Yesterday eBay acquired a company called Milo for $75m. Techcrunch reported on the deal with a post titled Confirmed: Ebay Acquires Milo For $75 Million. Investors Make A Killing.
From an investor perspective the key to making a killing from a $75m exit is capital efficiency. Milo had only raised $5m. With that amount of money going in there is plenty of space within the $75m for the investors to make a good multiple and there to be plenty left for the founders (if you are trying to guess what the split might have been it is a fair guess that the investors had 33-60% of the business – although I have no inside information).
If the amount of money raised rises to say $20m then you need for times the exit (i.e. $300m) to get the same multiple for the VCs assuming constant ownership percentages. Allowing for the fact that $20m raised means more rounds, more dilution for founders and a higher ownership for investors the same multiple for the VCs might be achieved with an exit as low as $200m – but either way it is much bigger.
All this is interesting because building a business that exits for $200m is more than twice as hard as building one that exits for $75m:
- the company needs to have proved out much more, to have executed well for longer and scaled to another level
- there are fewer acquirers willing/able to make acquisitions at that level
- deals over $100m are harder to close – many companies have a different approval process for deals of that size (often full board approval) and $100m is a psychological threshold for many above which greater proof and commitment is required
For these reasons, and because companies can now be more capital efficient anyway, I think Milo style exits will become more common.
