Video startup Wistia to buy out investors with $17M in debt

Venture capitalists are pouring more money than ever into startups, but Cambridge-based Wistia Inc. wants out of the game.

The decade-old video software company is buying back stock from its investors and says it's now focused on maintaining a profit while it grows steadily — an approach that doesn’t jibe with the economic incentives of most venture capital funds.

Although Wistia has a revenue run rate of $32 million, it didn’t have enough cash in the bank to finance the stock buyback itself. So in November, Wistia raised $17.3 million in debt from Silicon Valley firm Accel-KKR.

Wistia had only raised $1.4 million during two rounds of angel investment, so the company was able to offer early investors a tenfold return on their original investment, according to co-founder and CEO Chris Savage. Some of the $17.3 million also went toward buying out employee stock options. From now on, Wistia will offer employees a profit-sharing arrangement.

“The whole point of all of this was realignment (of incentives),” Savage said in an interview Wednesday. 

In a long blog post on the company’s website, Savage and Wistia chief technology officer Brendan Schwartz laid out the series of events that led them to the unusual course of action. 

Early on, Wistia raised equity investment from angel investors and built a profitable business selling video management software to marketing teams at mid-sized businesses. But the company wasn’t growing quickly enough to attract VC firms or a huge price tag from an acquirer. The founding team boosted spending to chase growth, but it didn’t work and put employees in "a constant state of stress.”

In other words, Wistia was stuck.

"We’re not a billion-dollar company,” Savage said. “What do you do if you’re in the middle?”

Savage said it took about a year and a half to find the answer, which he borrowed from private equity investors and called “a leveraged buyout of our own company.”

The strategy entails a significant degree of risk because Wistia is now on the hook for regular debt payments, but Savage said the new company ownership structure has already led to revenue growth and “ridiculous” profit margins, in part because employees now get a share of those profits.

“There’s so many companies that have raised so much money, but the founders and the employees get screwed,” Savage said. “In our world I feel like nobody even knows that this is possible.”