Is Buffer's Series A a Paradigm Shift in Fundraising?
Oct 30th, 2014
Buffer made a splash announcing its Series A fundraise and opening up the kimono on valuation and metrics on October 27. Joel and Leo, co-founders, have taken an unorthodox approach from the beginning, and naturally there are many interesting facets to their capital raise. While I'm skeptical that many startups will follow suit, what they've done is nonetheless worth exploring and even celebrating.
With a blog post, Buffer, the popular social media manager, announced it's raising $3.5 million in its Series A funding round. To the uninitiated, Buffer is singular among startups for its
open embrace bear hug of transparency. The company makes all employee salaries, company metrics, and equity composition open to the public. Heck, every email sent in the company can be seen by everyone else in the company. While this is a reflection of the company's values, it has no doubt proved to be a marketing boon. In this context, it's no surprise that Buffer would not only announce that it's raising but also make public how much ($3.5 million), at what valuation ($60 million post-money), and its key metrics. While it's progressive, doing this is not revolutionary. It's actually just general solicitation, which has been permitted for over a year in startup capital formation.
Thinking Progressively about Liquidity
What is revolutionary is the use of proceeds. While there has been a steady drumbeat, which has grown stronger, of founders taking chips off the table in funding rounds (see Snapchat last year), what Buffer is doing is unprecedented. $2.5 million of the $3.5 million round (71%) will be used to provide liquidity for founders and early employees. The balance will be used towards growth and operations. It's no small feat to convince venture investors to do this (they typically want a substantial majority of the proceeds to be used to fund aggressive growth). Kudos to Collaborative Fund, Vegas Tech Fund, Red Swan and the various angels for investing in an unorthodox deal.
Buffer has been profitable for the last six months and has $1 million in the bank; so there's no clear urgency for the raise. This raise is not being done for the usual reasons. The founders have stated they are in this for the long haul. Having rejected acquisition offers, they want to keep doing things their way for years to come. One way to ease pressure towards a premature exit is through liquidity. Joel and Leo feel that taking some chips off the table is the way to stay committed to their vision, team, and values.
What is also revolutionary is that Buffer is using this round to set a precedent for regular, periodic liquidity events for investors and employees. Typically, it's the Unicorns of the world that do secondary deals via tender offers for their employees. They do it out of necessity, after employee liquidity issues have built up to a point where they can't be ignored. The tides are slowly starting to change with the later-stage companies (hat tip to Kevin at Kabam), but seeing a progressive embrace of liquidity at such a young company is noteworthy. While the home run mentality might suit institutional VCs, it may not suit all risk profiles across the shareholder base of a company. Buffer gets this. Different investors may have different investment horizons and IRR targets, and employees may want liquidity for everyday life needs, such as buying a house or paying for tuition. These varying risk profiles and liquidity needs can be met through periodic liquidity. And by the way, it allows the people who play a big role in creating the value--the employees--to share in the value they create.
Another factor in the nature of Buffer's Series A is the desire to retain control. With this raise, Buffer has eschewed the tried-and-true VC-backed fundraising model. They don't want to raise a lot of money (the mean Series A size in California is $6.8 million and the "Jumbo A" of $10 million is increasingly popular) in pursuit of hypergrowth (whose goal is that really? the founders' or the VC's?) because of the strings attached. Buffer does not want to cede 20-30% of the company (what VCs require) or give up a board seat (also what VCs require).
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Buffer is certainly unique among startups in how it approaches business-building. I don't expect many post-seed companies to follow suit and think independently and irreverently about fundraising. But I certainly hope that founders don't reflexively choose the institutional VC approach, but do it because it makes the most sense for their vision as founders. Importantly, I hope that all stakeholders in the ecosystem will think progressively about liquidity as a way to reward hard work, ease personal financial pressure, and ease company-level pressure to pursue a premature exit.