Going off the pod, it seems that for a brief moment, the bike industry showed huge growth and sales that many thought would carry on, and...
Going off the pod, it seems that for a brief moment, the bike industry showed huge growth and sales that many thought would carry on, and with the low interest rates during the pandemic, the bike industry actually looked promising to some investors that would normally not look at us.. And when things changed, they either pulled their money out or just let the company die..
This is correct. Don't forget, every company or industry that had a growth coefficient looked frothy and fun so risk capital went way to the outskirts of common sense to find a return. When interest rates moved up and the sport normalized - poof, the money and the investors were gone.
FWIW if you go to Jenson and add the new 2025 Bronson CC frame to your cart, the check-out price is $600 less than what it...
FWIW if you go to Jenson and add the new 2025 Bronson CC frame to your cart, the check-out price is $600 less than what it is listed at. Silent discounts on new Santa Cruz models already?
Are you sure it's actually the CC frame? SC was going to be selling the C frames for the Bronson and Hightower due to the backlash...
Are you sure it's actually the CC frame? SC was going to be selling the C frames for the Bronson and Hightower due to the backlash over the CC not having cable routing for a derailleur.
We shall see soon. AFAIK Santa Cruz doesn't sell non-CC frames as a frame-only option and hasn't for a while.
If you had to guess... What leads a company at TPCs level to bother raising 60m? The general idea of 'if you could you should' and...
If you had to guess... What leads a company at TPCs level to bother raising 60m? The general idea of 'if you could you should' and maybe even 'we can achieve anything with this kind of capital'? I don't see how you don't view that as basically a large high risk loan or something. I would be sprinting away from that money (granted, I am no genius with a marketable idea)... But ya what in gods name did TPC think they were gonna do with all that to turn it around lol
This is really the big question mark, yet it remains a ubiquitous problem. To start, I feel it's really easy for someone like me to say, "Of course I wouldn't take it," but that's hindsight being 20/20. Something I haven't mentioned in this thread is how uneducated most founders are when it comes to finance. Most founders don't study financing for an extended period of time before jumping in. To the contrary, they are usually a bit delusional (you have to be), see their idea being bigger than it probably is and have no "checks and balances" in place against larger and larger equity raises. I put myself in the delusional and dumb category when I first took a crack at starting something. It's taken me the better part of a decade to gain some sobriety on the matter, for what that's worth.
Regardless, excess capital in a system creates a lot of weirdness...eh?
The component companies who have a notable OEM portion of business were in many cases being dragged into the mess by these overzealous OEM forecasts and then were left holding the bag when many of the bike companies canceled orders. Seems like a tough position to be in as a component company - do you increase capacity and take the orders or turn down orders and say "no thank you" and maybe loose the other business too.
A friend of mine who has been a long timer in the TW bike industry basically blamed some of the big OEMs for the mess. This was due to them dramatically increasing forecasts to win production priority from component suppliers who service most of the big bike brands. "We're your biggest customer, you deliver to us first" type stuff.
I hear this term thrown around in some podcasts I listen to and it's become one of my faves: "Irrational exuberance"
The component companies who have a notable OEM portion of business were in many cases being dragged into the mess by these overzealous OEM forecasts and...
The component companies who have a notable OEM portion of business were in many cases being dragged into the mess by these overzealous OEM forecasts and then were left holding the bag when many of the bike companies canceled orders. Seems like a tough position to be in as a component company - do you increase capacity and take the orders or turn down orders and say "no thank you" and maybe loose the other business too.
A friend of mine who has been a long timer in the TW bike industry basically blamed some of the big OEMs for the mess. This was due to them dramatically increasing forecasts to win production priority from component suppliers who service most of the big bike brands. "We're your biggest customer, you deliver to us first" type stuff.
I hear this term thrown around in some podcasts I listen to and it's become one of my faves: "Irrational exuberance"
This is a narrative I heard fairly early on that was very... Disconcerting. With the supply chain interrupted, every step of the global market was doing some... 'stuff' in terms of not only raising prices but basically only taking order from companies willing to put in the biggest orders and guarantee a more reliable single shot of income per everything they had to go through and pay. Shipping, labor, materials, etc. I just heard it as a theory so I'm not sure who specifically the big names are in this regard (one could imagine) and how true it is and how negatively it affected the already bottlenecked issue. But ya talk about a bullwhip effect when the only way to guarantee orders is to put your money where your mouth is, do a large order to guarantee shipment, and then ultimately by the time you got the product in question the market was already set to collapse. Weeeeeeeeeeeeee
The component companies who have a notable OEM portion of business were in many cases being dragged into the mess by these overzealous OEM forecasts and...
The component companies who have a notable OEM portion of business were in many cases being dragged into the mess by these overzealous OEM forecasts and then were left holding the bag when many of the bike companies canceled orders. Seems like a tough position to be in as a component company - do you increase capacity and take the orders or turn down orders and say "no thank you" and maybe loose the other business too.
A friend of mine who has been a long timer in the TW bike industry basically blamed some of the big OEMs for the mess. This was due to them dramatically increasing forecasts to win production priority from component suppliers who service most of the big bike brands. "We're your biggest customer, you deliver to us first" type stuff.
I hear this term thrown around in some podcasts I listen to and it's become one of my faves: "Irrational exuberance"
This is really the big question mark, yet it remains a ubiquitous problem. To start, I feel it's really easy for someone like me to say...
This is really the big question mark, yet it remains a ubiquitous problem. To start, I feel it's really easy for someone like me to say, "Of course I wouldn't take it," but that's hindsight being 20/20. Something I haven't mentioned in this thread is how uneducated most founders are when it comes to finance. Most founders don't study financing for an extended period of time before jumping in. To the contrary, they are usually a bit delusional (you have to be), see their idea being bigger than it probably is and have no "checks and balances" in place against larger and larger equity raises. I put myself in the delusional and dumb category when I first took a crack at starting something. It's taken me the better part of a decade to gain some sobriety on the matter, for what that's worth.
Regardless, excess capital in a system creates a lot of weirdness...eh?
Given that craziness of everything happening at the time with a bunch or weird outliers coming together, I wonder if it was TPC going out and looking for the money or if someone caught wind of the unique position they had in the market and thought it would be worth investing in.. And of course, once you get the type of money you could only dream of, the only thing left to do is spend it.. Excessive capital leading to excessive spending that the business model wasn't going to be able to support even in good times. Then trying to find new ways to generate revenue lead to spending even more money and the spiral starts going downward quickly..
I just wanted to chime in and say the pod episode with Jeff was a great listen. I'm in my mid-fifties and I've been working in the industry at different capacities for 42 years. 2020/21/22 were years unlike any I've ever seen in the business and am floored that anyone with a modicum of logical thinking could have thought it would continue. As pointed out in the pod, it's a special (sometimes infuriating, sometimes wonderful) industry and I was impressed with the insight. Looking forward to what Jeff and Dave are cooking up.
FWIW if you go to Jenson and add the new 2025 Bronson CC frame to your cart, the check-out price is $600 less than what it...
FWIW if you go to Jenson and add the new 2025 Bronson CC frame to your cart, the check-out price is $600 less than what it is listed at. Silent discounts on new Santa Cruz models already?
Are you sure it's actually the CC frame? SC was going to be selling the C frames for the Bronson and Hightower due to the backlash...
Are you sure it's actually the CC frame? SC was going to be selling the C frames for the Bronson and Hightower due to the backlash over the CC not having cable routing for a derailleur.
Certainly appears to be the CC frame. List price is $3899 (wut?!?) and in cart it's $3300 and change.
FWIW if you go to Jenson and add the new 2025 Bronson CC frame to your cart, the check-out price is $600 less than what it...
FWIW if you go to Jenson and add the new 2025 Bronson CC frame to your cart, the check-out price is $600 less than what it is listed at. Silent discounts on new Santa Cruz models already?
Are you sure it's actually the CC frame? SC was going to be selling the C frames for the Bronson and Hightower due to the backlash...
Are you sure it's actually the CC frame? SC was going to be selling the C frames for the Bronson and Hightower due to the backlash over the CC not having cable routing for a derailleur.
Question for @jeff.brines, are some of these over capitalization bankruptcies just really short-term money making schemes for the owners? I.e. you keep raising capital for as long as you can all while paying yourself very well. Then, if or when it all comes crashing down you just walk away but your cash is already in the bank.
Question for @jeff.brines, are some of these over capitalization bankruptcies just really short-term money making schemes for the owners? I.e. you keep raising capital for...
Question for @jeff.brines, are some of these over capitalization bankruptcies just really short-term money making schemes for the owners? I.e. you keep raising capital for as long as you can all while paying yourself very well. Then, if or when it all comes crashing down you just walk away but your cash is already in the bank.
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.
Question for @jeff.brines, are some of these over capitalization bankruptcies just really short-term money making schemes for the owners? I.e. you keep raising capital for...
Question for @jeff.brines, are some of these over capitalization bankruptcies just really short-term money making schemes for the owners? I.e. you keep raising capital for as long as you can all while paying yourself very well. Then, if or when it all comes crashing down you just walk away but your cash is already in the bank.
Have you heard about Theranos? Ask Elizabeth Holmes how that goes
This is really the big question mark, yet it remains a ubiquitous problem. To start, I feel it's really easy for someone like me to say...
This is really the big question mark, yet it remains a ubiquitous problem. To start, I feel it's really easy for someone like me to say, "Of course I wouldn't take it," but that's hindsight being 20/20. Something I haven't mentioned in this thread is how uneducated most founders are when it comes to finance. Most founders don't study financing for an extended period of time before jumping in. To the contrary, they are usually a bit delusional (you have to be), see their idea being bigger than it probably is and have no "checks and balances" in place against larger and larger equity raises. I put myself in the delusional and dumb category when I first took a crack at starting something. It's taken me the better part of a decade to gain some sobriety on the matter, for what that's worth.
Regardless, excess capital in a system creates a lot of weirdness...eh?
Given that craziness of everything happening at the time with a bunch or weird outliers coming together, I wonder if it was TPC going out and...
Given that craziness of everything happening at the time with a bunch or weird outliers coming together, I wonder if it was TPC going out and looking for the money or if someone caught wind of the unique position they had in the market and thought it would be worth investing in.. And of course, once you get the type of money you could only dream of, the only thing left to do is spend it.. Excessive capital leading to excessive spending that the business model wasn't going to be able to support even in good times. Then trying to find new ways to generate revenue lead to spending even more money and the spiral starts going downward quickly..
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.
Question for @jeff.brines, are some of these over capitalization bankruptcies just really short-term money making schemes for the owners? I.e. you keep raising capital for...
Question for @jeff.brines, are some of these over capitalization bankruptcies just really short-term money making schemes for the owners? I.e. you keep raising capital for as long as you can all while paying yourself very well. Then, if or when it all comes crashing down you just walk away but your cash is already in the bank.
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...
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.
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.
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...
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.
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..
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...
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.
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..
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...
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.
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...
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:
It's kinda wild how similar each of those firms employee/revenue ratio is:Santa Cruz = 1 employee per $283k revenueSpecialized = 1 employee per $318k revenueTrek =...
It's kinda wild how similar each of those firms employee/revenue ratio is:
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...
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...
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.
That data appears both dated and localized to the USA. At least for SC Bikes.
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?
Thx a ton for having me. Post any questions or call outs here (which is totally fair) and I'll respond. Also, apologies for all the rambling...
Thx a ton for having me. Post any questions or call outs here (which is totally fair) and I'll respond. Also, apologies for all the rambling. I was...nervous. 😬
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.
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...
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.
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.
It's kinda wild how similar each of those firms employee/revenue ratio is:Santa Cruz = 1 employee per $283k revenueSpecialized = 1 employee per $318k revenueTrek =...
It's kinda wild how similar each of those firms employee/revenue ratio is:
It's kinda wild how similar each of those firms employee/revenue ratio is:Santa Cruz = 1 employee per $283k revenueSpecialized = 1 employee per $318k revenueTrek =...
It's kinda wild how similar each of those firms employee/revenue ratio is:
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...
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?
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.
This is correct. Don't forget, every company or industry that had a growth coefficient looked frothy and fun so risk capital went way to the outskirts of common sense to find a return. When interest rates moved up and the sport normalized - poof, the money and the investors were gone.
We shall see soon. AFAIK Santa Cruz doesn't sell non-CC frames as a frame-only option and hasn't for a while.
This is really the big question mark, yet it remains a ubiquitous problem. To start, I feel it's really easy for someone like me to say, "Of course I wouldn't take it," but that's hindsight being 20/20. Something I haven't mentioned in this thread is how uneducated most founders are when it comes to finance. Most founders don't study financing for an extended period of time before jumping in. To the contrary, they are usually a bit delusional (you have to be), see their idea being bigger than it probably is and have no "checks and balances" in place against larger and larger equity raises. I put myself in the delusional and dumb category when I first took a crack at starting something. It's taken me the better part of a decade to gain some sobriety on the matter, for what that's worth.
Regardless, excess capital in a system creates a lot of weirdness...eh?
The component companies who have a notable OEM portion of business were in many cases being dragged into the mess by these overzealous OEM forecasts and then were left holding the bag when many of the bike companies canceled orders. Seems like a tough position to be in as a component company - do you increase capacity and take the orders or turn down orders and say "no thank you" and maybe loose the other business too.
https://www.bicycleretailer.com/international/2021/03/07/specialized-and-accell-executives-urge-taiwan-increase-capacity
A friend of mine who has been a long timer in the TW bike industry basically blamed some of the big OEMs for the mess. This was due to them dramatically increasing forecasts to win production priority from component suppliers who service most of the big bike brands. "We're your biggest customer, you deliver to us first" type stuff.
I hear this term thrown around in some podcasts I listen to and it's become one of my faves: "Irrational exuberance"
This is a narrative I heard fairly early on that was very... Disconcerting. With the supply chain interrupted, every step of the global market was doing some... 'stuff' in terms of not only raising prices but basically only taking order from companies willing to put in the biggest orders and guarantee a more reliable single shot of income per everything they had to go through and pay. Shipping, labor, materials, etc. I just heard it as a theory so I'm not sure who specifically the big names are in this regard (one could imagine) and how true it is and how negatively it affected the already bottlenecked issue. But ya talk about a bullwhip effect when the only way to guarantee orders is to put your money where your mouth is, do a large order to guarantee shipment, and then ultimately by the time you got the product in question the market was already set to collapse. Weeeeeeeeeeeeee
That phrase first got play waaay back in 1996 when Greenspan ran the Fed and he was talking about what became the dotcom bubble: https://www.investopedia.com/terms/i/irrationalexuberance.asp
Given that craziness of everything happening at the time with a bunch or weird outliers coming together, I wonder if it was TPC going out and looking for the money or if someone caught wind of the unique position they had in the market and thought it would be worth investing in.. And of course, once you get the type of money you could only dream of, the only thing left to do is spend it.. Excessive capital leading to excessive spending that the business model wasn't going to be able to support even in good times. Then trying to find new ways to generate revenue lead to spending even more money and the spiral starts going downward quickly..
I just wanted to chime in and say the pod episode with Jeff was a great listen. I'm in my mid-fifties and I've been working in the industry at different capacities for 42 years. 2020/21/22 were years unlike any I've ever seen in the business and am floored that anyone with a modicum of logical thinking could have thought it would continue. As pointed out in the pod, it's a special (sometimes infuriating, sometimes wonderful) industry and I was impressed with the insight. Looking forward to what Jeff and Dave are cooking up.
Certainly appears to be the CC frame. List price is $3899 (wut?!?) and in cart it's $3300 and change.
I'll be pissed if it isn't.
Question for @jeff.brines, are some of these over capitalization bankruptcies just really short-term money making schemes for the owners? I.e. you keep raising capital for as long as you can all while paying yourself very well. Then, if or when it all comes crashing down you just walk away but your cash is already in the bank.
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.
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