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Venture bets on startups yield more returns

Uma Kannan, DH News Service, Bengaluru Dec 4 2017, 14:14 IST
Representative image.

Representative image.

When Venture Capitalists (VCs) invest in startups, they are aware of risks involved in returns- it might be either mind-boggling or they might end up taking a lot of losses.

But VC hits are much talked about and at the same time, not all predictions come true. Some venture capital firms make successful exits and it shows the growth of the startup ecosystem.

CB Insights recently came out with a report, in which it had analysed 21 of the biggest VC hits of all time to learn about what those home runs have in common.

For each company, CB Insights dove into the numbers they posted before their IPOs and acquisition, the driving factors behind their growth, and the roles of their most significant investors.

According to the report, Facebook's $22 billion acquisition of WhatsApp in 2014 was (and still is) the largest private acquisition of a VC-backed company ever. It was also a big win for Sequoia Capital, the company's only venture investor, which turned its $60 million investment into $3 billion.

When firms invest with that kind of conviction, they get a large share of ownership - as opposed to when they join a deal with a crowded field of other VCs, the report said.

Nagaraja Prakasam, Angel Investor and Founding Angel, IAN Impact, says, successful exits have been happening. "A startup raises funds from angel investors, and when it starts scaling up, it again raises Series A, B, C and so on. Series A investors come forth to buy shares of angel investors and they can do so or partially exit from the startup. When they keep on raising, the value of investors goes up. When companies can't scale, there is no increase in valuation," says Prakasam.

Groupon's IPO in 2011 was the biggest IPO by a US web company since Google had gone public in 2007. Groupon was valued at nearly $13 billion, and the IPO raised $700 million. At the end of Groupon's first day of trading, early investor New Enterprise Associates' 14.7% stake was worth about $2.5 billion. But the biggest winner from that IPO was Groupon's biggest shareholder, Eric Lefkofsky, says the report, as he amassed 21.6% of the company by the time of the IPO, 1.5x more than the second-largest investor NEA, and 2.8x what co-founder and CEO Andrew Mason received.

Recently, Snapchat's IPO was much hyped and talked about in investment circles, as the company witnessed the second-highest valuation at exit of any social media and messaging company since 1999. The stake held by VC firm Benchmark Capital Partners during the IPO time became worth about $3.2 billion. The IPO also capped a highly productive series of deals for Lightspeed Venture Partners, whose investment of about $8 million grew to be worth $2 billion.

Successful Exits

Indian Angel Network (IAN) has been getting good returns and exits from its portfolio companies. It has had successful exits from 14 companies.

Some of its marquee investee companies include, WebEngage (6x in 15 months of investment), Druva (giving 17x over 30 months), Stayzilla ( 21x over 30 months), Box8 (~3x over 4 years), Consure (10x over 40 months).

Recently, IAN Founder Padmaja Ruparel said they had a successful cash exit from Sapience and that the investors received handsome returns. In 2010, it invested $350,000 in Sapience, which recently received a majority investment from Credit Suisse Asset Management's NEXT Investors.

She had told that it is necessary for investors to exit so that they can plough back more money into startups and that the industry can develop and evolve.

Mentioning about exit cycle, KPMG Enterprise's Venture Pulse Q3 2017, a quarterly report on the venture capital market globally, which was released recently, said on a quarterly basis, completed exit volume is certainly subsiding, while the Q3'17 exit tally of $13.9 billion remains within historical bounds, although below the mean of the prior three years, which stood at $22.65 billion.

It pointed out that venture-backed exits have definitely entered a cyclical decline for now. The pressing question is the duration of the decline and how the later stages of the exit cycle may allow for the mature crop of late-stage, venture-backed companies that are highly valued on paper to finally realise their gains.

Globally, six out of 10 startups die in the early stage, and VCs are quite selective before investing in startups. Venture Catalysts (VCats) co-founder and president Apoorv Ranjan Sharma says, "Ours is a three-level due diligence process. Of the 300 applications we receive every month, three startups get shortlisted and two get funded. Strong diligence is performed to recognise startup promoters' capabilities and background. On top of that to reduce further risk, we also facilitate one-year incubator support."

Is there anything called right time to exit? Yes, says Sharma. "There are instances where a tech company gets obsolete in 6 -12 months time, hence if the exit doesn't happen at the right time, there are high chances of investors losing money. Also, there are cases when you exit with 5x to 200x returns. The exit starts anywhere between 1 year and 3 year's time if the company seems to be well-performing . If non-performing, then an early call should be taken," he adds.

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