The new reality for VC-backed exits?
The big news (so far) this week was Mint‘s acquisition by Intuit for $ 170M. I love this deal. It shows that the VC model of rapid funding and growth can work. And it puts Internet M & A back on the map. Median exits in the sector have been sub $ 50M and most deals did not have a value disclosed (i.e. they were small).
Still, for all the fanfare about this (with I think every VC involved posting about it), I can’t help but notice the returns are way lower than what used to be considered a big win not that long ago. With $32M of capital raised, even if the VCs owned 80% of the company they would have collectively generated a 4.25X multiple on their cash ($170M * 80% / $ 32M). I don’t believe the founders would have parted with 80% of their company in two years, so the returns are likely much lower.
The 1st money in (First Round Capital) would have made a killing, but overall, this is only a good outcome by past standards. Yes, given that the company is less than two years old, the IRR must be great, but the multiples are not.
What I’m wondering is – is this the new reality? Are the fabled 10X multiples that investors talk about a thing of the past? Or will they continue to use potential for 10X as a real benchmark in evaluating dealflow?
Speaking for the entrepreneur side, I truly hope that VCs can and will embrace lower multiples as an ongoing fact of life. We all know that the true home run plays are very rare and shooting for them excludes many great companies from funding. It also kills many companies that do get funded but are shooting for a goal that they will never attain.
I posted some thoughts a while back on how VC could adjust to the reality of smaller returns. That post contemplated exits well below $ 170M and capital requirements way below $ 32M. Still, while its great to see this big exit, I hope the industry is gearing itself for long term success even when the exit values are well below what Mint got this week.
Good comments. Building to flip will inevitably lead to sub optimal decisions. Focus on doing the right things, solving real problems, delighting customers and building to profit. The rest will take care of itself.
I'm expecting many will *have to* build it into their model in order to adapt and thrive. I was explaining the issue about "build to flip" to someone today; if you build to flip, you're approaching the beginning with the intentions focused on the end-state, and you probably won't actually create enough value to actually be able to flip it; but if you're building to create something sustainable, then you'll probably create something someone will want to buy. Intentions and goals in the beginning shapes the path. My trip? No; almost yes; but no
Hey Taylor, I sure hope they can build it into their model. It will result in less carnage and destruction for everyone, shorter time horizons and solid IRRs. Yes, the "build to flip" criticism may come out and with some companies you will want to go all the way, but for many modest, quick exits will be the way to go. Especially on the web. BTW – are you back from your trip?
10X multiples won't be a thing of the past, but likely a smaller portion of exits. Your point about this acquisition highlighting the "VC model of rapid funding and growth" is spot on. Given the assets acquired in Mint, Friendfeed, Brightcove et, al., smaller exits aren't only expected but likely more efficient for the entire ecosystem. The real question will be if investors can embrace lower multiples and work that expectation into their operating model.