From Alibaba To Zynga: 45 Of The Best VC Bets Of All Time And What We Can Learn From Them
These venture bets on startups that "returned the fund," making firms and careers, were the result of research, strong convictions, and patient follow-through. Here are the stories behind the biggest VC home runs of all time. In venture capital, returns follow the Pareto principle — 80% of the wins come from 20% of the deals. Great venture capitalists invest knowing they’re going to take a lot of losses in order to hit those wins. Chris Dixon of venture firm Andreessen Horowitz, a CB Insights Smart Money VC, has referred to this as the “Babe Ruth effect,” in reference to the legendary 1920s-era baseball player. Babe Ruth would strike out a lot, but also made slugging records. Likewise, VCs swing hard, and occasionally hit a home run. Those wins often make up for all the losses and then some — they “return the fund.”
Whatsapp
Facebook’s $22B acquisition of WhatsApp in 2014 was the largest private acquisition of a VC-backed company ever at the time. It was also a big win for Sequoia Capital, the company’s only venture investor, which turned its $60M investment into $3B. Sequoia’s success was built on its exclusive partnership with WhatsApp founders Brian Acton and Jan Koum. Typically when early-stage investors put cash into a company, they want to bring on additional investors to drum up more buzz and validate their investment. Startups can end up with as many as five or six different VCs in their cap table. This is common enough that these rounds are often referred to as “party rounds.” WhatsApp and Sequoia Capital followed a different strategy: Sequoia was the sole investor in WhatsApp’s $8M Series A round in 2011, which valued the company at $80M. Sequoia was the sole investor in the subsequent Series B round as well. WhatsApp’s founders are known to be iconoclastic. For example, pretty early in the company’s history, they wrote a manifesto against advertising and vowed they would never make money from placing ads in the service and mucking up users’ experience with the app. So it’s not shocking that they chose to cultivate a single VC as an outside source of capital while raising only $60M of outside equity financing.
Sequoia, for its part, signaled its conviction in WhatsApp’s bright future even as the app scaled to hundreds of millions of users with negligible revenue. 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. For example, by the time Twitter had raised $60M, it had brought in well over a dozen outside investors. At exit, lead Series A investor Union Square Ventures owned just 5.9% of Twitter.
2. Facebook
Facebook‘s $16B IPO at a massive $104B valuation was a huge success for early investors Accel Partners and Breyer Capital. The firms led a $12.7M Series A into Facebook in 2005, taking a 15% stake in what was then called “Thefacebook.” At the time of the investment, the company had what was considered a sky-high $100M valuation. It wouldn’t be until almost exactly one year later that investors really started flocking to the early social media startup. In 2006, amidst high user growth and revenue numbers, several firms took part in Facebook’s Series B: Founders Fund, Interpublic Group, Meritech Capital Partners, and Greylock Partners backed the $27.5M round, which put Facebook’s valuation at $418M. Even after selling off $500M in shares in 2010, Accel’s stake was worth $9B when Facebook went public in 2012, ultimately giving Accel Partners an enormous return on its investment. This bet made Accel’s IX fund one of the best-performing venture capital funds ever. It was also a bet that Peter Thiel, the very first investor in Facebook, missed out on. Thiel became an outside board member with his $500K seed investment in Facebook in 2004. At the time, Facebook had what Thiel called “a very reasonable valuation” and about a million users. Thiel saw Facebook’s unprecedented popularity firsthand. He didn’t invest again alongside Accel and Breyer simply because he felt the company was overvalued. When Facebook raised its subsequent Series A just 8 months after Thiel’s initial investment, he (and much of Silicon Valley) felt that Accel had vastly overpaid. Thiel made a classic misstep: he failed to perceive exponential growth. For context, Facebook would turn out to actually look cheap at IPO in retrospect, when its IPO valuation to trailing revenue ratio is compared to that of later exits Twitter and Snap.
Thiel would later call missing out on the Facebook round his biggest mistake ever — and the one that taught him the most about how to think about a company that “looks” overvalued. As he later wrote, “Our general life experience is pretty linear. We vastly underestimate exponential things. . . When you have an up round with a big increase in valuation, many or even most VCs tend to believe that the step up is too big and they will thus underprice it.”
3. Groupon
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 $13B, and the IPO raised $700M. At the end of Groupon’s first day of trading, early investor New Enterprise Associates‘ 14.7% stake was worth about $2.5B. But the biggest winner from that IPO was Groupon’s biggest shareholder, Eric Lefkofsky. Lefkofsky had been involved in Groupon as a co-founder, chairman, investor, and biggest shareholder. He positioned himself on both sides of the Groupon deal through various privately owned investment vehicles and management roles. The way he did this was controversial. In the end, however, he owned 21.6% of the company. When Groupon went public in 2011, his share was worth $3.6B. It all started when Lefkofsky helped get Groupon off the ground. He met Groupon co-founder Andrew Mason when Mason started working for Lefkofsky doing contract work. In 2006, Mason told Lefkofsky about his idea for a crowd-sourced voting site called The Point. In 2007, Lefkofsky and Brad Keywell seeded The Point with $1M. By 2008, The Point was struggling. Lefkofsky noticed some users had used the platform to buy something together in a big group and get a discount. Seeing that this one-off use case could spin out into a much more successful business, Lefkofsky helped Mason pivot The Point into the company that we know as Groupon. Groupon’s subsequent rounds of funding saw the company bring on New Enterprise Associates (NEA) for its Series A, Accel for its Series B, DST for its Series C, and Greylock Partners, Andreessen Horowitz, Kleiner Perkins Caufield & Byers, and more for its $950M+ Series D. But none of those investors did as well as Lefkofsky at IPO.