SAN FRANCISCO, March 29 (Reuters) - 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 Retirement System.
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.