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I think the mere fact that they just raised $50M @ $500M valuation is the reason that this price is so high. Those investors in that round had to at least doub
by marcamillion 15y ago
I think the mere fact that they just raised $50M @ $500M valuation is the reason that this price is so high.
Those investors in that round had to at least double their money...if the price was indeed $1B, that's all they did. Just 2X. Although, the argument can be made that a 2X return in 1 - 2 months isn't bad...but then again, VC funds don't have a 2 month life, so over the long-term value (i.e. 10 years most-times) of that fund I am not sure how beneficial that is.
Although, I guess they can't be too pissed because it must feel good to be able to at least return something to their LPs in such a short time frame.
- nirvana 15y agoThe acquisition was in stock and cash. So the VCs that put up the $50M may have just gotten $100M in pre-IPO Facebook stock, which may well dramatically increase their return post IPO.
- marcamillion 15y agoAhhh....good point. That does change the formula a bit, but even still...what's the likely 1 year return on pre-IPO FB stock? 3X if so much? I doubt it. Anyway, it's better than 2X, so I guess they can't be pissed.
- waterlesscloud 15y agoThis has to be mostly stock...how much cash does FB even have? Enough to casually hand out hundreds of millions?
- shingen 15y agoFacebook has $4 billion in cash on hand (pre IPO).
- Toddward 15y agoI haven't been able to find anything anywhere that says they actually closed that round - merely that they were looking to raise money at that valuation. EDIT: Open mouth, insert foot: http://techcrunch.com/2012/04/09/right-before-acquisition-instagram-closed-50m-at-a-500m-valuation-from-sequoia-thrive-greylock-and-benchmark/ http://techcrunch.com/2012/04/09/right-before-acquisition-in...
- marcamillion 15y agoTechcrunch just confirmed it - http://techcrunch.com/2012/04/09/right-before-acquisition-instagram-closed-50m-at-a-500m-valuation-from-sequoia-thrive-greylock-and-benchmark/ http://techcrunch.com/2012/04/09/right-before-acquisition-in...
- hackerbob 15y agoI would like someone to sit me down, and explain the economics of why accept a buyout immediately after raising. And NOT the part of accepting $1 Billon. But why they closed a round with a buyout just around the corner.
- marcamillion 15y agoFor 2 main reasons that I can think of: a) You don't know if the acquisition will actually happen. Therefore if it doesn't, you aren't left with nothing. b) It gives you a stronger bargaining chip to increase the price of the acquisition because you literally have a strong alternative. Instagram could tell FB to screw off, they are already getting $50M.
- nodesocket 15y agoI wonder if the investors (Sequoia, Greylock) knew of the pending acquisition offer from FaceBook when they put forth the 50M investment? If they did, that was the easiest investment ever.
- RexRollman 15y agoIf they did, was it legal?
- lancewiggs 15y agoThey may have brokered the deal, and at least gave credibility to the investment to make it easier for Facebook to pay the price. Beautiful result for the portfolio - we are in a bubble and flipping this so quickly means that they have $ return in the bank way before the more speculative investments.
- ChuckMcM 15y ago100% return in 3 months (it won't close to the end of the quarter) is an annualized 400% return. If you're a VC you took $50M out of a fund put back $100M, now you can make 2 bets at $50M when before you only had one. I don't see any way that this isn't a great deal for the VCs. That being said, this wasn't part of the S-1 and Facebook really has to tell potential investors how this will affect the financials, so presumably there is a revised prospectus or perhaps S-1 in the works.
- kwamenum86 15y agoWhen VCs make money they generally don't reinvest it, which is why they always look for 10x in the long term rather than 2x in the (very) short term.
- marcamillion 15y agoWell...if I am not mistaken, the way VC investing works is once an investment return is made - they have to distribute it back to the LPs immediately. They can't just "re-invest it" into other companies. Unless those economics have changed, but I don't think they have. It is in that light why I say, it seems a bit precarious. Essentially what would have happened is, these VCs would have contacted their limited partners and said, we have an investment we want to make - send us the money now (this is after the limited partners already committed to giving them that money). The LPs then wire the VC fund the money. The VCs then wire that money to Instagram. 3 months later, Instagram wires the money (assuming it was all cash, which we know it wasn't) back to those investors, which then have to wire the money back to their LPs. So technically, it doesn't REALLY help their portfolio as much as if they got a 10X return in a few years because the money was put to work for a shorter period of time. Although, if you are 'annualizing' the return properly and assuming a 33% return each month, then the yearly return is actually 29X (compounded), but we digress.
- damoncali 15y agoUsually, that's not how it works (VC's don't reinvest) but I will have to admit I'm fascinated by the story behind a large round so quickly followed by an acquisition. Too bad we'll likely not hear it.
- 15y ago
- FireBeyond 15y agoAnd people say we're not in another bubble. People through comments saying things like "well, VCs needed to double their investment - this lets them do it in a few months" Wish I lived in a world where I should have expectations of a several hundred percent ROI on investments.
- marcamillion 15y agoYou are just seeing the good cases here. A 10X return on any one investment pays for all the bad investments. If I remember correctly, the return that Sequoia got on their YouTube investment paid for the entire portfolio many times over. But more importantly than that, I think it was one of a very few that were good in that fund. I believe that particular fund was particularly bad because it contained remnants of the dot com bust - so only 1 - 3 of their investments in that fund were profitable, and only 1 was enough to pay for the entire fund. I am not remembering EXACTLY so my numbers may be a bit off...but you can just imagine how annoying it must have been to be a partner in a fund and be telling your LPs that you have essentially lost all their money - and thinking about this for the entire 10 year life of that fund. Just for at the last minute, almost literally, all of that changes. People don't think about it, but it's not easy to be a VC.
- knowsnothing613 15y agoyeah, but they paid $1 BILLION dollar for a company with NO business model. This buy was just another way for connected Silicon players to cash out on the facebook IPO, since the IPO window for web 2.0 is closed.
- dirtyaura 15y agoGoogle bought YouTube for $1.65B when YouTube didn't have business model. It was critiqued a lot because of this, but it established Google as a dominant player in video space and it's ripest fruits might be seen in coming years when media consumption moves more and more to mobile. I grant that $1B sounds a lot for Instagram and it is harder to see similar commercial value in photos than in videos. My personal take is that in addition to friend connections, already posted photos could be the strongest lock-in for users that Facebook has against future competitors.
- commanda 15y agoWait a sec - if the investors put in $50M and the sale price was $1B, isn't that a 20x return in 2 months? Or am I doing the math wrong?
- mthreat 15y agoFor $50M the investors didn't buy 100% of the company. They bought something around 10% (assuming the valuation was $500M)
- dkrich 15y agoAre you joking? You don't think a 100% gain is good for a 1-2 month timeframe? The most successful hedge funds in the world have money thrown at them if they can average 50% gains over the course of a year. And that is an outstanding year! I realize the economics of hedge funds and VC funds are different in that VC's take a shotgun approach and hope that one out of ten investments makes up for all the losers, but on any single investment a 2x return is outstanding. On the surface it looks like the founders got screwed nicely on this one.
- Domenic_S 15y ago> if they can average 50% gains over the course of a year That's the point, this isn't what happened. Given the choice between 2x return in 2 months or 10x return in 120 months, there's no contest at all. That initial investment that returned 2x is now out of play for the life of the fund. If the fund's life is 10 years, the return is 1.1x, not 2x.
- tnorthcutt 15y agoExcept that because they'll get paid x% in FB stock, the life of this investment is now extended until they choose to sell the FB stock, which means the return could go up (or down!).
- dkrich 15y agoOkay, you go ahead and bet on the companies that will pay you a 10x return in ten years and I'll take the 2x return in two months. Will Instagram even exist in 10 years? Who knows? I wouldn't bet on it. BTW, you're absolutely right. The 2x return extrapolates to a return of trillions of dollars over ten years, so there really is no contest at all. It doesn't matter if you run a hedge fund, a VC fund, or a trust fund. A 2x return is a 2x return, and anybody would take it any day. Anybody who wouldn't has no business working in finance. Just because you assign a ten-year time frame to your portfolio does not diminish the return on that investment, so the return on your $50mm is 2x, not 1.1x. If you guide your investment strategy based only upon what you hope will happen in the best-case scenario and look down upon investments that double your investment, you're making a mistake. The only reason they need a 10x return on their winners is because at least nine other bets are going to lose. Any win adds value to the fund. As a fund manager would you rather the $50 million have been plowed into a business that returned 0% which is what you expect to have happen ~90% of the time? Do you understand why criticizing this investment makes no sense? You're comparing a great investment to the few investments that turn out to be astronomically fantastic instead of the vast majority that lose money.
- mikekij 15y agoAngel / Series A investors are shooting for 10X. VCs hope that investments in more mature companies with users, revenue, etc. get 2-3X. I don't think any of the VCs that invested last week are bummed on 2X in 5 days.