Last week, a trove of text messages involving Elon Musk were released as part of Twitter’s litigation against him for attempting to back out of a $44 billion acquisition of the social media company. Among them was an offer by venture capitalist Marc Andreessen to help bankroll Musk’s bid, which Musk now plans to move forward with, according to Bloomberg . “If you are considering equity partners, my growth fund is in for $250M with no additional work required,” Andreessen wrote.
“Thanks!” Musk replied. (Andreessen corresponded with Musk on the encrypted messaging app Signal, but took a screenshot of the conversation and attached it to an email, which was revealed in the court documents. ) The exchange between the two billionaires provided a rare look under the hood of how dealmaking can be conducted at Silicon Valley’s highest level: through brief text messages, rather than intensive deliberations in a boardroom.
Twitter’s status as a public company means that prospective investors can review its financials through public disclosures instead of having to meet with the company’s executives. But even for VC-backed startups that are still private, some founders and investors say the brevity and informality of the negotiation is more common than the public may realize. Each of the five funding rounds software startup Rippling closed on its way to an $11 billion valuation was conducted primarily through texting, says cofounder and CEO Parker Conrad.
In announcing each fundraise internally, he has shared screenshots of the messages with his employees to show them how the financing came together. “Each time I get comments from employees that they are shocked to learn that investment rounds are negotiated over SMS,” he told Forbes over text message. Bedrock Capital managing partner Geoff Lewis, who was a lead investor on Rippling’s most recent funding round, says that several of his firm’s key investments were negotiated over text, including lead investments into Flock Safety ($3.
9 billion valuation) and Vercel ($2. 5 billion). Fast tracking the negotiation process, often through text, was required to get into the hottest unicorn startups during venture capital’s bull run, says Redpoint general partner Logan Bartlett.
“Through March or April, it was very much an entrepreneurs’ market—investors were doing everything they could to get into the top decile of companies,” he told Forbes . Historically, investors counted on calls and face-to-face meetings to vet companies and become acquainted with founders. But at the height of the fundraising market last year, VCs often had to come to the startup equipped with an offer to invest.
To do so, many investors reduced the due diligence process from months to days, or did all the background research themselves, Bartlett notes. Even then, a text message might be the only way to reach the founder. “If you have [a founder’s] cell, then sometimes text is the only way to get through to them when there isn’t a physical office to show up at,” says Jeremy Fiance, managing partner of The House Fund, an early stage firm that invests in founders affiliated with UC Berkeley.
Bartlett says that 2016 was the first year he heard of a VC firm conducting the entire diligence process in advance of making contact with the startup. “By 2020, the top 25% to top 50% of venture-funded companies were getting this outside-in work done and taking the actual close process to text message,” he says. “The fact that large deals are done, and vast sums of capital are committed on the basis of what amounts to a handshake is a really important feature of our system,” Conrad says.
Andreessen telling Musk “no additional work required” for him to pour funds into the Twitter acquisition isn’t a surprise to Conrad. “I think it’s a mistake to assume that because an investor texts Elon that they are in for $X, that there isn’t some really careful consideration behind the scenes—this is just a standard medium for how people interact with each other,” he told Forbes . “It would feel weird and anachronistic to negotiate a fundraising round in some oak-paneled boardroom.
” Independent of the market environment, text-based negotiations are also simply reflective of a shift to a younger generation that grew up sending texts instead of talking on the phone, Fiance says: “When I have negotiated with founders via text, there is an outsized number of Gen Z in that bucket. Older founders are often negotiating via phone or Zoom in recent times. ” Still, while texting has become more prevalent, investors are quick to emphasize that Musk’s case is an outlier.
Proposing a deal with no exchange of information is unusual, says Emergence Capital general partner Jake Saper. The latter case, he says, likely requires “a Musk-level founder. ” Typically, Bartlett affirms, texting comes into play at the “last one-yard line,” particularly now that the market downturn has allowed VCs to regain some negotiating leverage and spend more time doing due diligence.
Moreover, some investors told Forbes that firms may need to be cautious about what they’re communicating through messaging apps. Last week, the Securities and Exchange Commission slapped 16 Wall Street firms with a collective $1. 1 billion in fines after finding that their employees were communicating about business matters through messaging apps on their personal devices.
One was registered as an investment adviser, a regulatory status that some larger VC firms—including Andreessen’s own—have adopted in recent years. “As technology changes, it’s even more important that registrants appropriately conduct their communications about business matters within only official channels, and they must maintain and preserve those communications,” said SEC Chair Gary Gensler in the press release accompanying the announcement. .
From: forbes
URL: https://www.forbes.com/sites/kenrickcai/2022/10/04/closing-deals-over-text-isnt-just-an-elon-musk-thing-vcs-and-founders-say/
