8 ms·

You 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 g

You 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 ago
yeah, 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 ago
  Google 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.
  - knowsnothing613 15y ago
    yeah, and Yahoo bought Flickr for hundreds of millions. And Flickr never became a profit center for yahoo. Now, Yahoo is laying off thousands of workers, and is close to dead poool, because of all its malinvestment in web1.5 (flicker, geocities, delicious, etc). Video has a higher value proposition than photos. Look @ how hard flickr has struggled turning photos into a sustainable business model. I'm comparing apples to apples. You're comparing apples to oranges.
    - lucasgonze 15y ago
      Flickr was in the tens of millions, on the order of $30 million. That was the blog buzz around the price, anyway.
      - tirrellp 15y ago
        Gonze! How are you my man?!
  - cpeterso 15y ago
    YouTube has a business model now, but is it a profitable business unit? (I'm not trolling; this is a serious question about business models.)
  - unreal37 15y ago
    Trust me, Youtube is very profitable. Major multi-national brands have to pay $100,000's in Google Adword purchases to have their own branded channel. And if you want to change the look of your channel? Pony up another $100K.
    - zbuc 15y ago
      It is very profitable now, however it wasn't when the purchase was made -- therefore it was a wise decision.
    - avree 15y ago
      YouTube just recently turned profitable in the last two years. It was hugely unprofitable with an unproven business model at the scale at which it was bought.
- Harj 15y ago
  You could have said the same about Yahoo acquiring Facebook itself for $1 billion, if that deal had happened. It's clear now who would have got the better deal there. Certainly that doesn't mean every large acquisition is justified (e.g. Bebo) but it also means you can't just automatically apply the "company X has no clear business model today and so shouldn't have been bought for Y" argument to every such acquisition either.
  - wtvanhest 15y ago
    I am actually wondering if the value was too low. They are crossing the chasm so to speak and moving toward mainstream very quickly. I don't know where they would have ended up, but if they could have negotiated an upround with the founders and VCs taking some cash off the table it may have been a better move. I fully understand that if I had a $1B offer for a company that I would literally be sick turning them down, but the potential was there for something really big. If I could keep going with $10m in the bank, I would like to think I would try.
  - benackles 15y ago
    I'm not convinced Yahoo buying Facebook for $1 billion would have been a good deal for Yahoo. Yahoo never would have been able to make Facebook nearly as successful as it is today. I have my doubts Facebook would be worth even a $1 billion today. Yahoo has an awful track record of making the worst out of their acquisitions and I don't see how this would have been any different.
- erikpukinskis 15y ago
  They have a business model: filters that cost money.
mattmanser 15y ago
You need some serious perspective, they just got 2x return in a few months. They can, I don't know, re-invest the money perhaps? And you're cherry picking out one of many Sequoia funds (and still a successful one at that) to point at to call VC life hard? A dot-com period fund as well? How many other hit funds have they had? Sequoia estimates that 19% of the NASDAQ’s value is made up of firms they have funded.
- TheCowboy 15y ago
  There was an article on HN about how most funds are structured so you can't, you know, re-invest the money from an exit.
- cududa 15y ago
  It doesn't work that way -- no, they can't reinvest the funds.
- sgk284 15y ago
  In many (pretty much all) funds, you can't re-invest capital earned from the fund. I recommend checking out the book 'Venture Deals' by Brad Feld and Jason Mendelson. They explain the various structures of funds, why they're structured that way, and how it influences the decisions the investors make.
- deleted 15y ago
  [deleted]

knowsnothing613 15y ago

yeah, 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 ago
Google 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.
- knowsnothing613 15y ago
  yeah, and Yahoo bought Flickr for hundreds of millions. And Flickr never became a profit center for yahoo. Now, Yahoo is laying off thousands of workers, and is close to dead poool, because of all its malinvestment in web1.5 (flicker, geocities, delicious, etc). Video has a higher value proposition than photos. Look @ how hard flickr has struggled turning photos into a sustainable business model. I'm comparing apples to apples. You're comparing apples to oranges.
  - lucasgonze 15y ago
    Flickr was in the tens of millions, on the order of $30 million. That was the blog buzz around the price, anyway.
    - tirrellp 15y ago
      Gonze! How are you my man?!
- cpeterso 15y ago
  YouTube has a business model now, but is it a profitable business unit? (I'm not trolling; this is a serious question about business models.)
- unreal37 15y ago
  Trust me, Youtube is very profitable. Major multi-national brands have to pay $100,000's in Google Adword purchases to have their own branded channel. And if you want to change the look of your channel? Pony up another $100K.
  - zbuc 15y ago
    It is very profitable now, however it wasn't when the purchase was made -- therefore it was a wise decision.
  - avree 15y ago
    YouTube just recently turned profitable in the last two years. It was hugely unprofitable with an unproven business model at the scale at which it was bought.
Harj 15y ago
You could have said the same about Yahoo acquiring Facebook itself for $1 billion, if that deal had happened. It's clear now who would have got the better deal there. Certainly that doesn't mean every large acquisition is justified (e.g. Bebo) but it also means you can't just automatically apply the "company X has no clear business model today and so shouldn't have been bought for Y" argument to every such acquisition either.
- wtvanhest 15y ago
  I am actually wondering if the value was too low. They are crossing the chasm so to speak and moving toward mainstream very quickly. I don't know where they would have ended up, but if they could have negotiated an upround with the founders and VCs taking some cash off the table it may have been a better move. I fully understand that if I had a $1B offer for a company that I would literally be sick turning them down, but the potential was there for something really big. If I could keep going with $10m in the bank, I would like to think I would try.
- benackles 15y ago
  I'm not convinced Yahoo buying Facebook for $1 billion would have been a good deal for Yahoo. Yahoo never would have been able to make Facebook nearly as successful as it is today. I have my doubts Facebook would be worth even a $1 billion today. Yahoo has an awful track record of making the worst out of their acquisitions and I don't see how this would have been any different.
erikpukinskis 15y ago
They have a business model: filters that cost money.

mattmanser 15y ago

You need some serious perspective, they just got 2x return in a few months. They can, I don't know, re-invest the money perhaps? And you're cherry picking out one of many Sequoia funds (and still a successful one at that) to point at to call VC life hard? A dot-com period fund as well? How many other hit funds have they had? Sequoia estimates that 19% of the NASDAQ’s value is made up of firms they have funded.

TheCowboy 15y ago
There was an article on HN about how most funds are structured so you can't, you know, re-invest the money from an exit.
cududa 15y ago
It doesn't work that way -- no, they can't reinvest the funds.
sgk284 15y ago
In many (pretty much all) funds, you can't re-invest capital earned from the fund. I recommend checking out the book 'Venture Deals' by Brad Feld and Jason Mendelson. They explain the various structures of funds, why they're structured that way, and how it influences the decisions the investors make.
deleted 15y ago
[deleted]