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Secret’s investors should be fired for gambling away their fund’s money.

So with a “heavy heart” Secret’s founder David Byttow decided to “return” their investors money rather than attempt a pivot.

Sounds like a noble move, until you realize that during their last round, the two founders were allowed to cash out to the tune of $6M.

Normally astute investors put in liquidation preferences that should a company fail to get a decent exit, they would be the ones who get the money out first as they should.

Only in this case, they get their money out LAST. Out of whatever was remaining in the last round, the founders got $6M, and the investors got whatever was left if any.

Way to go Kleiner Perkins and Index Ventures! Your investors must be so proud of you.

 

 

  • The investors allowed the founders to realize secondary liquidity. Whether that was a sound choice is certainly questionable. Once that decision was made the liquidation preference part is irrelevant.

    These things happen in a bubble. An app without a revenue model and nothing more than buzz becomes a “hot deal” and the fear of missing out kicks in. The funding marketplace is, on the whole, a bunch of overpriced lottery tickets.

    Given VC’s public pension LP base, we taxpayers are indirectly subsidizing and backstopping this nonsense. Oh well.

    “Frustrated LP”

    Reply

  • I’m hardly defending Secret, but I would point out that perhaps the early cash out is why Secret was willing to return the considerable amount of unspent funds rather than ride it into the ground.

    The early cash out also may have been due to Secret successfully playing the “hard to get” game with investors.

    Reply

    • According to NYtimes the cash out poisoned the culture in the company with the employees seeing that the founders were no longer aligned with them and they started leaving soon after.

      Reply

      • That is possible, but I doubt anyone creates a company just to cash out a little and then fail publicly.

        I actually know an ex-Secret employee – they left because of a Whisper-like situation.

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          • I don’t think you can compare Pincus’ post IPO Zynga cashout with Secret’s cashout. For one thing, Pincus’ cashout was 100x or larger. Secondly, IPO!

            Secondly, the Secret founder presumably did have some investment into Secret before it got funded, so his $3M secondary was at least partly a repayment.

            There are definitely circumstances which would change my mind – if the cashout happened after it became clear that Secret wasn’t going anywhere, then that is a legitimately suspicious timing – either a cashout because the end was nigh or even a bribe to gracefully exit.

            Reply

            • As written above: According to NYtimes the cash out poisoned the culture in the company with the employees seeing that the founders were no longer aligned with them and they started leaving soon after.

              Very similar to Zynga.

              Reply

        • You know you are in a bubble when $6M for ~1 year’s worth of work, is considered a “little cash out”..

          Reply

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