Category Archives: Exits

On the Square and Match IPOs and hopes for a correction

By | Exits, Venture Capital | No Comments and Square both enjoyed strong first days after their IPOs yesterday. Match closed up 23% at a valuation of $3.5bn and Square was up 45% at a valuation of $4.2bn.

That’s good news for both companies, because first day declines can sour a stock for months to come. However in the run up to its IPO Square had indicated it would go out at between $11 and $13 per share, and then ended up at $9, and in October last year Square raised $150m at a $6bn valuation. So the share price has been trending down for some time before popping after the IPO.

The interesting question for me is what this means for startup valuations more generally. The obvious narrative is that investors thinking of investing in other late stage private companies are either going to walk away or insist on much lower valuations, which will then have a knock on effect on all company valuations, particularly as Box IPO’d at less than its previous valuation back in January, Fidelity recently wrote down the value of its holding in Snapchat, and there are lots of private companies sitting on valuations higher than similar companies with public listings.

A lot depends on what happens next in the public markets, particularly with the Fed preparing to raise interest rates, but I think there’s grounds for hoping that investors in late stage private companies will have a reaction, but won’t hit the panic button. I say that because investors in the $6bn round in Square have still made money on the deal. They had a ‘ratchet’ which repriced their investment in the event of a down round to give them a 20% return. If you compound the 20% with the 45% pop then when the markets closed yesterday they were showing a 74% profit on the Square deal. That’s a good return, but it came in a way that investors won’t want to repeat.

Hence I think investors will have a measured reaction and if we’re lucky some heat will come out of the market but we won’t have a crash.

European venture backed IPOs triple

By | Exits | No Comments

Screen Shot 2015-01-28 at 12.50.09 Screen Shot 2015-01-28 at 12.49.57

These are two great charts!

With IPOs like this European venture funds must be performing better, and that will bring more money into the market.

It has taken us a long time to get over the 1999/2000 bubble and build a sustainable ecosystem. It would be nice if we could expect a recognisable moment when we all know that we have achieved critical mass and crossed over into sustainability, but unfortunately things don’t work that way. The best we can hope for is to be able to look back retrospectively and say 20XX was the year when European venture finally came of age.

As the months go by the positive evidence is accumulating and I’m starting to think that 2014 or 2015 may be that year.

eCommerce inflection point coming in 2018: invest now

By | Ecommerce, Exits | No Comments

Screen Shot 2015-01-21 at 11.59.21

I just saw this chart in a Morgan Stanley investor note with the subtitle eCommerce Hits it’s Stride. Firstly it’s good to see that top investment banks continue to see a lot of growth ahead in eCommerce, but more exciting is the notion that an inflection point is coming towards the end of this decade. If that’s true then growth for ecommerce businesses will peak around 2020. Company valuations are highly geared to growth, so we can expect them to peak around the same time. That makes 2015 a great time to be investing in eCommerce startups.

Google acquires the most, Apple hasn’t bought big (until now)

By | Exits | 2 Comments

Screen Shot 2014-08-06 at 13.29.34

Tomasz Tunguz of Redpoint ventures posted this table as part of a long analysis of M&A by leading tech companies over the last 15 years. Here are the takeaways:

  • Google comes out as the most prolific acquirer by far, with almost twice the number of acquisitions per year as Facebook who sit behind them.
  • Most surprising for me was that with the exception of the $3bn acquisition of Beats (which is missing from the analysis above) Apple hasn’t paid more than $390m for a company in the last 15 years. Beats may be a one off, or their acquisition strategy may be changing under Tim Cook. One to watch.
  • Of particular interest to us as an ecommerce investor is that Amazon is the most infrequent acquirer. Other data in the post shows that the bulk of their acquisitions fall in the $100-300m range.


Bubble watch: a comparison of 1999 and 2013

By | Exits, Uncategorized | 2 Comments

The markets are hotter now than they have been for a while and people are (once again) talking about bubbles. The data points below show that in terms of the IPO market at least the heat is nothing like what it was in 1999.

  • Median sales of company at time of IPO — $12m in 1999 vs. $106m in 2013
  • Median price/sales ratio at time of IPO — 26.5x in 1999 vs. 5.5x in 2013
  • Total # of tech IPOs — 369 in 1999 vs 45 in 2013
  • Total IPO proceeds raised — $33.5 billion in 1999 vs $8.5 billion in 2013
  • Average first-day stock price increase at IPO — 81% in 1999 vs 20% in 2013
  • Total venture capital dollars raised — $55 billion in 1999 vs $17 billion in 2013

This data is from a Ben Horowitz annotation of a David Einhorn post on RapGenius.

As a side point I’m loving the power of inline commenting on Medium and RapGenius. Commenters can talk directly to the point they are interested rather than having to comment on the whole post or explain which part of the post they are talking about. That makes the comment more powerful and easier to write. I’d love to bring inline commenting to this blog.

Amazon the most aggressive acquirer in ecommerce – by far

By | Exits | No Comments

Click on the chart below to get to an amazing interactive visualisation of 15 years M&A by Apple, Amazon, Google, Yahoo, and Facebook.

From our perspective as ecommerce investors the most interesting thing is confirmation that Amazon is the only volume acquirer in our market, and generally not at huge valuations. That makes it crucial that ecommerce startups can get to high valuations based on fundamentals – i.e. the ability to generate profits and cash.

Click image to see the interactive version (via Simply Business).

Explaining why TMT M&A deals at highest level since 2006

By | Exits, Uncategorized | No Comments

Over the weekend the FT wrote that the value of TMT M&A deals in Q1 was $174bn, the highest level since 2006 and up 65% on the year ago period.

The market is hot right now. No doubt about it. The $174bn includes a bunch of cable deals that aren’t relevant for the startup community, but even with those stripped out I’m sure the picture is still very healthy.

‘Is this a bubble?’ I hear you say.

I don’t think so. I think there are two reasons why companies are currently paying a lot to acquire startups. One that is hear to stay for the long term and another that is linked to the current low interest rate environment.

As I’ve written many times the pace of change continues to increase and that will be a long term driver of M&A, both big and small deals. Gene Sykes, Head of Global M&A explains why in the FT article (also linked above):

“It is the most interesting and disruptive time in the market I have ever seen. The value of the technology incumbents is more at risk than it has ever been. The best way for the established tech companies to overcome the challenge of new forms of technology is for them to be venturesome, as some of the leading companies have recently demonstrated.”

Facebook’s multi-billion dollar acquisitions of Oculus Rift and Whatsapp, and Google’s $3.2bn acquisition of Nest and string acquisitions in the robotics space are all best understood in this light. Moreover, this is a trend that is only going to increase. So long as there are highly valuable companies out there they will increasingly find their valuations at risk as their markets shift ever faster.

The second driver of high value M&A at the moment is the low interest rate environment. Simply put, when interest rates assets investments which increase in value are harder to find and hence more valuable (Fred Wilson explains the maths here). Hence stock markets reward growth and companies pay more for acquisitions which give them the growth that stock markets desire.

Tech is the main source of disruption and one of a small number of sources of growth. That’s why TMT M&A is breaking records right now, and why I’m optimistic about the future for our sector.

The key to Whatsapp’s success? Focus on product

By | Exits, Facebook | No Comments



When I talk about our approach to investing I often say that the next generation of successful companies will be most notable for their amazing products. That contrasts with previous eras where great sales and marketing capabilities and great engineering were often more important than product (think about the great enterprise software success stories of the 1990s…).

Whatsapp, which following last week’s $16bn acquisition by Facebook is now the largest startup M&A deal in history, makes a good case study. This is from a post about the company and exit from their investor Sequoia:

From the moment they opened the doors of WhatsApp, Jan and Brian wanted a different kind of company. While others sought attention, Jan and Brian shunned the spotlight, refusing even to hang a sign outside the WhatsApp offices in Mountain View. As competitors promoted games and rushed to build platforms, Jan and Brian remained devoted to a clean, lightning fast communications service that works flawlessly.

The note pictured above is apparently taped to one of the founder’s desks and it sums up what they Whatsapp is about: great user experience. They process 50bn messages per day with 99.9% uptime and a service so good that 72% of active users come back daily.

And they do that with 32 people. Amazing.

Finally a note on Whatsapp’s valuation – the $16bn price tag ($19bn including employee retention bonuses) is best understood in the context of Facebook’s valuation ($180bn as I write this). If Whatsapp as an independent company, or more likely in the hands of Google, could have become a powerful competitor that took 10% of Facebook’s business then this is money well spent.

Google has only made four $1bn+ acquisitions

By | Exits | One Comment

Following Google’s acquisition of Nest last week Venturebeat published the following list of Google’s top ten acquisitions by value:

  1. Motorola Mobility – $12.5 billion, 2012
  2. Nest Labs – $3.2 billion, 2014
  3. DoubleClick – $3.1 billion, 2007
  4. YouTube – $1.7 billion, 2006
  5. Waze – $966 million, 2013
  6. AdMob – $750 million, 2009
  7. ITA Software – $700 million, 2011
  8. Postini – $625 million, 2007
  9. Wildfire – $450 million, 2012
  10. Admeld – $400 million, 2011

The striking thing about this list is that there aren’t more higher value deals. Google stands out as perhaps the most prolific acquirer of internet businesses in recent years, yet they have only made four deals over $1bn (or five if you include Waze) and two of those (Motorola Mobility and DoubleClick) were mature businesses rather than startups.

This re-enforces the old truism that the most reliable path to a massive exit is to head for an IPO, even with all the difficulties that come with that route.

Additionally it makes clear that getting above $400m in a trade sale is a bit of a crap shoot.

Some lessons on startup financing from Tren Griffin and Nassim Taleb

By | Exits, Startup general interest, Venice Project | No Comments

Nassim Taleb is one of the most visionary thinkers in modern finance. His books Black Swan and Fooled by Randomness are must reads for anyone in the investment business. Tren Griffin writes a good blog about investing, and this post is inspired by his article A dozen things I’ve learned from Nassim Taleb about optionality/investing. Thanks to Josh March for the pointer.

Griffin and Taleb’s main point is that we should all seek investments which offer high optionality. He explains why in his first bullet:

1. ”Optionality is the property of asymmetric upside (preferably unlimited) with correspondingly limited downside (preferably tiny).”  Venture capital, when practiced properly by a top tier firm, is a classic example of a business that benefits from optionality. All you can lose financially in venture capital is what you invest and your upside can be more than 1000X of what you invested.  Another example of optionality is cash held by a disciplined patient value investor with the temperament to not buy until Mr. Market is fearful.  As just one example, Warren Buffett did exactly this during the recent financial panic and earned $10 Billion by putting his cash to work.  Seth Klarman, Howard Marks and other value investors use dry powder in the form of cash to harvest optionality since Mr. Market is bi-polar.

He later explains why venture capitalists build portfolios of risky options:

Warren Buffett believes:  “If significant risk exists in a single transaction, overall risk should be reduced by making that purchase one of many mutually- independent commitments.  Thus, you may consciously purchase a risky investment – one that indeed has a significant possibility of causing loss or injury – if you believe that your gain, weighted  for probabilities, considerably exceeds your loss, comparably weighted, and if you can commit to a number of similar, but  unrelated opportunities.  Most venture capitalists employ this strategy.”

The corollary of this is that when valuations get too high, or the amount of cash raised gets too high then the asymmetry between the upside and the downside disappears. The optionality is therefore lost and the investment becomes less attractive. This is all from the perspective of the venture investor.

Interestingly though, I think things end up looking pretty similar for the entrepreneur. In this case the investment is largely in the form of time committed to the startup, and hence the downside is the time lost to other opportunities. Most entrepreneurs work as hard as they can to grow their businesses quickly and for the good ones the limits to growth are generally exogenous – i.e. they come from outside the startup, usually in the form of market readiness for a solution or the availability of enabling technologies – so there isn’t much that can be done to change the investment or limit the downside. There are however many important decisions to be made that change the probability profile of the upside, and following the Munger/Taleb logic they should be made to maximise optionality.

The most important of these decisions is how much money to raise. Many entrepreneurs seek to raise the maximum amount of money they can at the highest valuation possible at the earliest possible time, but that locks the company on the path of seeking a very high exit and looking through the lens of maximising optionality it’s clear that from the point of view of maximising founder returns it isn’t always the right thing to do. The examples are pretty obvious to think through. If after a $5m Series A a founder holds 30% of her company and then goes on to raise a $20m Series B at $60m pre-money her stake will drop to 22.5% but she will most likely now be sitting behind a $25m liquidation preference and have taken on new investors who want to exit the company for at least $240m (to get 3x on their investment). The probability of getting to a big exit will have increased but the commitments to new investors will have reduced the chances of getting a smaller exit and the amount of cash the founder gets from those smaller exits will have reduced, particularly at sub $50m exits when the lions share of proceeds will go to the preference holders.

The upshot of this is that in the situation where it’s too early to have real confidence in the big upside opportunity AND there is a viable go slower option raising the maximum amount of money at the highest valuation isn’t the smartest strategy.

Griffin puts it this way:

7. “[Avoid] companies that have negative optionality.” Companies (1) focused on a niche market,  (2) have employees with limited technical skills, (3) which raised too much money at an inflated early valuation or(4)  are highly leveraged are examples of companies with negative optionality.

8. “[Avoid[ A rigid business plan gets one locked into a preset invariant policy, like a highway without exits —hence devoid of optionality.”

Locking into arrangements that demand a high exit is a form of rigid business plan.

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