There is a popular joke on Indian’s fad for engineering, it says, if you toss a stone in the air, it is likely to land on an engineer. People have started recirculating the joke with a slight change, which reflects the latest craze in the country. According to the new version, the stone is likely to land on an entrepreneur. Start-ups have mushroomed all over the country, but their success depends on the quantum of capital they can attract to fuel growth. Venture capital firms provide crucial funds and know how to small start-ups, which helps them expand. Though it is risky to back small companies without a proven track record, the returns for venture capital firms are often exemplary. Let us have a look at some extremely successful venture capital bets.
Source: The Hindu
The instant messaging application has become the default channel of communication for billions in countries like India, Brazil, UK and France. The company founded by Brian Acton and Jan Koum was acquired by Facebook for $22 billion in 2014. The mega-deal brought a $3-billion windfall for its only venture investor Sequoia Capital. The venture capital fund had invested around $8 million in Series A funding round and an additional $52 million in the second round of funding. Sequoia Capital exited WhatsApp with $3 billion for a total investment of $60 million.
The social media giant started as a small company for college students. When not many investors were ready to put in their money, Accel Partners and Breyer Capital had invested $12.7 million in the start-up for a 15 per cent stake in 2005. When Facebook listed in 2012 at a valuation of $104 billion, the value of the two venture investors’ shares zoomed. Accel had sold shares worth $500 million in 2010, even after that, its balance stake in the company was valued at $9 billion at the time of listing.
Cerent was an optical equipment maker acquired by Cisco for $6.9 billion in 1999. The US-based company was a pioneer in communication equipment and was backed by Kleiner Perkins Caufield & Byers, which had invested $8 million in Cerent. The venture investor’s 30.8% stake in the company was valued at $2.1 when Cisco acquired Cerent.
The parent of popular photo sharing application Snapchat listed on the exchanges in 2017 at a valuation of $25 billion. At the time of the IPO, the stake held by venture capital firm Benchmark Capital Partners was worth $3.2 billion. The investor had backed the company with $13.5 million in 2013. Another venture firm Lightspeed Venture Partners exited with $2 billion after invested $8 million in several tranches.
King Digital Entertainment
One of the biggest gaming companies Activision acquired King Digital Entertainment for $5.9 billion in 2015. King Digital—the makers of Candy Crush Saga—made its debut on the bourses in 2014 at a valuation of $7.1 billion. Index Ventures, one of the earliest backers of King Digital exited shortly after the listing for a return of $560 million on their 8 per cent stake.
In 2014, the Chinese retail giant had raised $22 billion in the biggest IPO on record. Soon after the listing, the market capitalisation of Alibaba soared to $231 billion. Masayoshi Son-led Softbank had invested $20 million for a 34% stake in Alibaba in 2000. The return Softbank made on its investment can arguably be considered one of the biggest appreciation in absolute terms. Softbank’s stake was valued at $60 billion just after Alibaba’s public offering.
Not many have heard of the JD.com, one of the biggest business-to-consumer retailers in China. In 2006, Chinese investment firm Capital Today invested $10 million in the retailer. When JD.com made its market debut in 2014, Capital Today’s stake was valued at $2.4 billion. Venture investors like Capital Today get rewarded for taking extreme risks, but small investors cannot afford to take huge risks. Investing in mutual funds is a safer option than backing nascent start-ups. Portals like Finserv MARKETS have made the process of investing in mutual funds hassle-free and simple.
Source: CB Insights
The omnipresent search engine was not a technology giant back in 1999 when Kleiner Perkins Caufield & Byers and Sequoia Capital had invested $12.5 million each in the company. When the company went public five years later, both investors witnessed the value of their stakes zoom to $4.3 billion each. The venture investors held on to their shares through the dot com crash and earned 300x returns on their investment.
At the time of its stock market debut, many venture capital firms held a stake in Twitter. One of the earliest investors was Union Square Ventures, who had invested $5 million in 2007. When Twitter got listed in 2013 at a valuation of $14.2 billion, Union Square Ventures’ stake was valued at $863 million.
Many venture capital firms earn outsized returns on multiple investments. Union Square Ventures was an early investor in social media gaming company Zynga, just like it was on Twitter. Within a year of Zynga’s founding, the venture investor ploughed in $10 million in 2008. Just three years later, at the time of Zynga’s listing Union Square’s 5.1% stake in the company was valued at $285.1 million.
Though the returns earned by venture capital funds are exorbitant, the risks associated with it are also enormous. Venture capitals firms spread their capital in several promising start-ups and even if a couple of investments fructify, the quantum of returns is huge. The numbers feel good but it is very difficult to recognise a business model with growth potential in a crowded market. The capital deployed is humongous which is not possible for a small investor. An average investor is always better off investing in mutual funds, which give steady returns in the long run. At Finserv MARKETS, you can browse through a variety of mutual funds and make an informed decision as per your risk profile.
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