I often see in the press that a company was acquired for $x million (say $200m) after having taken $y million in investment (say $20m). They often then go on to say that this led to a 10x return on investment. This is wrong unfortunately (for us VC’s). The final return depends on what valuation the money came in at. If the VC’s owned all the business, then it is 10x. However, if they came in at a $280m valuation, they made 1x their money if it was preferred stock and about 1.6x if it was participating preferred. On several occasions, I have seen articles written about exits in our network where I know that investors made 3x their money. The articles put the return at a significantly higher level.
An example of this is the YouTube acquisition. Some speculate that the initial $3.5m in Sequoia money went in at a $15M valuation which would give them roughly a 20% stake and that the second $8m tranche went in closer to $200m in value. I don’t know the right numbers, but if this is correct, then Sequoia would end up with about 23% of the company when the dust settled or about a $380m payout. This would result in a 33x return on their money. Not bad for a year and half’s work. That said, I have also seen some articles or posts talking about 100+x money.
Many reporters dig deeper to get to the real numbers. However, when you see an article about a big exit, don’t always assume that it resulted in a big win for the investors. We have been known to over-price our deals on occasion (more so these days) and this obviously impacts the return multiple.