Party Like A VC: It’s Not As Easy As It Looks

This piece was originally published on GoingConcern.com on July 29, 2009.

A couple of Sundays ago, I started a conversation by re-tweeting Fred Wilson’s response to James Altucher’s piece in the Wall Street Journal, The Internet Is Dead (As An Investment).

Wilson disagreed with Altucher and said:
“There are easily a dozen and probably two dozen worldwide Internet businesses that investors should own today and for the long haul.”

Wilson jumped into my conversation with Max Zeledon on the subject. He mentioned some Web 2.0 companies he does own. One was not familiar to me, Zynga, a “social gaming” company.

Startups, especially on the West Coast, are usually full of folks who’ve been involved in more than one. Sometimes that’s due to success – the company is acquired – and sometimes that’s because of failure. Startup junkies are always moving. The Zynga management team includes several alumni, including their CEO and CFO, of SupportSoft.

SupportSoft’s founder, Mark Pincus, is the current Zynga CEO. Pincus, and Zynga’s CFO, have been out of SupportSoft for a while. Within five minutes I knew why. SupportSoft settled a class action law suit in 2007 for $10.7 million that alleged its then-CEO and CFO, Radha Basu and Brian Beattie, violated federal securities laws. They were accused of making false and misleading statements about the reasons for record revenues, resulting in the artificial inflation of the company’s stock price.

I told Mr. Wilson,

Twitter DMs are sacred, so I will not repeat Mr. Wilson’s comments. Suffice to say, Mr. Wilson didn’t seem fazed by this. I asked him how well he knew Zynga’s current CFO, Mark Vranesh. SupportSoft went through a series of CFO’s in a short period of time, all of them internal financial and accounting executives from industry related large organizations. Mr. Vranesh, who is a CPA, was in the background at SupportSoft the whole time, probably doing all the work. He’s an Ernst and Young alum. Ernst and Young was SupportSoft’s audit firm.
Max Zeledon blogged later that day about VC’s and other investment gurus’ use of social media:

The people who offer their opinions for free do so not from an emotional need to be good; they do it because they love to promote themselves and they make a good living doing it. They are insiders, dealmakers. Many hold board seats in the very startups they pump on the social web.

Mr. Wilson has a very different perspective on class action lawsuits, revenue recognition issues, and aggressive accounting than I do. For him, I suspect, professionals who have been in several startups – winners and losers – have earned their stripes. Does it matter to him if executives of his portfolio companies have some litigation baggage? I suspect not. He gains (or loses, balanced by portfolio diversification) in spite of the long term.

To me, knowing who the serial entrepreneurs who push the limits are, and the CPAs and financial professionals who support them, does matter. These executives wear failure and lawsuits like badges of honor, proof they’re part of the tribe. “Failure” can be written off if you get your money out early and before the company disappears, like Mr. Wilson usually can. But for the average person, investing in a company run by executives who’ve been involved in securities litigation might be risky. When these guys screw up or fail again, even without all the zeros, it hurts like real money for the rest of us.