Thinking About Thinking

There have been a number of great venture-backed acquisitions recently, and WSJ.com does a great job outlining the Top 10 acquisitions that have closed this year.  Here they are:

1. Zappos ($847M)
2. CoreValve ($700M)
3. Pure Digital ($590M)
4. Visiogen ($400M)
5. SpringSource ($362M)
6. BBN Technologies ($350M)
7. Evalve ($320M)
8. Ablation Frontiers ($225M)
9. Mint Software ($170M)
10. PayCycle ($170M)

Let me revise the list to add in a few more things.  The list below includes deals that have been announced and not closed (AdMob, Playfish, RueLaLa).  It also gives 100% credit for all earnouts ($300M+).  And, it gives credit to Zappos for Amazon’s stock appreciation (an additional $300M+).  Let’s consider this the fully loaded list.  Here’s how the top 10 will look:

1. Zappos ($1,200M)
2. AdMob ($750M)
3. CoreValve ($700M)
4. Pure Digital ($590M)
5. Playfish ($400M)
6. Visiogen ($400M)
7. SpringSource ($362M)
8. BBN Technologies ($350M)
9. RueLaLa ($350M)
10. Evalve ($320M)

In aggregate, this is a whopping $5.4 billion in exit proceeds when you take the top 10 acquisitions this year.  Most of these companies probably took investments from venture funds from the 2002–2006 vintage, when a typical large VC fund might be $750M.  Now let’s say this fictional $750M venture fund invested in all of these companies – yes, one VC firm investing in every top 10 acquisition in 2009.  And, let’s go further and say this VC firm got a very healthy 20% ownership in every single company.  Since I’m being so generous, let me do one thing that is not so generous, which is presume these exits represent all the exits in the fund.  Here’s what you’d get with some basic math:

That would lead to $1,084 million in gross proceeds back to this fictional large VC firm.  Now let’s net out 2% fees over 10 years (to keep numbers simple) – that leads to $934 million of net proceeds.  That’s a 1.25x net cash on cash multiple after getting the top 10 acquisitions in 2009. 

Now, let’s presume a fictional small $100M VC firm made a bunch of bets and owned 20% of AdMob.  And, let’s say they lost money on everything else in their portfolio.  That would be a $150M gross return and $130M net of fees.  That’s a 1.3x net cash on cash multiple from one great exit.  

The fictional small VC firm made a better cash on cash return for its LPs through one winner, than the large VC firm could accomplish by getting all top 10 winners.  That’s the law of large numbers in effect.