Bootstrapper.com - Confessions of Serial Entrepreneurs

So while playing around on TheFunded the other day I ran across an ad for EBExchange Funds and reached out to them. It turns out they have a cool model. They allow us crazy entrepreneurs to pool illiquid stock in venture backed or growing private companies into a giant pot and then profit off of each others’ exits. They take a 15% management fee and get everyone some much needed liquidity. As you all know, I am a big proponent of liquidity and sadly most of us entrepreneurs may be worth a lot but aint so liquid so this is great. I interviewed David below … He is also working on a great book and I hooked him into a bunch of people in publishing, hopefully we’ll see it out soon in hardcover!

Who are you?

EB Exchange Funds (EBX) is a private equity exchange fund that allows entrepreneurs
of VC-backed companies to pool their pre-IPO stock. Essentially, each member becomes
a limited partner in a venture capital fund. When a company in the fund experiences
a liquidity event, all members benefit. A founder can substantially reduce his
downside risk by only minimally impacting his upside. EBX is currently assembling
the portfolio members of its fourth fund, EBX IV, L.P.

What’s your story?

EBX was founded by Lawrence Albukerk in 1999. The first fund contained 11 portfolio
companies and was called Eleven Baskets, L.P. (hence the name EBX). Since then two
more funds have closed, EBX II, L.P. and EBX III, L.P, with a fourth fund underway.
Our mission is to bring diversification and liquidity to founders of companies.

What problem does EB Exchange Funds Solve?

Entrepreneurs face a problem because they own lots of stock, but in order to see
liquidity they must either have an IPO or be acquired. For an entrepreneur, almost
all of their personal wealth is tied up in their stock. We allow entrepreneurs to
diversify a portion of that stock into the fund, where they can see liquidity when
another company reaches an exit. As our funds become more prominent we hope to add
value by being a networking organization as well.

What has been the market reaction so far?

Over 150 entrepreneurs have participated and demand is very high. We are currently
in the process of closing EBX IV, L.P, and we are looking to continue closing about
one fund a year. The past funds have done very well compared to their vintages –
EBX II had 15 exits out of 26 companies.

Can you tell us a story about the richest (on paper) broke entrepreneur you’ve ever
run across?

Zaffire, an EBX I company, turned down a $6 billion offer and then went belly up a
year later. The founder owned 20% and was in his twenties.

You can also read a good summary of our premise at
TechCrunch
(

When you’re a serial entrepreneur there’s always a question that every possible investor asks “Why don’t you fund it yourself?” I’ve been asked it myself and so have lots of my friends.

Simple question right? Not so simple answer…

Here’s why: Serial Entrepreneurs Dilemma.

There are 2 parts to serial entrepreneurs dilemma.

The first is our tendency to spread ourselves too thin. One success usually mean we invest in 5 more great ideas before cashing out of the first and thus end up in a cash crunch. I know a lot of people that started quality valuable companies but not exit-able companies and thus the founders are worth $5MM, $10MM, $50MM but are basically broke. It’s a funny thing but there’s a good chance that your neighbor that founded a company you hear about all the time and that the papers say is worth X zillions of $ but isn’t public has a lot less money then you in the bank. So when your billionaire neighbor doesnt offer to pick up the check understand - he may need a loan. But one day he’ll cash out and hopefully remember that you picked up the check when you pitch him to invest in your great idea.

The other problem with serial entrepreneurs dilemma I addressed in my last post. We are a rare breed of trustworthy quick thinking people. Our enthusiasm gets the better of us and we tend to get screwed even if other people make a lot of money. We also don’t like to admit that we got fucked getting other people rich. Sure we made money but a $50MM company doesn’t mean we made $50MM. Odds are we made money, saved some, put some in more startups and are trying to double down (not out of greed but out of love for the startup life)

Between the two reasons, we tend to have a lot of paper money and a lot of people owe us favors but not have a ton of cash - though we’re always willing to invest what we can.

So now to answer the initial question “If you are so successful, why don’t you invest your own money” … a lot of times we don’t have a liquid $5MM to invest. Sure we usually can seed fund it but beyond that better to bring on other people’s money then stress yourself out.

Of course there are exceptions. Some people have huge payday’s their companies go public or get bought by Yahoo. Those people are lucky and the exception - they get serious cash out. Most even successful companies don’t sell for huge multiples and most serial entrepreneurs are good guys and like to give cash back to their employees when they cash out (out of their own pockets basically) so for every Peter Thiel, there are a million successful but not quie as successful entrepreneurs that by reading their resume you’d think they have tens of millions of dollars but really did well but not quite THAT well.