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
(

I wanted to give my friends out there, a little follow up on a great quote from Scott Rewick. When I asked Scott why he’s doing his current roll-up he said he can summarize the last 8 years of his life, wherein he built 2 big companies and managed a 3rd as saying “It’s Hard Getting Paid”.

Simple right? When you build a startup, you dream big and think big. You may even grow big, however that doesn’t mean you make big money. This is especially true if Venture Capital is involved. Why? Because don’t think you’re getting any dividends while the company is still private. Your only chance of getting paid is upon exit or public offering. This is not an easy feat. Very few companies including very few venture backed companies and even very few successful companies ever get bought and even fewer go public.

So you’ve built a company that does $30,000,000 in revenue and generated $10,000,000 in cash flow. You even own 40% of it. Think you’re taking home $4,000,000 this year? Think again. You’re not. Maybe you’ll make a few hundred grand in salary but there’s no liquidity for you my friend. The cash will most likely stay in the company. With that said, some (very few) progressive funds such as Peter Thiel’s Founders Fund that allows founders to sell a bit of stock with each progressing financing round. But that’s about it. It’s tough getting paid. You may have a million shares of a company worth $10 a share - in private stock but that doesn’t mean you can get the value out.

Scott’s new company is publicly traded and thus in theory if its liquid any shareholder can sell stock (after restricted periods where applicable of course) and thus capture the true value of the shares or at least liquidate some holdings.

Most people think being an entrepreneur is illustrious and that we all make a fortune. Well the truth is, even when we hit it big and are running big powerful cash flowing companies, often time so much of our net worth is tied up into our company that we are fairly illiquid. I’ve wrote about this in the past on how most founders, even after an exit do not recoup the opportunity cost of being an entrepreneur but do it anyway. Well, sometimes if we’re lucky but usually it’s hard getting paid!