Lessons to Learn from the Best VC Bets of All Time
At the end of the day, if you have founded a company or if you have invested in one, all that counts at the end of the day is a healthy return (and a bountiful exit)
The acquisition of Flipkart, valuing it at close to $21 billion is by far the most valuable exit for a tech company in India. The second most-valued exit was of MakeMyTrip via an IPO, which valued the company at $477 million. The tech startups in India are only just ripening for the picking, entrepreneurs in India hope, now that the poster startup of Startup India has found its path to sustainability and its early investors, Tiger Global, Accel, SoftBank and co. have reaped rich exits.
While wishing more and more exits for Indian startups here’s a look at “some of the biggest VC home runs of all time”, as compiled by CB Insights here.
Lesson 1 from: WhatsApp – For early- stage startups, just one high quality investor is enough
Facebook’s $22 billion acquisition of WhatsApp in 2014 was (and still is) the largest private acquisition of a VC-backed company ever. It was also a big win for Sequoia Capital, the company’s only venture investor, which turned its $60 million investment into $3 billion.
Sequoia’s success was built on its exclusive partnership with WhatsApp founders Brian Acton and Jan Koum.
Typically when early-stage investors put cash into a company, they want to bring on additional investors to drum up more buzz and validate their investment. Startups can end up with as many as five or six different VCs in their cap table. This is common enough that these rounds are often referred to as “party rounds.”
WhatsApp and Sequoia Capital followed a different strategy: Sequoia was the sole investor in WhatsApp’s $8M Series A round in 2011, which valued the company at $78.4 million.
Sequoia was the sole investor in the subsequent Series B round as well.
WhatsApp’s founders are known to be iconoclastic. For example, pretty early in the company’s history, they wrote a manifesto against advertising and vowed they would never make money from placing ads in the service and mucking up users’ experience with the app.
So it’s not shocking that they chose to cultivate a single VC as an outside source of capital while raising only $60 million of outside equity financing.
Sequoia, for its part, signaled its conviction in WhatsApp’s bright future even as the app scaled to hundreds of millions of users with negligible revenue.
When firms invest with that kind of conviction, they get a large share of ownership — as opposed to when they join a deal with a crowded field of other VCs.
For example, by the time Twitter had raised $60 million, it had brought in well over a dozen outside investors. At exit, lead Series A investor Union Square Ventures owned just 5.9 percent of Twitter.
In contrast, WhatsApp had expressed a desire to only work with a single firm from the beginning.
Sequoia’s well-known trajectory as a Silicon Valley kingmaker and its deep pockets helped it beat out micro-VC fund Felicis Ventures and others for the deal. After an initial $8 million investment in WhatsApp’s Series A in April 2011, Sequoia put in an additional $52 million in July 2013.
When Sequoia invested that additional $52 million at a $1.5 billion valuation, WhatsApp was doing $20 million in revenue — meaning Sequoia paid for their shares at an eye-popping revenue multiple exceeding 75x.
It paid off. By the time Facebook acquired WhatsApp for $22 billion, Sequoia had invested a total of $60 million for around 18 percent ownership. Their share was worth more than $3 billion, a 50x return overall.
Lesson 2 from: Facebook – Investors must watch out for tricky startups with “exponential growth”
Facebook’s $16 billion IPO at a massive $104 billion valuation was a huge success for early investors Accel Partners and Breyer Capital. The firms led a $12.7 million Series A into Facebook in 2005, taking a 15 percent stake in what was then called “Thefacebook.”
At the time of the investment, the company had what was considered a sky-high $87.5 million valuation.
It wouldn’t be until almost exactly one year later that investors really started flocking to the early social media startup.
In 2006, amidst high user growth and revenue numbers, several firms took part in Facebook’s Series B: Founders Fund, Interpublic Group, Meritech Capital Partners, and Greylock Partners backed the $27.5 million round, which put Facebook’s valuation at $468 million.
Even after selling off $500 million in shares in 2010, Accel’s stake was worth $9 billion when Facebook went public in 2012, ultimately giving Accel Partners an enormous return on its investment. This bet made Accel’s IX fund one of the best-performing venture capital funds ever.
It was also a bet that Peter Thiel, the very first investor in Facebook, missed out on.
Thiel became an outside board member with his $500K seed investment in Facebook in 2004. At the time, Facebook had what Thiel called “a very reasonable valuation” and about a million users.
Thiel saw Facebook’s unprecedented popularity firsthand. He didn’t invest again alongside Accel and Breyer simply because he felt the company was overvalued. When Facebook raised its subsequent Series A just 8 months after Thiel’s initial investment, he (and much of Silicon Valley) felt that Accel had vastly overpaid.
Thiel made a classic misstep: he failed to perceive exponential growth.
For context, Facebook would turn out to actually look cheap at IPO in retrospect, when its IPO valuation to trailing revenue ratio is compare to that of later exits Twitter and Snap.
Thiel would later call missing out on the Facebook round his biggest mistake ever — and the one that taught him the most about how to think about a company that “looks” overvalued. As he later wrote,
"Our general life experience is pretty linear. We vastly underestimate exponential things. . . When you have an up round with a big increase in valuation, many or even most VCs tend to believe that the step up is too big and they will thus underprice it."...
It comes down to conviction. An investor must have strong convictions about a company to follow on in the face of a steep valuation jump.
When you have strong convictions, you can do whatever you need to do to expose yourself to as much of the upside as possible — as Eric Lefkofsky did after he helped found Groupon.”
Lesson 3 from: Groupon – Consider becoming “The Founder” and “The Investor”
Groupon’s IPO in 2011 was the biggest IPO by a US web company since Google had gone public in 2007. Groupon was valued at nearly $13 billion, and the IPO raised $700 million.
At the end of Groupon’s first day of trading, early investor New Enterprise Associates’ 14.7 percent’s stake was worth about $2.5 billion. But the biggest winner from that IPO was Groupon’s biggest shareholder, Eric Lefkofsky.
Lefkofsky had been involved in Groupon as a co-founder, chairman, investor, and biggest shareholder. He positioned himself on both sides of the Groupon deal through various privately-owned investment vehicles and management roles. The way he did this was controversial. In the end, however, he owned 21.6 percent of the company. When Groupon went public in 2011, his share was worth $3.6 billion.
It all started when Lefkofsky helped get Groupon off the ground. He met Groupon co-founder Andrew Mason when Mason started working for Lefkofsky doing contract work. In 2006, Mason told Lefkofsky about his idea for a crowd-sourced voting site called The Point.
In 2007, Lefkofsky and Brad Keywell seeded The Point with $1 million. By 2008, The Point was struggling. Lefkofsky noticed some users had used the platform to buy something together in a big group and get a discount. Seeing that this one-off use case could spin out into a much more successful business, Lefkofsky helped Mason pivot The Point into the company that we know as Groupon.
Groupon’s subsequent rounds of funding saw the company bring on New Enterprise Associates (NEA) for its Series A, Accel for its Series B, DST for its Series C, and Greylock Partners, Andreessen Horowitz, Kleiner Perkins Caufield & Byers, and more for its $950M+ Series D. But none of those investors did as well as Lefkofsky at IPO.
Lefkofsky amassed 21.6 percent of the company by the time of the IPO, 1.5x more than the second-largest investor NEA, and 2.8x what co-founder and CEO Andrew Mason received.
In his roles as co-founder, chairman, and earliest investor, Lefkofsky assumed the plurality of ownership in the company and saw astronomical returns.
Lefkosky cashed out part of his stake early on. $120 million of the $130 million Series C round and $810 million of the $950M+ Series D round went to stock redemptions for existing shareholders.
Lefkofsky received $386 million of that amount via two of his investment vehicles, Green Media LLC and 600 West Partners II LLC. What’s more, he only paid $546 in total for those shares, turning literally hundreds of dollars to hundreds of millions in pre-IPO redemptions — and later, billions at IPO.Lesson 4 from: Snapchat – Investors should look past popular conceptions
Lefkofsky’s position as both co-founder and investor may sound like an unusual strategy, but “playing for both sides” is actually a longstanding practice in Silicon Valley [and as witnessed here, a profitable one].
Lesson 4 from: Snapchat – Investors should look past popular conceptions
When Snap Inc. went public in March of 2017 at a $25 billion valuation, it was the second-highest valuation at exit of any social media and messaging company since 1999.
At the time, the stake held by VC firm Benchmark Capital Partners became worth about $3.2 billion. The IPO also capped a highly productive series of deals for Lightspeed Venture Partners, whose investment of about $8 million grew to be worth $2 billion.
Lightspeed Venture Partners made its first investment in Snap by backing a $480K seed round in May 2012. Nine months later, Benchmark invested $13.5 million in the company’s Series A, as the sole investor in the round. Notably, Benchmark’s investment was led by partners Matt Cohler and Mitch Lasky, the latter of whom would become a mentor to Snap founder Evan Spiegel.
In part, Lasky was able to build this relationship because of a dispute between Spiegel and Lightspeed, which is not uncommon in the pressure-cooker world of early-stage startups, ambitious founders, and seasoned VCs.
Later, in a move reminiscent of Facebook, Snap’s $60 million Series B brought a bevy of new investors to the table — among them, General Catalyst, SV Angel, Tencent Holdings, Institutional Venture Partners, and SF Growth Fund. None would see returns as high as Benchmark or Lightspeed.
The key to Benchmark’s success with Snapchat was the firm’s ability to see beyond the app’s public perception. Where others saw a fad, they saw a company.
As late as 2013, Snapchat was thought of as little more than an app for college students to send each other naked photos. When Bloomberg Businessweek did a feature story on the company early that year, the piece included a GIF “cover” showing racy photos that disappeared after a few seconds.
While the public and the media were underestimating what Snapchat would become, Mitch Lasky and Benchmark saw something very interesting going on. When they talked to people about the social media they used, they heard Snapchat mentioned in the same breath as companies like Facebook, Instagram, and Twitter.
After learning more about the company and its founder, Benchmark became convinced that this supposed “sexting” app had a bright future.
“At Benchmark we search for entrepreneurs who want to change the world, and Evan and Bobby certainly have that ambition,” Lasky later wrote on his blog, “We believe that Snapchat can become one of the most important mobile companies in the world, and Snapchat’s initial momentum — 60 million shared “snaps” per day, over 5 billion sent through the service to date — supports that belief.”
“Snapchat’s ramp reminded us of another mobile app Benchmark had the good fortune to back at an early stage: Instagram,” he added.
For investors like Mark Suster at Upfront Ventures, the associations with illicit activity were too much to get over.
“I had just seen (maybe 6 months before) a project called TigerText,” Suster later wrote on his blog. “It was a ‘disappearing text app’ where the founders told me that they named the company because the idea came from how Tiger Woods got caught cheating on his wife because all of his mistresses had evidence that he cheated because they saved text messages from him… That narrative was fresh in my head when I first had the discussion about Snapchat.”
Suster didn’t want to support any app that seemed like its primary audience was cheating husbands. He admits that this was a failure of imagination and a mistake.
“People assume that porn is the first use-case for many new kinds of Internet services, and sometimes it is,” Susan Etlinger at Altimeter Group told the New York Times, recently. That doesn’t necessarily mean, however, that it will be the only, or even primary use case.
One of the first successes for Snapchat came when Spiegel realized that the app’s usage levels were spiking at a small high school in Orange County every weekday between the hours of 8am and 3pm. Spiegel’s mother had told his cousin, a student at the school, about the app. It had spread from there — the kids were using it, in Spiegel’s words, as a “digital version of passing notes in class.”
That was the app that Lasky and Benchmark invested in — not an app for sexting, but one that had undeniable virality and engagement levels even at an early stage.
As the examples of Benchmark with Snap and Accel with Facebook show, coming in early with a large offer and actively guiding an investment to success can be a great strategy.
As we see from the example of King Digital Entertainment, however, that kind of investment doesn’t always take a linear path.
Lesson 5 from: King Digital Entertainment (Candy Crush) – Be an active facilitator in exit deals to maximize your returns
Activision’s 2015 acquisition of King Digital Entertainment — the makers of Candy Crush Saga — helped grow the conglomerate company into the largest game network in the world, with over 500 million users. The $5.9 billion acquisition price also made the deal a big success for Apax Partners, the buyout firm that owned 44.2 percent of King Digital at the time.
The previous year, King’s 2014 Lesson 4 from: Snapchat – Investors should look past popular conceptionsIPO was hotly anticipated. King set out a plan to sell 22.2 million shares at a total valuation of $7.6 billion. The company’s valuation wound up closer to $7.1 billion, at $22 per share.
Index Ventures, which invested in King in 2005, cashed out shortly afterward, for a return of about $560 million on their 8 percent stake.
Apax Partners also first invested in King Digital in 2005, when the company was still distressed from a point of near-bankruptcy in 2003. It was still 9 years away from its biggest cash cow game, Candy Crush Saga, and the venture capital market for consumer startups was still in a “hangover” from the bursting of the dot-com bubble a few years prior.
Due to a combination of these factors, Apax was able to take a huge stake of King Digital, paying around $36 million for 45 percent ownership in the company.
King Digital’s popularity skyrocketed when the company released Candy Crush Saga in 2012. The app had over 10 million downloads by the end of the year. Within two years, it had 97 million active daily users.
At the time of the company’s IPO 2014, Apax’s stake was worth about 100x what they paid in 2005. This made King Apax’s most successful investment to date.
This growth caught the attention of Activision, a large game maker known for games like “Call of Duty” and “Guitar Hero.” In 2015, Activision approached Apax to ask if the investor would consider selling its shares in publicly-traded King.
However, Apax didn’t just want to sell: the company saw the potential for a wholesale acquisition of publicly-traded King, and its huge 44 percent stake allowed it to have a significant say in the deal. Apax brought King’s chief executives into their conversation with Activision. The resulting deal happened at a premium to the price at which King had been trading.
Apax maximized the return on its investment by taking an active role in negotiating King’s exit.
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