ActiveState Founder Steps Aside

Lumpish Scholar writes "ActiveState founder Dick Hardt has quit. Or, as the press release puts it, "ActiveState Expands Board & Founder Steps Aside." No reason for the resignation was given, unless you count, "The company is looking to become a $100 million company, and they're looking for someone ... that [sic.] has that experience." ActiveState (profitably!) distributes its own proprietary products, and also both free and commercially supported versions of Perl, PHP, Python, Tcl, and XSLT, having given back significantly to the free / Open Source communities associated with those languages."

Comments

Why?

[aero6dof]

Why does every company have to become $100M+ in size. Why can't they grow the market that they serve now? It's this need for disruptively fast riches that's driving the WorldCom silliness. It's really OK to be a small to medium company with steady growth.

My prediction is that they'll take on huge debts & expenses to try to expand, fail in 90% of their new "expansion" markets, and die completely or settle back to their same growth curve and niche only saddled with several times more debt. Are there any studies on companies trying for excessive growth?

Re:Why?

[gwernol]

Why does every company have to become $100M+ in size. Why can't they grow the market that they serve now?

Actually the answer is quite simple. Whether you think it is sensible or not is up to you.

ActiveState are a Venture Capital financed company. This is the list of their investors:

Greg Aasen, Kevin Huscroft, PMC-Sierra; Matt Dion, Crystal Decisions; Haig Farris, Fractal Capital Corp; Paul Lee, Don Matrick, Electronic Arts; Amos Michelson, CREO Products Inc; Tim O'Reilly, O'Reilly & Associates; Hadar Pedhazur, Opticality Ventures; Michael Tiemann, Red Hat

I don't know how much money was put into the company, but a good guess is the $10 million - $40m range; perhaps more. The basic math of VC funding is something like this:

1 in 10 VC-financed companies make it. Therefore 9 in 10 fail. To break even a VC has to make 10 times their investment back. Therefore for a $25m investment the company has to be sold (through IPO or merger) for at least $250 million. To attract investor money that otherwise goes to the stock market or bonds or whereever you need to do better than break even. You need to have 2-3 times returns at least. So you need to be able to invest $25m and get back $500-$750 million at the "liquidity event".

You want to sell a company for $500 million? You're going to need to be making profit and have revenues in the $100m/year range.

Venture Capital is a high-risk high-reward deal, where the vast majority of investments fail. The handful that succeed have to succeed big in order to support any VC money at all.

If a company wants to start small and grow slowly it should not take VC money; there are lots of other sources of financing, but they will be for much smaller amounts. Once you've taken VC money, don't start moaning when the investors want you to live up to the other end of the bargain. They give you $25 million, you give them back a company with huge revenues.

To go public

[taniwha]

The basic problem is that to eventually be a public company you need to be of a certain size - N shares times $15/share. Why go public - because you need to be able to pay off the VCs and the founders (all those engineers who worked their butts off for 3 years with the hope of making it big).

This model for building a tech company has been basicly the only way to create a company here in the US since the 60s - the VCs understand how it works, the execs, the engineers all know how it works. Most of these companys die - maybe 2 out of 10 live to go public - it's the risk you take building a startup - it's also effects the scale of things the VCs try for - they need those 10-20% of BIG successes to pay for all the investments that fail. The basic business model for people starting this sort of company is "we will build a company that's worth something and sell it on the stock market". You make money from an ever increasing stock price.

Of course it's not the only way to build a company you can start a small company and grow it slowly financing it out of profit - this is really hard to do (I know I've tried :-) - but not impossible - I've known a number of people who've built such companies - you have a completely different model for your business "we will sell the stuff we make and take home part of the profits". You make money from your profits.

The big advantage of the DIY company is that you can stop growing at any point. Besides, because you're living directly off your profits you don't have to grow for ever to keep making money - you can stop at $1M or $5M or wherever you're comfortable. The big downside is you're probably spending your own (very real) money, not some VCs.

Re:Larry Wall (perl) in their payroll

[hobbs]

Neither Larry nor Guido are ActiveState employees. They are on the Technical Advisory Board. However, Sarathy (former Perl pumpking), myself (Tcl core release manager), David Ascher (Python notable) and many other notables are developers at ActiveState that do spend time contributing back to the core of our respective languages. It is, was, and will still be, part of our business.

Re:What is the real purpose of a company?

[gmhowell]

The purpose of a corporation historically has been twofold:

First and foremost, to survive the creator. It's easier to avoid inheretance and contract problems when a founder dies if there is a corporate entity as opposed to individuals.

Second: separate liability.

In the case of MSFT and others who don't pay dividends, you are buying a portion of the assets of the company. You assume that through wise action of the company, the company will gain assets, thus you will gain assets.

But MSFT really should pay some dividends. It would increase the value of their stock, and set a new model that other tech companies would likely be unable to follow, lacking in cash as they are.

Why I stepped aside ...

[Dick Hardt]

Thought I would post to clarify why I stepped aside. ActiveState is doing very well right now and we are about to grow out our management team and capitalize on our new product line PerlMx, an anti-spam, anti-virus and corporate communication policy server side solution. I have never run a large management team and in discussions with my board, we decided ActiveState was more likely to be successful having me be part of the management team rather than leading it, allowing me to focus on growing product capabilities. ... and if anyone thinks they have an original joke on my name, I'd like to hear it