Federated mud

Just nine months after this:

After turning down a $100 million buyout offer, Federated Media Publishing has opted instead to raise $50 million in a C round led by Oak Investment Partners. As was reported two weeks ago, the rumored valuation is $200 million. While the company is not confirming that number, publisher Chas Edwards quips, “We have to be worth at least $101 million.”

We get this:

Sometime in the next hour or so, John will announce on the FM blog what we’re telling the staff right now: A small number of employees are leaving FM today. We’re sad about losing good people who have made valuable contributions to FM. We honor their service, we wish them well, and we’ll do everything we can to help ease their transition.

Federated has fewer than 75 staff, so they can’t have spent $50 million in just nine months, even with San Francisco’s inflated salaries. (Right?) Surely that small number of employees could be retrained if Federated was on a decent trajectory, right?

Federated appears to have gotten caught by the classic VC squeeze: first, agree a huge price tag. That’s fun for both the VC and the investee to brag about publicly. Then dole out the money in a series of chunks (called “tranches” by VCs) that are released only after the investee hits certain benchmarks.

Why does this happen? Well, at the end of lots of boastful presentations in the money-raising process, the investee is caught in a logical bind when the VC says, “You’ve made big promises and since you’re so sure of your story, let’s just add a small clause that covers our investment in the event you don’t live up to those promises.”

Having made this bargain/bet, the company starts spends madly trying to hit its benchmarks. Then when that scramble fails, the company has to pare back quickly to get to profitability.

It’s a nasty gambit, but greedy folks fall for it all the time.

Nine months after Edwards said “we have to be worth at least $101 million,” I wonder what the right number is today?