On Monday, more than 500 outlets reported that Facebook is acquiring the location-based startup Gowalla, which will shutter in January. Gowalla’s team will now work on Facebook’s new Timeline feature.
The acquisition was unexpected for several reasons, including that Austin-based Gowalla has been eating Foursquare’s dust for some time.
There were also niggling questions over the outcome. Did Facebook strike a side deal with Gowalla’s founders that left its investors out in the cold? Or do Gowalla’s investors, who gave Gowalla $10.4 million, consider themselves lucky that Facebook agreed to acquire their flagging portfolio company? “Is [Facebook’s deal with Gowalla] an acquisition? Or rather a shutdown with the founders taking new jobs?” asked investor Mike Arrington in a blog post on Monday.
We may never know how much Facebook “likes” Gowalla. The Gowalla investors I contacted didn’t respond. Another person involved with the company declined to offer specifics, offering only that Arrington’s post had “no actual information other than [Gowalla cofounder] Josh Williams’s letter to investors.”
Nevertheless, if Facebook structured Gowalla’s sale differently than Parakey and Hot Potato, it’s probably the exception, not the rule, according to venture capitalist Mark Suster. Suster says he has “zero insight” into the Gowalla transaction but thinks that so-called “acqui-hire” deals are a “real topic” that are an increasing source of concern for investors.
Suster points to three recent trends that have undermined investors’ leverage. The first is reputation: “Blocking a deal [through exercising blocking rights] will get out to other entrepreneurs, who won’t want to work with you.” Another driver is the uptick in convertible debt deals that began in early 2010: “A lot of those deals don’t have blocking rights,” he says. “So even if investors don’t want to sell yet, they may not have a choice.” And then, there are so-called “club deals” in which companies assemble an extensive list of venture and angel investors. These financings, which also became increasingly fashionable last year, typically offer investors little chance to meddle, because ownership is so diverse. They’re also great for entrepreneurs who want to shake off those same investors when opportunity knocks.
Says Suster, “If you take $1.5 million from one VC, he might have blocking rights that he can use if he thinks the selling price is unfair to him. If you take $1.5 million from 10 investors, those 10 people have to collaborate to block the deal.”
Of course, a fourth scenario also exists: An entrepreneur can simply tell his investors that he doesn’t want to run the company any more. While the board could hire a new CEO, a small startup’s culture is often so closely tied to its founder that introducing new management is frequently a losing proposition.
“On balance, I think this sort of thing is dangerous” and “one of the consequences of creating ‘micro-companies,’” says economist Paul Kedrosky.
And it probably won’t change as long as entrepreneurs wield the power. After all, being an entrepreneur is cool. Being a venture-backed entrepreneur is cooler. But being a venture-backed entrepreneur who gets courted, then “friended,” by Facebook? For someone running a company that’s going nowhere fast, there’s nothing cooler right now. Look no further than the coverage of Gowalla’s sale as proof.