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Good question. Though in theory something like this could happen, its incredibly unlikely. Here is why...
Board: Usually when equity is raised from outside investors, a board is put together with seats given to the investors (or similar). The board usually has some power, including appointing the CEO and determining their comp. Obviously, I'm speaking in generalities here, but the board is broadly the "check" against a CEO wielding all sorts of power in negative ways.
Covenants and Use of Proceeds: Investment agreements usually have restrictions as to how the funds can be used which prohibits a CEO from writing themselves handsome checks.
Fiduciary Duties and Legal Obligations: As officers and directors, founders have fiduciary responsibilities to act in the best interests of the company and its shareholders. Giving yourself a crazy salary would violate this.
Social Consequences: If you do find some loophole that lets you get past everything I just wrote, and you can write yourself a nice $500K/yr check to run your bankrupt company, good luck ever working in startup culture or raising capital ever again. You'll effectively be blackballed.
Exceptions:
One - Now, all that being said, we have seen plenty of situations where a CEO/founder successfully runs a company then the company falls on hard times, the CEO doesn't make adjustments and is paid handsomely until the board ousts the leader, sometimes with a golden parachute, or the company does go bankrupt while the CEO is paid fairly well until the end. This is different merely because the company had achieved some form of maturity, profitability and/or product market fit.
Two - Something that is a bit sketchy but fairly normalized (ie, not completely rare) is when a founder sells their shares (interest) in a company on the secondary market way (way) before the company has met its targeted goal (IE, IPO). What this means is I could go make a deal with a venture capital firm or a family office to buy my personal shares so they increase their ownership in the company while this money does not directly benefit the company in the form of additional capital raised. While I completely understand wanting to take some chips off the table in case thins go south, it sends a really bad message to the market and to investors when a CEO/founder does this.
Have you heard about Theranos? Ask Elizabeth Holmes how that goes
To quote a VC I know, "We expect the money to be spent immediately. If we wanted money in a bank, we would keep it in our bank."
Basically when these businesses become over capitalized they are pushed to spend the money as quickly as possible. You could see this in the auction for TPC where they were selling multiple 25' square photo booth setups that had to cost thousands, if not 10's of thousands, of dollars each. No way they needed this many booths this size, but they had a dumb amount of money and were being pushed to spend it so all fiscal discipline goes out the window.
I see scenario 2 a lot in the tech industry, but they include the wider company org. Basically during the D/E/F rounds employees are allowed to sell a certain percentage of their equity into the round. I have also seen companies offer employees liquidity in between rounds as well through private placement. At my last company both founders sold over $100M in equity pre IPO which was a minor portion of their total equity. As employees we were offered something like $8/share during the same timeframe. The company later IPO'd at over $80/share so in theory anyone who sold in the early rounds lost a ton of money. Databricks offered their employees $250+ per share if they wanted to sell some of their shares and the company is still private.
My point is that not all pre IPO sales are necessarily bad. Founders and pre IPO employees usually have a significant amount of their personal wealth tied up in illiquid assets. Any financial planner will tell you this is a horrible idea and that you need to diversify if possible.
BTW my previous employer that IPO'd at $80/share ended up selling to a larger org for $35/share and was as low as $16/share at one point. As employees with a six month lockup post IPO the first point we could sell was at $37/share even though we were all taxed on the $80/share IPO price. These things get really complex really quickly from a tax/planning perspective. There are no guarantees so founders/employees looking for liquidity are doing the rational thing and it is very rarely nefarious.
That's about the way I figured it went down based on some of the same things you mentioned.. I guess it all depends on how the contract is written up, but it looks like a lot was spent on equipment and acquiring product to sell.. More equipment than they needed and more product than they could move.. Now, this is where the "right-sizing" begins..
SC is as big as trek and almost sbc
Thanks, all valid points, but I was actually thinking on a smaller scale that might slip under the oversight of a board.
The owner of company A could not take outside capital and struggle to scale up all while making less than, say 100K/year. Or the owner of company A could aggressively raise money which inflates the value of the company. A higher company evaluation would warrant the CEO/owner taking a higher salary, and they could reasonably get the board to approve, say a 200/year salary. That might not look too unreasonable when it all goes south, but in the end they have more cash in their bank and a ton less stress managing cash flow. Plus, if the owner is close to retirement they might not be worried about the stigma of a failed start-up.
Maybe I should have prefaced the questions a bit. I'm guessing this is pretty uncommon among small business owners carefully taking on individual investors. I was more curious about oversight of seemingly small/medium companies and the PI or VC firms. What is 60 million in capital to the average PI firm? Is it small potatoes at the bottom of their balance sheet or is it something they are very actively monitoring?
I don't think so.. SC can't be doing the volume that Trek and SBC are doing with the low end MTBs, hybrids and kids bikes..SC is more of a mainstream boutique company that focuses more on the higher end of things, Also, Trek and SBC have road lines where Pon relies on Cannondale and Cervelo for that.. Cannondale would be closer to Trek and SBC than SC as they are generally viewed as #4 in the US market..
According to Growjo.com SC's revenue is around $93.4m with 329 employees, Specialized around $999.5m with 3145 employees and Trek with $1.4 billion and 4386 employees, making Specialized more than 10 times and Trek around 15 times the size of SC.
It's kinda wild how similar each of those firms employee/revenue ratio is:
Santa Cruz = 1 employee per $283k revenue
Specialized = 1 employee per $318k revenue
Trek = 1 employee per $319k revenue
I was thinking about doing the same math...
That data appears both dated and localized to the USA. At least for SC Bikes.
I agree it's less than clear, but as far as I can see the figures are from last year. I doubt anything has changed significantly in that time. The information for Specialized and Trek appears to be global, it would seem strange to me that the site would provide global stats for one company, but solely US figures for another (I couldn't see any caveats), but I'm far from being an expert in these things.
I looked at a few different websites that showed wildly varying figures (one had SC's revenue at $340,000, another showed Trek's revenue at over $2b). One thing I could find (relative) consistency in was the size of the companies in relation to one another.
Maybe someone with more expertise in these matters (I'm happy to admit this stuff makes my head hurt) could chime in?
Finally had a chance to listen to this. Thanks to you and @sspomer for putting it out! Excited to see what you have cooking on the component front.
SP is broadly right about everything.
First, I want to be clear when I was talking about selling a stake in a company on the secondary market, my thoughts were specific to the CEO/founder. If we are talking about an employee, its all together different. There is nothing wrong with an employee liquidating their holdings in an entity, especially if a company has stalled in the IPO process (which a gagillion have) and that employee wants to buy a house, send a kid to college etc. However, when a CEO/founder does this it sends different signals, especially while the company is still being built. This is what I was flagging.
Second, as to the rate of spending and what the VC expects you to do with money raised, that's sort of debatable. End of the day, you as the founder have control over your income statement and balance sheet. Yes, the board will advice and sometimes they can fire you, but I've seen all sorts of different outcomes here. For instance, eBay famously raised $6.7M from Benchmark in 1997 and never used the money. Benchmark didn't care, in fact, they were thrilled to just have a stake in the online auction company. This turned into a $4B investment (more to the story I'm leaving out). I know of another company that raised right before interest rates went up and it became impossible to raise again. They effectively laid off most of their staff, put the money in a high yield savings account and is more or less running the company off the interest the account is throwing off. (yes, this is pissing the investors off).
What the venture firm really cares about is that you are growing. They have to return capital to LPs in a ~10 year time horizon, and if you stall out and just chug along like a mom and pop diner, this does their portfolio zero good. However, any smart venture firm wouldn't want the money lit on fire in the form of buying stuff the company doesn't need. Spending the money for spending's sake is a huge red flag, too. There are so many stories of this behavior in the 2020ish era with the more tenured VCs out there looking at it in a very ghastly way. Having been in a C-suite role while looking to raise capital, I know first hand the questions a good VC will ask around "what is it you expect to do with this capital, please show me your roadmap, please show me revenue projections bla bla bla". To be fair, there was an era rife with free money those questions were not asked and it was a feeding frenzy to get on any company's cap table.
The fact is TPC is not a venture backable company. The outcome won't ever be big enough to warrant that kind of funding. Now, maybe it can be a decent investment and good business if done correctly, but I think there is some monkey math when long term projections are being thrown out there. Maybe I'm wrong and maybe TPC can do for bikes what Carvana did for cars, but I have my doubts based around logistics, wear/tear, warranty and total selling price car vs bike.
...and for fun, Nvidia - $3,253,615 per employee
(and operating margins are 65%, too)
must be nice.
Oh to work in an industry that all other industries need to function haha
> Oh to work in an industry that all the fads-du-jour need to function haha
FTFY
Sorry for missing this dude! Here is my answer...
In short, most businesses that can raise real capital from a group of investors (ie venture capital) are not the types of businesses that require the CEO to live off the cashflows of the business. Put simply, small businesses are very different than the larger types of businesses those companies that take venture capital are aiming to be. Your local bar is a small business. Conversly, DoorDash is the type of business a VC firm would be interested in. Point I'm making, usually its not in the cards for a business to go "how about I raise some money so I can pay myself more".
Ironically, TPC might be one of the rare exceptions in that it isn't really a venture backable business, but some savy CEO spun a yarn to make it look like such. And ya know what? Nothing wrong with dreaming. Its on the VC/investor side of things to say "yes" or "no", not on the founder to "not dream".
In the case of TPC or a company like it, I'm sure raising allowed management to get paid at elevated levels. Good for them. This isn't unethical nor wrong. Every VC I've been around wants management paid at a level high enough to keep them not worried about day to day finances ($150K/yr pretty common for C level at most early stage startups)
As to what $60M is to a PE firm, well, that varies heavily depending on size of the fund itself. Some funds, that are small, its a lot. Other firms, that are large, (Blackstone, Apollo, KKR) its a rounding error.
Hope that helps. Feel free to ask more.
I'm not really sure where to put this – it isn't about a company going to the wall – but I think it's relevant to the industry's current situation. One of the local suspension dealers has marked down its Flight Attendant Enduro Kits by 50-55%, meaning it now costs significantly less than putting a full set of plain "dumb" Ultimate level suspension on a bike.
NUNSPEET, The Netherlands - Once claiming to be market leader in the Netherlands, e-bike brand Stella is on the verge of bankruptcy. Despite repeated financial injections from its owner DMEP, the manufacturer has now filed for a payment extension. According to DMEP, Stella can no longer achieve sustainable profitability in its current form and requires a "substantial" capital injection.
“the millions in losses were caused by a toxic mix of declining customer demand, rising costs, and increasing price competition"
Peaked at €130 million, currently employs 400 people and sold 38,000 bikes last year.
I think certain dealers can get C frames though. I got my 2023 5010 C as a frame only from Jenson last year.
Yeah well, I know I'm a couple days late on this one but like Deviate pointed out... When Trek is dumping all sizes of Gen 5 Trek Slash 9.8 (gx eagle, carbon wheels, solid suspension, etc) for $3800 CAD, down from like $8,500 (through retailers and with margin for retailers in that, mind), people, and by extension TPC are welcome to think that their used bike is somehow worth more than that.
You'd have to think the TPC guys are getting a cash infusion that will hold off on operating at whatever their capacity is until market stabilization, whenever that might be.
I personally hope Deviate can hang on. Someone's gotta honour my lifetime warranty!
Not to be overtly political, but the US’s once and future president has indicated he intends to impose significant tariffs on foreign manufactured goods. Let’s assume for discussion that this actually happens -- anyone care to conjecture what effect such a policy would have on this industry?
I think it'll reinvigorate the used market a bit, for sure. TPC is probably drooling about it as we type/read.
Very badly.
Makes all imported frames and parts more expensive, passes on those costs to consumers.
Frames and parts in the country are already discounted to sell, meaning they won't be ordering any more at a 10%+ increased price as they can't already move the cheaper ones.
A universal tariff is a horrendous economic policy
FAFO
As much as I like some Trump's ideas, his thoughts on tariffs are definitely off base. All they end doing raising prices for us the consumer. I might feel different if we had a US company making bike shop quality bikes in large numbers here in the USA, but we don't
on the flipside, all those goods tarrifed to shit will need to go somewhere, smoking deals for the rest of the world.
Thanks Donny boy!
I heard from someone at Trek Australia that at their peak they had between 75,000 and 100,000 bikes sitting in their warehouses thanks to the oversupply.
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