People often fixate on the Home Run Deals: the Googles, the FaceBooks and the like. A home run deal is a 50x-100x return on a deal where you get in 1) really early, 2) really cheaply, and 3) an astronomical valuation that you 4) stay with the entire ride without being diluted. It is the stuff of movie magic and business books. But it’s also extremely rare and risky.
FaceBook was able to manufacture a success at a critical time by using Russian money in place of an interim round. Plus they locked up all world markets before positioning their final public offering. This was done at the end of the process, not the beginning. They discovered you don’t wait for things to go up. You force it to go up by controlling everything. Yet it was still a white knuckle ride and there were a lot of very big mistakes that were costly – the pajama adventure at Sequoia was quite memorable and led to quite a bit of trouble for the lad. That’s why he needed the Russian money. And as one VC likes to say, “You don’t screw around with the Russians”.
So how do folks make money in the vast majority of Silicon Valley tech deals? What early investors look for is someone who knows how a business works. They have a strategy to be able to consistently grow a business taking advantage of their expertise and contacts. They have sufficient resources to fund that growth while widening their customer base so as to present a desirable acquisition. And they need more than one acquisition candidate who sees them achieving this steadily.
And a good example of a reasonable and profitable tech venture investment is the recently announced acquisition of eVestment by Nasdaq.
The company raised $19M from Silicon Valley Bank. Over the next six years they did seven acquisitions, allowing them to aggregate the value, obtain several key customer accounts, and present a compelling proposition for Nasdaq to acquire for $705M. Their investor was in it for the long-term as it takes time to create a credible business in the financial sector.
For those who think this was too long to wait for the money, if you took that $19M and put in an annual yield of 9% over six years and compound it, you’d end up with future value of money estimate of around $32M.
Their primary investor, Silicon Valley Bank, made 22 times the future value of that money invested. The rule of thumb is ten times for a smart investment. Bravo to eVestment and Silicon Valley Bank.