don’t just invest in companies, we really work on projects.  To us, each company is a project that consumes our time as we do whatever we can to help it succeed.   Sometimes we devote a little bit of time, often we devote a lot.   In the case of Groupon, I’ve personally spent the last year or so serving as their quasi-CFO until Jason Child was hired.  We often do a series of odd jobs at the companies we're helping support - sometimes in business development, or finance, or operations, or legal.   Brad and I are both 41, which makes us wise old men in the world of tech and so we’ve actually picked up a few skills along the way which are useful to the entrepreneurs we work with.  
 
When we start a company, or invest in a company, we typically have no formal role as part of management (meaning we don't sit in on all of the management meetings, we aren't assigned functional areas to manage, we don’t hire people or hand out raises, and we don't take on responsibilities that are integral to day-to-day operations, etc.).   But, we’re far more active than typical investors; we’re around most of the time, and we’re often instrumental to the success of the business in some way until the roles we're filling get replaced and the management team gets fully built out.    


When we pivoted from Thepoint to Groupon in November of 2008, no one could have prepared for the growth that ensued.  Being the fastest growing Internet company of all time is no small feat and so there were very real "gaps" that existed in the early days as the management team tried to handle the explosive growth they were experiencing.    As we were expanding from city to city at a torrid pace, the team needed to be built out.  Back in those days, we didn't have Rob Solomon as our President, or Darren Schwartz as our head of sales, or Dan Jessup as our head of HR, or Brian Toddy as our VP of Engineering, and so on.   Even in the last few weeks, we just added the final missing piece to the team with the addition of Jason Child as our CFO.  Despite Andrew being one of the most talented entrepreneurs and young executives I've ever seen, it's taken the village as they say (Brad and I included) to keep this rocket in orbit.


Yet our roles have evolved over time.   In the case of Starbelly and InnerWorkings, we were the founders and CEOs of those businesses and we did them one at a time.  By the time we launched Echo and Mediabank, we had to learn to be founders and CEOs of multiple businesses at the same time and so it became increasingly important for us to hire senior management at an earlier stage.   Then we made a fundamental decision to stop solely working on our companies and to start investing in other people's ideas. In a twist of fate, my first investment was in Andrew Mason and Thepoint.com, which eventually became Groupon.  The difference between Groupon and our previous companies (Starbelly, InnerWorkings, Echo, Mediabank) is that for the first time, we weren't just starting our own businesses, we were investing in somebody else's business, somebody else's management team, somebody else's vision.   Given the success of Groupon, and our ability to support Andrew and his team in unique ways, we decided to institutionalize the process launching Lightbank in 2010, and do it across many companies at the same time, using our experience to support entrepreneurs and help them build disruptive and enduring businesses.  


So while it's fair to say we are far more active than the average investor bear, it's also fair to say that we serve a finite and discrete purpose that while critical at the beginning, tends to fade over time as the teams are formed and gaps are filled.  Because of what we do and how we do it (which we actually think is a huge advantage for the companies we invest in and makes Lightbank different than other firms in our space), we need to be mindful of how many companies we can work on at one time which means we also need to be mindful to how we sell our stock.
 
So, we’ve developed a strategy and it has worked fairly well for us over the past 10 years and that is we try and sell off small positions in our companies every 6-12 months (if we can), so that we can reduce our position over time.   It often takes a business several years before any one from the outside is willing to buy out existing investors, so on average we might be in a company for 3-5 years before we can even begin selling stock.  From that point, if we can sell off part of our position over another 5-7 years that means on average it will take us 10 years or so before we're able to sell off a meaningful percentage of our holdings.   
 
In the case of Innerworkings, I started that business in 2001 and as I approach my 10 year anniversary, I am still one of the largest shareholders in the company.   But, my position has come down.  At one point I think my family owned 14 million shares of stock and now we own about 4 million.   We sold stock at $1, at $4.92, at $9, and $13.50, and some as high as $18.  When we sold at $1 and 6 months later it was worth almost $5, people thought I was an idiot.  When we sold at $9 and a few months later it was worth almost twice that, they thought the same thing.   When we sold at $18 and it went down by 50% a year later, they thought I was a genius.   And so on, and so on.
 
Here is the punch line for everyone following my stock buying or stock selling trends.  I’m the worse stock picker in the world.  The first stock I bought was Microsoft in 1990 for about $75/share, which I sold after 3 months for about $70/share which was about 5 trillion stock splits ago.   That same year, I also refused to buy Berkshire Hathaway stock at $1200 share thinking it was over priced even though it peaked at almost 100 times that price.  I know as much about buying and selling stocks as I know about astro physics.  Nothing.
 
So when I read people saying “oh boy, here is an insider selling which means they must know something we don’t”, I’m always baffled.    I can’t speak for every other insider in the world, but my decision to buy or sell typically has nothing to do with how I feel about a business and everything to do with a methodology that has worked well for me over time and that I try and follow with rigor.  The last time I didn’t follow it, I watched $70 million dollars worth of stock in a company called Halo become worthless in under a year, because at every stage I was convinced the price was too low and any day it would go up.
 
I typically sell stock to reduce the risk that comes with concentrated holdings.  It's hard to sell stock (especially when you own a lot of it) so if from time to time you can sell off a small percentage of your stock - i think you should.  It doesn't mean you have any less conviction about the business.  It just means you own a bit less of it.