How Jason Fried Whiffed On the Mint Acquisition and the Role of VCs

Jason Fried of 37 Signals stirred up a bunch of controversy on Friday with his blog posted titled “The Next Generation Bends Over”. Jason suggested that evil VCs forced Mint-founder Aaron Patzer to sell his company prematurely. And while I have a lot of respect for Jason, his “my way or the highway” approach to entrepreneurship (and blogging) rubs some folks the wrong way. And so when he falsely accused some very honorable and accomplished investors of acting out of sheer greed and at the expense of the Founder(s), Fried was appropriately taken to task.

Alexander Muse at Texas Startup Blog gave the most reasoned, thoughtful response noting that The Founders Fund and DAG Ventures, who led a $14M Series C round of funding last month, certainly are not happy with their return. Those firms spent more time doing diligence than as shareholders of preferred stock. But Muse didn’t go the extra step and spell out the real reason why Fried’s post was so far from the mark.

The truth is that Mint’s willingness to be acquired for $170M is actually an unmitigated disaster for the venture capital industry. Sure, DAG and Founders Fund are unhappy with their investments, but its a good bet that Patzer, Mint’s early employees and earlier investors are all pretty happy with their outcomes. First Round Capital claims to have done better than the 14X return they got when Ebay acquired Stumbleupon. That means Mint’s other Angel and Series A investors are likely to be pretty happy with their outcome (including Felicis Ventures, Shasta Ventures, Ron Conway, Dave McClure and other Angels).

Benchmark Capital led a $12M Series B round in March of 2008 and there’s no way they are happy with the outcome. For arguments sake, let’s assume they put in $6M of the $12M round and the Company was valued at $60M post money (both are somewhat arbitrary guesses and likely inaccurate but this is a ballpark placeholder. Valuations were falling at the time but Mint was a hot deal). Even then, Benchmark would have gotten about 3X or about $18M of the $170M. For a firm that just raised a $500M fund, $18M doesn’t move the needle very much. Needless to say, Benchmark was expecting needing a much bigger return.

But Fried was very much on point when he wrote:

Here’s a fresh new company that was gunning for an aging incumbent. And not only gunning, but gaining. They had a great product, great design, and great potential. They were growing rapidly and figured out the revenue game. They were on their way to redefining an industry — one that was left for dead by the current custodians.

There is no doubt that Mint is/was one of the more promising Web 2.0 startups yet Benchmark didn’t come close to making enough money to make their LPs happy. So what does this say for $500M funds and their ability to invest in Web startups?

I’m in no way picking on Benchmark- they are a fantastic firm with a hugely successful track record and all entrepreneurs should be so lucky to work with them - but funds of that size are will have a very tough time investing in capital efficient Web startups. Simply put, they can’t put enough money in to make it work. Web based startups just don’t need that kind of capital anymore to provide great outcomes for Founders and early, early stage investors. As Ron Conway noted recently, the Real-Time Web is going to create $5B in market opportunities, but given that these companies are certain to leverage Web economics it will be very difficult for firms managing large funds will be able to invest in most of those opportunities.

This is a great, great sign for smaller, more nimble firms like First Round, Alsop-Louie Partners and True Ventures. But the percentage of the global Venture Capital asset class that can actually make these economics work remains pretty small and serves as a great illustration of the Venture Capital Math Problem.