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Venture capital jumps the shark

It seems that every sector of the financial industry reaches a point where hubris gets the better of them.

For investment banks, it came in 2009 with Lloyd Blankfein’s “doing God’s work” line.  Private equity is now in the crosshairs and Mitt Romney’s claims that Bain Capital created jobs is falling on deaf ears.  The latest to cross the line are venture capitalists.  Twelve years after the dot-com bust and emboldened by recent IPOs of social media companies, VCs are emerging from their bunkers and they’ve hatched some  peculiar ideas while plotting their comeback.

The Wall Street Journal had two articles yesterday on Andreesen Horowitz , the VC firm co-owned  by Marc Andreesen, tech whiz behind Netscape (remember 1994?). “We are encouraging all of our companies to put in place a dual-class share structure if and when they go public,” said Andreesen to the Journal.  “It is unsafe to go public today without a dual-class share structure,” he continues.

What?  It’s 2012, fellas!  Andreesen and his partner have been soaking too long in the Hot Tub Time Machine.  Not only do they not recognize that multiple classes of stock are routinely denounced by corporate governance experts, but they are overstepping their own expertise and role in the marketplace when they comment about how to organize long-lasting, public companies.

This anti-shareholder view is not new for Andreesen.  In a blog post from 2009, he argues that dual-class shares are OK  when “the controlling Class B shareholders have a commitment to treat Class A shareholders fairly and equally in all respects other than voting power.”  Yeah, that’s realistic.  In his list of nine factors that can work against the almighty founder-CEO’s quest to create a “long-term franchise” he lists “hedge funds aggressively short-term buying and shorting stocks for the quick pop, and often spreading malicious and untrue rumors along the way” and financial journalists who might “write all kinds of nonsense.”  ROTFLMFAO.  If a CEO can’t handle facts of business as usual like short sellers and negative press, then there is no chance for a long-term franchise!

In the other Journal article Ben Horowitz (the other half of Andreesen Horowitz) recalls encounters with an “activist investor” when he was the 35-year-old founder and CEO of Loudcloud.  “She started this campaign to force the board to remove me so we would sell the company for $10 a share. She would go to shareholder meetings, call sell-side analysts and send letters to the board,” he laments.  The journalist does not identify the investor, but one can assume this was not an institutional investor advocating for change in a programatic way.  It was some vocal individual, perhaps a smart individual, but one person all the same.  That’s the price of going public Ben.  Live with it.

In our economy, venture capital firms, investment banks, private equity firms have valuable specialist roles to play.  No one would argue that Morgan Stanley should prowl the garages in Silicon Valley to fund the next big thing.  Venture capitalists like Andreesen and Horowitz should stay in their start-up sandboxes and understand that being a public company is a privilege and with that privilege come expectations for performance and that founder-CEOs in particular need checks and balances.

Demand for social media companies, however, has resulted in several IPOs with multi-class stock and founders who retain voting control.  According to the Journal, 14% of tech IPOs in the last two years have at least two classes of stock — most notably, Facebook, LinkedIn, Groupon and Zynga.

ISS was among the many critics of Facebook’s dual class share structure, citing “retrograde government practices,” and LinkedIn has also come under fire.

Update:  Felix Salmon at Reuters also takes a look at Andreesen’s comments and notes that Andreesen “has a level of access to management and corporate information that most public shareholders can only dream of. If he likes that system, maybe he should start thinking about how to port it over to public companies, as well.”


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