In 2009, a small startup called Square was raising its Series A. Andreessen Horowitz saw the deal and passed. That mistake cost them $4.8 billion.
The Pitch
Square (now Block) had a big idea: make it easy for small merchants to take credit cards. It had an awesome product: a little dongle you could plug into your phone and accept credit card payments anywhere, any time.
But there was one problem.
Although Jack Dorsey of Twitter fame was a co-founder, he wasn’t the CEO. That spot was held by Jim McKelvey, a childhood friend.
“…we didn’t know Jim nor did we have a good way to evaluate his skills as a CEO for the company, and we wondered whether Jack might prove to be a better long-term CEO for this business.”
Scott Kupor, The Secrets of Sand Hill Road
Andreessen liked the concept, but wasn’t sure if Jim was CEO material. So they passed on the deal.
A $4.8 Billion Mistake
The Series A instead went to Khosla Ventures. They invested $10 million at a $40 million post-money valuation in November of 2009.
Today, that stake would be worth approximately $4.8 billion, assuming 50% dilution.
For any investor, our biggest mistakes aren’t the deals we did. It’s the ones we didn’t.
$10 million is a lot of money to you and I, but to Andreessen Horowitz, it’s nothing. But holding on to that money because the deal wasn’t perfect cost them one of the great investments of all time.
Scott Kupor, Managing Partner of Andreessen Horowitz, recounts this fascinating story in his book The Secrets of Sand Hill Road.
What Went Wrong?
Where did Scott and a16z mess up here?
They should’ve taken one look at this deal and dropped a massive pile of cash on Jack’s head.
His other company, Twitter, was already a unicorn by September of 2009. He was clearly one of the great entrepreneurs of his generation.
Maybe a16z would’ve preferred Jack in the CEO slot. But no deal is perfect!
If these startups had every single thing figured out, they’d be in the Fortune 500 and they wouldn’t need us. Every deal will have its imperfections.
But when one of the greatest entrepreneurs of his day gives you the opportunity to be in business with him, you take it. End of story.
When Opportunity Knocks…
I put this theory into practice in the summer of 2021.
The deal memo for Callin was at the top of my inbox. I worked late into the night researching the company, a social app for audio.
Callin hadn’t hit all the benchmarks I usually look for. But in the end, only one detail really mattered.
David Sacks, the co-founder of PayPal, started it. I was in.
Ultimately, I didn’t get an allocation. The deal was massively oversubscribed. And in the end, Callin was acquired for a modest sum, never having quite found an audience.
Nonetheless, I would make that bet again any day.
Wrap-up
The opportunity to invest in Jack Dorsey seems like the perfect deal to me. But we can pick holes in even the best pitch.
We have to remember to not just think about what could go wrong for a startup. We have to think about what could go right!
Would you have invested in Square? Why or why not?
Leave a comment and let us know!
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More on tech:
The Secrets of Sand Hill Road (Part One)
What I Learned From an Investor Who Turned $100,000 into $100,000,000
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Photos: “Jack Dorsey” by magerleagues is licensed under CC BY-SA 2.0. and “square dongle close up” by adafruit is licensed under CC BY-NC-SA 2.0.
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