Secret’s death will encourage VCs to make more investments like Secret
[Editor’s note: This is a guest post by Bryan Goldberg. The post went through PandoDaily’s usual editorial process.]
Secret has died an honorable death.
I was never a fan of the app — and though I am unlikely to ever cheer against a fellow entrepreneur — the product’s rapid growth left me uneasy. Anonymous apps create a lot of issues for a community, cyber-bullying being chief amongst them.
Secret’s CEO David Byttow wrote a thoughtful goodbye piece, and everybody can move on. The overwhelming majority of the cash will go back to investors, who will take a microscopic financial loss in the grand scheme of things. Byttow’s $3 million secondary was probably the biggest single expense.
So what is the end lesson from all this?
If nothing else, Secret’s decline is a sort of ironic affirmation of how Silicon Valley works. Its many large investors will lose a few hundred thousand dollars each — maybe a million or two — but had Secret succeeded, they may have made billions. Their partners will argue that it was a good gamble to take, and that they would take such a gamble again in the future, hopefully with a different outcome.
And, though it pains me to admit it, they are right.
Kleiner Perkins and Google Ventures do not mind losing a few hundred thousand dollars. In fact, they probably don’t mind losing a few million dollars here and there. Why? Because some of their other big gambles — Uber and Nest come to mind — have brought them immense returns.
And the numbers support their mindset.
Make no mistake about it… the narrative circling the well-lit halls of Sand Hill Road is not one of a “$35 million loss”, because that is not how much money was lost. The real number is a fraction of that.
The narrative circling Silicon Valley right now is going to be this:
“Secret was a sudden failure… and their VC’s only lost how much? A few million bucks? That’s it?!”
Secret’s collapse is a Harvard Business Case Study in loss mitigation.
David Byttow was not obligated to return the majority of that capital to investors… at least not without a fight. But he did. And now he has set a precedent for all flash-in-the-pan founders to follow.
VC’s are going to start flocking even harder to big-risk-big-reward deals now. Why? Because they aren’t that risky at all any more. Startups that fail quickly may now return as much as 80-90% of their capital to investors.
That doesn’t feel like a high-risk equity investment. That feels like an investment-grade bond.
The implications of this may be far reaching, and the gravity of Byttow’s decision to return the capital should not be understated.
VC’s like Peter Thiel* have long advocated to take the biggest risks possible, noting that a very small percentage of deals return the majority of capital.
That argument is now strengthened.
So, going forward, I think there could be three major trends that emerge from the Secret story:
(1) VC’s are going to start pressuring their struggling portfolio companies to return the capital rather than die a slow, pivot-filled death.
(2) This will create more culture of loss mitigation, which will then encourage said VC’s to take more risk with potential breakout hits.
(3) There will be fewer secondary transactions, given the complete poisoning of the well created by David Byttow’s $3 million secondary. (This is a shame, because secondaries are a wonderful and logical way to align founder/VC interests).
There you have it.
In short — Secret’s failure will create more Secrets.
* Editor's note: Peter Thiel is an investor in Pando