Linden Lab’s acquisition: sundry thoughts & speculation

via lawdonut.co.uk

It’s been a week since the news broken that Linden Lab is in the process of being acquired by new owners (see Linden Lab announces it is to be acquired, July 9th, 2020). Since then there has been a lot of  ranging from the entirely positive to the inevitable “we’re doomed! / the sky is falling!”

Some have raised concerns that neither J. Randall Waterfield nor Brad Oberwager have experience with running games companies. However, having hands-on experience in running the type of company in which you’re investing isn’t actually a prerequisite for funding / representing / guiding it. Rather, what’s important is having the ability to understand the company, appreciate its value proposition and being able to contribute to its continued growth; and both Mr. Oberwager and Mr. Waterfield appear to have these abilities. In particular, J. Randall Waterfield, as CEO of the Waterfield Group, comes from an environment where long-term investment in companies to ensure their growth is very much the raison d’etre.

Waterfield buys and builds well-run American businesses.
We prefer basic businesses with a few years of proven, conservative growth. We avoid companies that are growing too fast. We believe slow and steady makes the race… We strive to be a good partner to existing management, are passive with regards to general managerial issues, and work hard to help our CEOs and their families’ realize their vision.
Waterfield’s investment timeframe is forever. We work to grow book value at a reasonable pace with no exit in mind.

– from the About / Investment Criteria page of Waterfield

Now, to be clear, it’s not the Waterfield Group that is investing in Linden Research, but rather a venture between Mr. Waterfield and Mr. Oberwager; but given Mr. Waterfield’s pedigree with long-term investment, is hard not to see him taking the same approach in his other ventures.

Nor should the fact that Mr. Oberwager has sold off three of the businesses he’s built be seen as a negative. Building a company from the ground up is a different matter to investing in an established, profitable entity, and selling the former in order to repeat the cycle isn’t automatically indicative of a intent to buy-in to an existing company simply to sell it on without a longer-term commitment.

Which is not to say a buy-out like this isn’t without risk; with the best will in the world on the part of incoming investors to a company, things don’t always go as planned or turn out as hoped – but planning for failure isn’t generally how investors set about acquiring profitable companies.

A further point to remember is that acquiring a company isn’t something that happens overnight; it can actually take multiple months or even years to progress from an initial decision to sell, through reaching an agreement in principal, to that final closure.

Due Diligence means investors are rarely unaware of the business they are about to invest in

One big part of this process is due diligence, a process designed to make potential investors precisely aware of what they are getting themselves into – things that might alter the deal, such as revealing unwanted risks or unwelcome financial exposure that they might wish to see properly mitigated prior to proceeding further. This means that incoming investors are rarely coming into a company flying blind or are suddenly going to find themselves facing an unwelcome wake-up call that might leave them re-evaluating their desire to retain the company.

On a more interesting – to me at least – level is that given the length of time an acquisition can take – even if measured over months, rather than years – is how closely the decision to sell Sansar might have been tied to the decision to offer Linden Research up for acquisition.

Simply put and despite the effort already put into Sansar, it still has a long way to go before it is likely to establish a sold income-generating business model, and therefore represents a significant revenue sink hole of unknown depth. As such, it would make sense for the Lab to divest itself of Sansar prior to putting itself up for acquisition; doing to removes the uncertainty around that platform whilst leaving the company with a demonstratively profitable product (Second Life) and a second that is just starting to show its potential (Tilia Inc.). Depending on the time frames of the two events, the sale of Sansar might even have been a pre-requisite put in place by the new investors to limit potential risk raised through the due diligence process.

Following the acquisition announcement, there were questions asked through the forums, etc., on why would a profitable company be put up for sale, and statements (such as can be seen in comments on this blog) that you “don’t sell a profitable company”.

Well the fact is that profitable private companies are routinely sold for a variety of reasons, and none of them are “bad” or “negative”. For example, and leaving aside the point that the fact a company is profitable obviously makes it more attractive, a sale can be because the current owners wish to exit the company entirely to pursue other opportunities; or they may simply want reduce their overall holdings in the company as part of a general change in lifestyle, whilst leaving the company with the ability to continue operating successfully (and in the case of the latter, still have their experience / expertise available, should it be needed).

I’m not about to try to second guess what reasoning is at work in the case of Linden Research, but  I am curious as to the shape of the board once the acquisition has been finalised. Will it be just the two new investors (which seems likely), or will one or two of the remaining board remain?

Obviously, how things pan out will only become clear over time, but overall (and such is my nature as a “glass half full” person) I lean towards the feeling that the coming change for Linden Research will prove to be positive.

Tilia – a further look and a little more speculation

Logos © and ™ Linden Lab and Tilia Inc.

Note: this article is about Tilia Inc., as a business. It is not about the Tilia and how USD dollar balances and cashing-out from Second Life will be handled. If you wish to comment on those subject please refer to:  Linden Lab announce important Second Life account changes and comment there. Thank you.

On Monday, July 1st, Linden Lab announced important upcoming changes related to Second life accounts and credit processing, which linked to their subsidiary company, Tilia Inc. Full details of these changes can be found in the Lab’s official blog post: Important Changes to your Second Life Account – Introducing Tilia, which I also covered in my own post, Linden Lab announce important Second Life account changes, which includes additional links to the Lab’s comments posted in reply to questions on the forums.

But what exactly is Tilia Inc.?

Well, for a start, Tilia Inc isn’t actually something new – it’s been around in relation to the Lab since 2014 / 15; in fact, Second Life users might actually already be aware of it without realising it, as the Tilia Inc., logo appears on the SL web pages related to L$ account purchases (Tilia also drives elements of Sansar accounts as well).

In describing Tilia Inc., in the blog post noted above, the Lab give a fairly basic description of company’s function::

A subsidiary of Linden Lab that offers certain financial services to the Second Life community and helps Second Life comply with U.S. laws and regulations.

This is actually only a part of the story – the part that affects Second life users; there is more, some of which I speculated about when first writing about Tilia almost five years ago in November 2015 – see Linden Lab and Tilia Inc. – speculations on the Lab’s new subsidiary – and which would now seem to be correct.

That article came about as an extension of investigations fellow Second life user Vick Forcella, had started before punting things over to me to build on his work. In the course of my digging, I spoke with Peter Gray, who was then the Director of Global Communications at Linden Lab, and while he didn’t give too much away at that time, he did say something that resonated with me as I speculated about what Tilia Inc might hold for the future.

Tilia is a subsidiary of Linden Lab, focused on payments and the compliance work associated with operating virtual economies, and it will provide services for both Second Life and Project Sansar.

– Peter Gray, former Director of Global Communications, Linden Lab, November 2015

Back in November 2015, two things in particular struck me about Peter’s comment.

The first is pretty straightforward: Tilia Inc., was, and would remain, central to the Lab’s work in seeking federal and state registration as a US Money Transmitter and to comply with all US laws regarding the movement of money. This had been a stated goal within the Lab pretty much since Ebbe Altberg officially joined the company as CEO.

Secondly, Peter’s statement struck me as interesting in that its structure seemed to suggest that supporting Second Life and Sansar (then still “Project Sansar”) was part of, but also separate to, the overall goal of presenting Tilia as an entity focused on providing a robust payments and compliance system for operating (and managing) virtual economies to third parties.

Another option might be that the Lab be considering making the Linden Dollar and all its attendant services a pre-packaged solution / service they can offer to other companies wishing to operate a virtual currency, with Tilia Inc., as the nominal operating company for that service. After all, they have made much of their leadership in matters of virtual economies and compliance, so spinning it out and offering it to others might be a means of generating additional revenue, although admittedly, given the complexities potentially involved, this might be seen as a bit of a stretch.

– Part of my speculations, November 2015

Reading the Tilia Inc website, it seems that this is what Linden Lab plans to do – the main difference being that Tilia is geared to work with any “virtual token”, not just the Linden Dollar. Not only does the home page promote the company as a “solution provider”, so to speak, but it also includes a form by interested companies / organisations can register their interest with the Lab.

The Tilia Inc., home page promoting the company as a virtual economy solution provider to other businesses

(I’ll only say in defence of my linking Tilia and the Linden Dollar as the hip in 2015 was in part due to the Lab at that time hoping to use the Linden Dollar with Sansar, so it seemed logical to present they would offer it to others as part of the overall package.)

Some may well be upset at the idea of LL spinning off a business entity “at the expense of Second Life” (even though Tilia does and will have a bearing for both SL and Sansar, as noted). However, as noted in the quote above, it does have potential. There is already much more talk today about virtual currencies and economies  – notably focused around blockchain systems (such as Etherium), and the Lab does – as noted – have 16 or so years of running a virtual economy at scale and with users cashing-out up to US $65 million a year. Combine this with Tilia’s US-wide certification as a recognised Money Transmitter, and the Lab could have a robust business platform to offer clients.

Of course there are risks involved, such as the realities of this new market and how long it might take to grow, how LL might fair in the face of competition like decentralised blockchain system should these reach a similar level of certification, how much of any potential market LL might corner, etc. However, none of these mean the company shouldn’t necessarily try. Were Tilia prove to be successful over time, it could provide Linden Lab with an alternative revenue stream, possibly allowing them to do something else Ebbe Altberg alluded to in his Meet the Lindens session at SL16B: reduce their margins around SL and possibly lower fees.

But even if this doesn’t pans out, Tilia Inc., still means that LL are in compliance with US laws regarding money handling across state lines and borders, and so can continue to offer users the ability to generate and cash-out their own revenue through Second Life (and Sansar).

Which perhaps -for now – just leaves the question, ‘Why “Tilia”’? Well, possibly because, as I also noted back in 2015, tilia is genus of trees that encompasses linden trees.