| SAN FRANCISCO, March 29
SAN FRANCISCO, March 29 Big companies like
Groupon letting their founders cash out well before an initial
public offering has raised eyebrows in Silicon Valley and on
Wall Street, but start-up Hootsuite is showing that smaller
companies can get in on the action too.
The Vancouver-based company, which sells social-media
management services, attracted a $20 million investment from
OMERS Ventures, part of the Onatario Municipal Employees
But OMERS didn't buy its stake directly in the company. It
bought it in a secondary transaction from a handful of employees
and early investors, said chief executive Ryan Holmes.
Investors often badmouth the practice of letting employees
cash out early because of the belief it removes incentives for
employees to work as hard as they would if they were focused on
an eventual IPO.
Many analysts were surprised at the $109 million Zynga chief
Mark Pincus made when the company bought back some of his shares
months before Zynga's IPO, or the $809.8 million that investors
and some employees at Groupon got as part of a funding round
months before its IPO, also last year.
But Holmes argued the transaction would actually align
investor and employee goals, saying it would help avert the need
to sell his company prematurely simply to cash out.
"I want to take that temptation of having an early exit off
my plate," he said. Besides, he dreams of one day running a
company valued at $1 billion, and eventually creating a Canadian
ecosystem of start-ups that stem from the company, much as
alumni of the payments company PayPal did in Silicon Valley.
At OMERS, investor Derek Smyth said the cash, spread among
the group, "is enough for some financial security, but not
enough to take away from the incentive."
While in the last year or two more venture rounds have
included portions that cash out early investors and backers,
venture capitalists say, it is rare for the entire amount to go
to that group, especially when a company is relatively young.
Existing investor David Blumberg, managing partner at
Blumberg Capital, didn't sell any of his stake in the
transaction and said that while the situation was unusual, it
testified to the company's fast growth. Founded in late 2008,
the company is profitable and expects revenue this year in the
high double-digit millions, Holmes said.
Hootsuite's last and only equity funding round was a $1.9
million investment in late 2009. Last year, it also took on $3
million in debt. The OMERS investment values it in the $200
million range, said a person familiar with the situation.