The big news (so far) this week was Mint's acquisition by Intuit for $ 170M. I love this deal. It shows that the VC model of rapid funding and growth can work. And it puts Internet M & A back on the map. Median exits in the sector have been sub $ 50M and most deals did not have a value disclosed (i.e. they were small).
Still, for all the
fanfare about this (with I think every VC involved posting about it), I
can't help but notice the returns are way lower than what used to be
considered a big win not that long ago. With $32M of capital raised,
even if the VCs owned 80% of the company they would have collectively
generated a 4.25X multiple on their cash ($170M * 80% / $ 32M). I don't
believe the founders would have parted with 80% of their company in two
years, so the returns are likely much lower.
The first money in (First Round Capital)
would have made a killing, but overall, this is only a good outcome by
past standards. Yes, given that the company is less than two years old,
the IRR must be great, but the multiples are not.
What
I'm wondering is - is this the new reality? Are the fabled 10X
multiples that investors talk about a thing of the past? Or will they
continue to use potential for 10X as a real benchmark in evaluating
dealflow?
Speaking for the entrepreneur side, I truly hope that VCs can and will embrace lower multiples as an ongoing fact of life. We all know that the true home run plays are very rare and shooting for them excludes many great companies from funding. It also kills many companies that do get funded but are shooting for a goal that they will never attain.
I posted some thoughts a while back on how VC could adjust to the reality of smaller returns. That post contemplated exits well below $ 170M and capital requirements way below $ 32M. Still, while its great to see this big exit, I hope the industry is gearing itself for long term success even when the exit values are well below what Mint got this week.
(Originally posted on http://startupcfo.ca)
(Image source: ridgeonline.files)
Nice thoughts Mark. Alternative investments (like venture capital) ideally help diversify a portfolio so if the rest of the market is doing poorly, the alternative investments are not doing as poorly, or perhaps even generating gains. Obviously, that's not always the case. But in this particular instance, a portfolio company provided two things all investors are starving for in the post crash economy: liquidity and realized cash-on-cash returns.
I would think it's hard in any environment for investing partners, or limited partners, to ignore the time value of money. If you use a date of September 14th to measure the change in value, you are looking at rough (guestimated) returns of just under 90% IRR for the Series A, around 130% IRR for the series B, and a ridiculus sounding 7,000+% IRR for the Series C on an annual basis. Timing makes a difference.