You may have read Hodinkee’s big announcement: the website raised $40 million in venture capital and hired a new CEO. Given The Truth About Watches’ combative nature, you might be expecting another screed about Hodinkee founder Ben Clymer and his dark side combination of commerce and “journalism.” I come neither to praise nor bury Hodinkee, but to do the math. Let’s start with a couple of basics . . .
Forbes reports that the new investors set a valuation of “around $100 million” for Hodinkee. As is generally accepted for these kinds of things, Hodinkee did not publicly announce their valuation; they gave a heads-up to a favored media outlet to maintain plausible deniability. This, dear readers, is too cute by half.
Regardless of the messaging, the valuation has very little to do with what Hodinkee is going to do with the money. It has everything to do with the how existing shareholders got diluted – how much of the company stockholders gave up to investors to get the cash. After they write the check, everyone who had stock before now owns less of the company.
We’ll get to the math about the dilution. Before that, read the watchpro.com interview with Mr. Clymer. It’s a classic example of the mutual satisfaction genre – especially Hodinkee founder Ben Clymer’s declaration that mixing sales and editorial is a “non-issue.” What’s interesting to me: what isn’t said.
Hodinkee founder Ben Clymer says his brainchild’s going to use the money to build out, expand, blah blah blah. And hey! Hodinkee’s profitable. Contrary to public opinion, established profitability and venture capital funding are not mutually exclusive. Many profitable businesses raise money to accelerate growth, to invest more and faster than they could otherwise.
Clymer takes this a step further. He claims Hodinkee could have achieved all their expansion goals without raising additional capital. If you believe that I’ve got an authentic panda-faced Rolex Daytona for sale for $2000. Back to the crux of the matter: Hodinkee’s stock dilution . . .
When you talk about raising capital, there are two types of valuations: pre-money and post-money. Pre-money refers to a company’s valuation before you add the cash raised to the balance sheet. Post-money refers to the valuation after the money hits the bank account. It’s a very simple equation: pre-money valuation + investment = post-money valuation.
Journalists tend to publicize a company’s post-money valuation. It’s the bigger, more exciting number. In my world, the pre-money valuation is the money shot. That’s a businesses’ “true” value. A business worth $100m pre-money doesn’t suddenly become worth more once additional funds sit on the balance sheet.
I’m going to give credence to the more generous version of the story. I’m going to assume that the Forbes number of $100m is actually a pre-money valuation, yielding a $140m post-money value.
A $40m equity stake on a $140m valuation works out to about a 28.6% share (40/140). If accurate, Hodinkee founder Clymer gave away nearly a third of his company. I looked around for some comps: profitable eCommerce companies that raised venture capital.
I had difficulty finding this level of fundraising at this level of dilution. Rent the Runway, for example, did a $50M round at a $600m valuation, AllBird’s Series C was $50m @ $1.4b, and Warby Parker’s B was $37m @ $291m. Bottom line: the Hodinkee deal created a lot of stock dilution.
Then there is the CEO (Chief Executive Officer) issue . .
The general rule of thumb: a successful company founder doesn’t bring on a new CEO unless the founder is unwilling or unable to take the company to the next level. As Hodinkee’s “Executive Chairman,” Mr. Clymer won’t be involved in the website’s day-to-day operations. I’m not dissing Hodinkee’s Ben Clymer; I’m sure he’s a perfectly nice guy and a shrewd businessperson. But I don’t think he’s still at Hodinkee’s helm.
I also would be surprised if new CEO Toby Bateman wanted $40m in additional capital – that much dilution – before he started work. The cash brings new board members and investors that will want their voices heard. The new venture partners (True Ventures and GV) expect a significant return on their investment, as quickly as possible. They will use their leverage to steer Hodinkee in that direction. Which is why I don’t think Hodinkee raised $40m.
I believe Hodinkee received maybe $20m in primary funding (preferred shares issued by the company) and somebody sold another $20m of their personal shares to the investor pool. (Called a secondary: non-dilutive because the shares already exist; they’re just trading hands.)
My take: Hodinkee founder Ben Clymer cashed out. And rightly so. No self-respecting CEO wants a cashed-out founder looking over their shoulder.
Good for Mr. Clymer! I hope he doesn’t squander his money on ridiculously rare watches, and enjoys his post-Hodinkee career in good health. As for Hodinkee’s future, expect more of the same only more so. Hodinkee’s completely commercialized content will be the same as it ever was. A non-issue.