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>Only in the bizarre world we live in could a half billion sale be spun out into a failure to get a billion. I can't speak for the author but selling Trello "f

by jasode 10y ago

>Only in the bizarre world we live in could a half billion sale be spun out into a failure to get a billion. I can't speak for the author but selling Trello "for only $425m" is a failed outcome if the growth expectations was for it to become a massive $1 billion business. How do we know that? Because Trello took $10 million in VC money in 2014.[1] So we can just work backward from the $1 billion goal using basic math: VC firm Index Ventures buys 25% ownership of Trello for $10 million.[2] They manage several funds and I don't know which one they used to write that $10 million check but let's assume the money came from the 6th Fund of $442 million they raised in 2012.[3] Over the 10-year life of that fund, they basically need to grow that $442 million into ~$3 billion. Since most startups in the fund will turn out to be money losers, they need at least one of their investments in the portfolio to become a $1 billion+ company. And keep in mind they only own 25% which means that even if Trello sold for $1 billion, they'd only cash out their position for $250 million. For Index Ventures to get to ~$3 billion, they need one or a tiny handful of winners from their portfolio to return ~$10 billion! (Assuming they take ~25% ownership in each startup and therefore cash out at ~2.5 billion.) Yes, IndexVentures still gets ~$106 million (25% of $425m) from the sale to Atlassian but as you can see from the math above, $106m hardly moves the needle toward ~$3 billion. That's a $10 million opportunity cost that they could have put into a different company in 2014. So, if you're a financial analyst, or one of the Limted Partners in IndexVentures fund, or possibly even J Spolsky, the failure to reach $1+ billion is indeed a "failure." tldr: because of algebra, if a VC invests in a company, that means they expect the startup to reach a multi-billion market cap. [1] https://www.crunchbase.com/organization/trello#/entity https://www.crunchbase.com/organization/trello#/entity [2] https://www.quora.com/At-what-valuation-did-Trello-raise-10M-when-it-was-spun-out-from-Fog-Creek https://www.quora.com/At-what-valuation-did-Trello-raise-10M... [3] http://vator.tv/news/2012-06-17-index-ventures-raises-442m-early-stage-fund http://vator.tv/news/2012-06-17-index-ventures-raises-442m-e...

kbenson 10y ago
That's only a failure on the VC overall fund level, not the company or investor level. That investment is not a failure, even if the fund is. If most the investments are money losers, but this one "only" paid out %1000, it's still contributing towards making the fund pay out, even if it's not doing well enough to account for the losing investments. You wouldn't classify a stock that tripled in price over a few years as a failure, even if overall your portfolio was a failure, and this is the same thing.
- jasode 10y ago
  >That's only a failure on the VC overall fund level, not the company or investor level. That investment is not a failure, even if the fund is. I put that last "failure" in scare quotes to soften the label a bit because in many ways, Trello is a success. Nevertheless, the VC will frame it as a "failure" or "suboptimal outcome" because they use the framework of "opportunity cost" which means they missed the other startups they could have invested that 10 million in. If the VC knows ahead of time that investing $10m startup in will return just 1000% in 2 years, they'd rather ignore Trello and find "another Facebook" that can return 20000%+[1] [1] https://techcrunch.com/2010/11/22/accel-partners-fund-ix-facebook-extraordinary/ https://techcrunch.com/2010/11/22/accel-partners-fund-ix-fac...
  - kbenson 10y ago
    > Nevertheless, the VC will frame it as a "failure" or "suboptimal outcome" Sure, but that's in the context of the fund, not the company. It's meant to be consumed by people dealing with the fund in some way. > If the VC knows ahead of time that investing $10m startup in will return just 1000% in 2 years, they'd rather ignore Trello and find "another Facebook" that can return 20000%+ No, any fund that knows they will get a 1000% return will definitely invest. The assumption will be that those dollars would have gone to one of the bad investments, because since the vast majority of dollars do, they're likely right. That investment will help the fund, because it doesn't it can be one large return, or a few slightly less large but still great returns. Not every fund that makes money does so because of a single great investment.
wtvanhest 10y ago
My understanding is that a 10x return is what most vcs consider successful. At the very least, this investment had a major positive attribution in their port returns and they likely list it in their materials to LPs as a success.
st3v3r 10y ago
So some VCs didn't get the crazy high returns they thought they would. So what? Calling Trello a failed outcome is still crazy. There are far, far more metrics, and I'd say far more important metrics to decide whether a company is a success than the amount of VC returns.
- jasode 10y ago
  >Calling Trello a failed outcome is still crazy. Please read my previous comment charitably as I deliberately wrote about Trello using the "investment perspective" for discussion purposes only. It wasn't rendering absolutist judgement that Trello was a failed company. >So some VCs didn't get the crazy high returns That's only looking at one side. The other side is J Spolsky who accepted the $10m. To do that, he had to believe Trello would grow beyond $1 billion and convince outside investors of that same vision. If a founder makes a decision to accept VC money, he has redefined the threshold of what success/failure will be. The math makes that unavoidable.
  - st3v3r 10y ago
    I cannot agree with that. Taking $10m does not mean you plan on growing into a $1B business. I also disagree with the idea that we have to focus on the "investment perspective". The VCs made money. I can't care less that they didn't make as much as they wanted to.
  - rhizome 10y ago
    What is the basis for a $10M investment implying a $1B expectation?
Certhas 10y ago
How do you get that they need to grow to 3 billion based on raising 442 million? At an annual return of 10 percent they would need to hit 1150 over ten years. Hitting 3 billion over ten years means getting more than 20 percent growth year on year ten years in a row...
- jasode 10y ago
  >Hitting 3 billion over ten years means getting more than 20 percent growth year on year ten years in a row... Exactly! When Harvard University invests some of their endowment in a Sequoia VC fund, they are expecting returns better than 20%! To compare, here's my previous comment about USV's 22%+ returns: https://news.ycombinator.com/item?id=12678009 https://news.ycombinator.com/item?id=12678009
rlucas 10y ago
This is regrettably out to lunch, my friend. A 10x return (and a nine-figure absolute return) in two years is "failure" all around? Only in the waning days of a market top would such an assertion (that such a return is a "failure" to anyone involved) even have a frisson of plausibility. Also, most of your numbers & ratios are order-of-magnitude right, but as they say, "horseshoes and hand grenades." A $442 M fund size is big enough that returning even a 3x-4x overall, with any consistency, would be downright virtuosic. So, no, they don't need to return $3B or 6-7x the entire fund to be successful (nor do they or their LPs have any realistic expectation of doing so). The long game, as always, is to try to have just ONE Google in your portfolio (the 400x+). But the short and mid games dominate, and they are about staying alive long enough to have enough at-bats to hit that grand slam. And the absolute, bar-none best way to stay alive that long, is to consistently make money for your investors. Finally, the ex ante assumptions and hopes and dreams are not really the way to judge the decision to sell Trello. That decision must be judged on facts in hand at the time. And frankly, at that time, Trello was a leading Kanban app, with no obvious or de-risked path toward a 10x or 100x from where they were. TL;DR: Nobody actually in that game is pooh-poohing a 9-figure exit for 10x in 2 years with a straight face.
- jasode 10y ago
  >is "failure" all around? It's definitely not failure all around. >A $442 M fund size is big enough that returning even a 3x-4x overall, with any consistency, would be downright virtuosic. A 3x return is 11.6%/year which isn't much more than Warren Buffet's Berkshire Hathaway (9.6% last time I checked) -- given the increased risk of VC funds. BH stock also doesn't have overhead of 2/20 fees. Every institutional investor is different but many would look at safer investments if they are targeting ~11%. If Sequoia, USV, etc are consistently returning 20+%, that's what the competitive levels among top VCs look like. Maybe it's unreasonable for LP's to expect returns like that from a VC fund but they do.
  - rlucas 10y ago
    11.6% a year for 10 years compounds out to 3x. If it was 10 years to 4x, that would be 15%. Which would be a very respectable risk premium over BH, the greatest publicly-traded large hedge fund/conglomerate of all time. But, the "percent" returns, as opposed to cash-on-cash, aren't actually calculated that way. Most funds eventually call something close-ish to 100% of capital (1.0x paid-in), so you can meaningfully-ish talk about the "times money" on the entire fund. But it doesn't work for "percent" returns, which are necessarily annualized. Funds call capital over time, not all at once. They also pay back distributions as they become liquid, not all at the end. Investors measure this with IRR, taking into account the timing and magnitudes of the cash flows. So a fund that posts up a 4x "times money" within ~ 10 years is going to have a substantially better IRR than 15%. WRT LP expectations: institutional investors aren't just weighing VC against "safer investments." They look at long-term historical data about different asset classes, project out their best opinions about likely risk and return AND correlations among classes, and make a top-down decision about where to allocate. Then, within each bucket, they try to select a group of managers who can meet (or ideally safely beat) those assumptions. (If rather small, they may delegate this to a fund-of-funds; if rather large, they may further differentiate into various stages or strategies of venture, and the process is more or less fractal.) Partly we may be talking past each other because "expect" here could mean various things. One thing that's clear is no major LP / institution is going to be invested only in one VC firm or only one vintage year. They think about these things in aggregate and over time. If by "expect" you mean, "in aggregate and over time, some LPs project 20% IRR for the venture asset class (subject to a very high, like say 25%+ std dev)" I think that's very fair and you'd be right. But if by "expect" you mean "LPs look at each venture investment and rely on it to consistently return 20% IRR, or that will have been deemed a failure" then you're not giving them enough credit. #1 driver of venture performance: fund vintage year. #2 driver of venture performance: manager persistence (manager skill/alpha). But to bubble back up to the higher level: LPs who see 10x, 9-figure exits in 2 years coming out of the portfolio of a ~$400M fund are not going to say "why not $3B?" They are going to understand that it's a rare fund in a rare vintage year that is going to return 7x+ on the whole fund, and they are going to be exceedingly happy if the "off years" consistently return 3x.
mattnewport 10y ago
Your argument doesn't hold up. As you point out, most startups in the fund will turn out to be money losers. It therefore doesn't make sense to consider the opportunity cost of the $10m investment vs. only the unicorns but vs. the average return. An investment that returns more than the fund's overall target return is a winner. The opportunity cost is an investment in another company that will probably lose money, not a guaranteed unicorn.

by jasode 10y ago

kbenson 10y ago

That's only a failure on the VC overall fund level, not the company or investor level. That investment is not a failure, even if the fund is. If most the investments are money losers, but this one "only" paid out %1000, it's still contributing towards making the fund pay out, even if it's not doing well enough to account for the losing investments. You wouldn't classify a stock that tripled in price over a few years as a failure, even if overall your portfolio was a failure, and this is the same thing.

jasode 10y ago
>That's only a failure on the VC overall fund level, not the company or investor level. That investment is not a failure, even if the fund is. I put that last "failure" in scare quotes to soften the label a bit because in many ways, Trello is a success. Nevertheless, the VC will frame it as a "failure" or "suboptimal outcome" because they use the framework of "opportunity cost" which means they missed the other startups they could have invested that 10 million in. If the VC knows ahead of time that investing $10m startup in will return just 1000% in 2 years, they'd rather ignore Trello and find "another Facebook" that can return 20000%+[1] [1] https://techcrunch.com/2010/11/22/accel-partners-fund-ix-facebook-extraordinary/ https://techcrunch.com/2010/11/22/accel-partners-fund-ix-fac...
- kbenson 10y ago
  > Nevertheless, the VC will frame it as a "failure" or "suboptimal outcome" Sure, but that's in the context of the fund, not the company. It's meant to be consumed by people dealing with the fund in some way. > If the VC knows ahead of time that investing $10m startup in will return just 1000% in 2 years, they'd rather ignore Trello and find "another Facebook" that can return 20000%+ No, any fund that knows they will get a 1000% return will definitely invest. The assumption will be that those dollars would have gone to one of the bad investments, because since the vast majority of dollars do, they're likely right. That investment will help the fund, because it doesn't it can be one large return, or a few slightly less large but still great returns. Not every fund that makes money does so because of a single great investment.

wtvanhest 10y ago

My understanding is that a 10x return is what most vcs consider successful. At the very least, this investment had a major positive attribution in their port returns and they likely list it in their materials to LPs as a success.

st3v3r 10y ago

So some VCs didn't get the crazy high returns they thought they would. So what? Calling Trello a failed outcome is still crazy. There are far, far more metrics, and I'd say far more important metrics to decide whether a company is a success than the amount of VC returns.

jasode 10y ago
>Calling Trello a failed outcome is still crazy. Please read my previous comment charitably as I deliberately wrote about Trello using the "investment perspective" for discussion purposes only. It wasn't rendering absolutist judgement that Trello was a failed company. >So some VCs didn't get the crazy high returns That's only looking at one side. The other side is J Spolsky who accepted the $10m. To do that, he had to believe Trello would grow beyond $1 billion and convince outside investors of that same vision. If a founder makes a decision to accept VC money, he has redefined the threshold of what success/failure will be. The math makes that unavoidable.
- st3v3r 10y ago
  I cannot agree with that. Taking $10m does not mean you plan on growing into a $1B business. I also disagree with the idea that we have to focus on the "investment perspective". The VCs made money. I can't care less that they didn't make as much as they wanted to.
- rhizome 10y ago
  What is the basis for a $10M investment implying a $1B expectation?

Certhas 10y ago

How do you get that they need to grow to 3 billion based on raising 442 million? At an annual return of 10 percent they would need to hit 1150 over ten years. Hitting 3 billion over ten years means getting more than 20 percent growth year on year ten years in a row...

jasode 10y ago
>Hitting 3 billion over ten years means getting more than 20 percent growth year on year ten years in a row... Exactly! When Harvard University invests some of their endowment in a Sequoia VC fund, they are expecting returns better than 20%! To compare, here's my previous comment about USV's 22%+ returns: https://news.ycombinator.com/item?id=12678009 https://news.ycombinator.com/item?id=12678009

rlucas 10y ago

This is regrettably out to lunch, my friend. A 10x return (and a nine-figure absolute return) in two years is "failure" all around? Only in the waning days of a market top would such an assertion (that such a return is a "failure" to anyone involved) even have a frisson of plausibility. Also, most of your numbers & ratios are order-of-magnitude right, but as they say, "horseshoes and hand grenades." A $442 M fund size is big enough that returning even a 3x-4x overall, with any consistency, would be downright virtuosic. So, no, they don't need to return $3B or 6-7x the entire fund to be successful (nor do they or their LPs have any realistic expectation of doing so). The long game, as always, is to try to have just ONE Google in your portfolio (the 400x+). But the short and mid games dominate, and they are about staying alive long enough to have enough at-bats to hit that grand slam. And the absolute, bar-none best way to stay alive that long, is to consistently make money for your investors. Finally, the ex ante assumptions and hopes and dreams are not really the way to judge the decision to sell Trello. That decision must be judged on facts in hand at the time. And frankly, at that time, Trello was a leading Kanban app, with no obvious or de-risked path toward a 10x or 100x from where they were. TL;DR: Nobody actually in that game is pooh-poohing a 9-figure exit for 10x in 2 years with a straight face.

jasode 10y ago
>is "failure" all around? It's definitely not failure all around. >A $442 M fund size is big enough that returning even a 3x-4x overall, with any consistency, would be downright virtuosic. A 3x return is 11.6%/year which isn't much more than Warren Buffet's Berkshire Hathaway (9.6% last time I checked) -- given the increased risk of VC funds. BH stock also doesn't have overhead of 2/20 fees. Every institutional investor is different but many would look at safer investments if they are targeting ~11%. If Sequoia, USV, etc are consistently returning 20+%, that's what the competitive levels among top VCs look like. Maybe it's unreasonable for LP's to expect returns like that from a VC fund but they do.
- rlucas 10y ago
  11.6% a year for 10 years compounds out to 3x. If it was 10 years to 4x, that would be 15%. Which would be a very respectable risk premium over BH, the greatest publicly-traded large hedge fund/conglomerate of all time. But, the "percent" returns, as opposed to cash-on-cash, aren't actually calculated that way. Most funds eventually call something close-ish to 100% of capital (1.0x paid-in), so you can meaningfully-ish talk about the "times money" on the entire fund. But it doesn't work for "percent" returns, which are necessarily annualized. Funds call capital over time, not all at once. They also pay back distributions as they become liquid, not all at the end. Investors measure this with IRR, taking into account the timing and magnitudes of the cash flows. So a fund that posts up a 4x "times money" within ~ 10 years is going to have a substantially better IRR than 15%. WRT LP expectations: institutional investors aren't just weighing VC against "safer investments." They look at long-term historical data about different asset classes, project out their best opinions about likely risk and return AND correlations among classes, and make a top-down decision about where to allocate. Then, within each bucket, they try to select a group of managers who can meet (or ideally safely beat) those assumptions. (If rather small, they may delegate this to a fund-of-funds; if rather large, they may further differentiate into various stages or strategies of venture, and the process is more or less fractal.) Partly we may be talking past each other because "expect" here could mean various things. One thing that's clear is no major LP / institution is going to be invested only in one VC firm or only one vintage year. They think about these things in aggregate and over time. If by "expect" you mean, "in aggregate and over time, some LPs project 20% IRR for the venture asset class (subject to a very high, like say 25%+ std dev)" I think that's very fair and you'd be right. But if by "expect" you mean "LPs look at each venture investment and rely on it to consistently return 20% IRR, or that will have been deemed a failure" then you're not giving them enough credit. #1 driver of venture performance: fund vintage year. #2 driver of venture performance: manager persistence (manager skill/alpha). But to bubble back up to the higher level: LPs who see 10x, 9-figure exits in 2 years coming out of the portfolio of a ~$400M fund are not going to say "why not $3B?" They are going to understand that it's a rare fund in a rare vintage year that is going to return 7x+ on the whole fund, and they are going to be exceedingly happy if the "off years" consistently return 3x.

mattnewport 10y ago

Your argument doesn't hold up. As you point out, most startups in the fund will turn out to be money losers. It therefore doesn't make sense to consider the opportunity cost of the $10m investment vs. only the unicorns but vs. the average return. An investment that returns more than the fund's overall target return is a winner. The opportunity cost is an investment in another company that will probably lose money, not a guaranteed unicorn.