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 power law — 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 top venture firm Andreessen Horowitz 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.”
Fred Wilson of Union Square Ventures recently wrote that for his fund, this translates to needing at least two $1B exits per fund:
“If you do the math around our goal of returning the fund with our high impact companies, you will notice that we need these companies to exit at a billion dollars or more,” he wrote. “Exit is the important word. Getting valued at a billion or more does nothing for our model.”
We analyzed 21 of the biggest VC hits of all time to learn more about what those home runs have in common.
To do so, we pulled data and information from web archives, books, S-1s, founder interviews, the CB Insights platform, and more.
For each company, we dove into the remarkable numbers they posted before their IPOs and acquisitions, the driving factors behind their growth, and the roles of their most significant investors. Below, we’ll show you our analysis on each specific case. You’ll read about how:
WhatsApp decided early on to work only with a single investor, Sequoia Capital, which invested a total of $60M into the company for a massive $3B return.
Facebook’s exponential growth resulted in huge successes for early investors like Accel Partners. Even Peter Thiel, who wrote the first check to Facebook, later worried the company was overvalued and sat out a subsequent round while Accel maintained its conviction in Facebook.
Groupon pivoted from a social activism platform to a local deals aggregator, and generated huge returns for co-founder, chairman, and biggest shareholder Eric Lefkofsky.
Cerent, which was founded by a Kleiner Perkins Caufield & Byers partner, saw investment from Kleiner Perkins from the very beginning and returned $2.1B.
Snapchat developed a tight relationship with Series A investor Benchmark Capital Partners as it shook off the early perception that it was just a faddish app for “sexting.”
King Digital Entertainment, maker of mobile game Candy Crush, was acquired for $5.9B, resulting in a huge payout for Apax Partners, which owned 44%.
UCWeb was acquired by Alibaba, a prior investor, because they offered services that would help Alibaba triple their own valuation.
Alibaba grew alongside the early growth of the internet, helping to make early investor Masayoshi Son, today chairman of Softbank Group, the richest man in Japan and a tech titan in his own right.
JD.com took a huge risk by stepping into a major market and investor Capital Today made a $2.4B return by helping the company through a difficult financial time.
Delivery Hero beat out competitor FoodPanda and bought out the company from startup incubator Rocket Internet, which saw a nearly 3x return on its investment when Delivery Hero went public earlier this year.
Zayo became a large geographical aggregator in the fiber optics industry and generated a $480M return for investor Columbia Capital.
Mobileye built a successful company in Jerusalem, outside of traditional tech hubs, and raised money from non-traditional investors like Goldman Sachs.
Semiconductor Manufacturing International generated huge returns for investor New Enterprise Associates when it built a semiconductor company with an experienced team in a fast-growing international market.
Meitu recognized the need for local nuance in the value that its product offered — and early investor Sinovation Ventures saw 40x returns in the IPO.
Google grew through the bursting of the dot com bubble with the help of Kleiner Perkins Caufield & Byers, which held on to its early investment even when the market plummeted.
Twitter chose to partner with Union Square Ventures because USV had a clear vision for Twitter’s growth and potential, thanks to its investment thesis and firm conviction around it.
Zynga made social gaming history with a $7B IPO and generated huge returns for early investors like USV by building on top of existing social networks.
Lending Club made changes to its business model that created new opportunities for growth.
Genentech pioneered the biotech industry, which generated “one of the largest payoffs in history” for VC Kleiner Perkins Caufield & Byers.
Stemcentrx developed plans to minimize risk in the unpredictable biotech industry, and drew attention and funding from Founders Fund as they grew toward a $10.2B exit valuation.
Workday founder Aneel Bhusri leveraged his experience as a senior partner at Greylock Partners to eventually earn the investment firm a 9x return when Workday made its IPO.
Let’s dive into exactly what these companies and these investors did.
Note: Unless specifically stated, the “returns” discussed in the sections below are calculated based on the nominal value of the company at IPO or at acquisition. Earn-outs (such as those that apply to, for example, Stemcentrx) and lockups are not factored into those calculations.
Table of contents
- King Digital Entertainment
- Delivery Hero
- Semiconductor Manufacturing International (SMIC)
- Lending Club
Facebook’s $22B 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 $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 $78.4M.
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.
|Series A||Amount raised||$8M||$5M|
|# of investors||1||8|
|Series B||Amount raised||$52M||$15M|
|# of investors||1||6|
|Series C||Amount raised||N/A||$35M|
|# of investors||N/A||6|
In contrast, WhatsApp had expressed a desire to only work with a single firm from the beginning.
Sequoia’s well-known trajectory as a Silicon Valley kingmaker and its deep pockets helped it beat out micro-VC fund Felicis Ventures and others for the deal. After an initial $8M investment in WhatsApp’s Series A in April 2011, Sequoia put in an additional $52M in July 2013.
|Series A||Series B||Acquisition|
When Sequoia invested that additional $52M at a $1.5B valuation, WhatsApp was doing $20M in revenue — meaning Sequoia paid for their shares at an eye-popping 75x+ revenue multiple.
It paid off. By the time Facebook acquired WhatsApp for $22B, Sequoia had invested a total of $60M for around 18% ownership. Their share was worth more than $3B, a 50x return overall.
For Sequoia, the fact that WhatsApp was acquired by Facebook was a satisfying win for another reason.
Ten years prior, Mark Zuckerberg (egged on by Sean Parker, who held a grudge against partner Michael Moritz) had shown up deliberately late to a pitch meeting with Sequoia.
The meeting was meant as a prank — Zuckerberg never intended to let Sequoia invest. He arrived in his pajamas and presented a Letterman-inspired anti-pitch deck entitled “The Top Ten Reasons You Should Not Invest.”
“I assume we really offended them and now I feel really bad about that,” Zuckerberg later told journalist David Kirkpatrick.
Making $3B+ off selling WhatsApp back to Mark Zuckerberg surely took some of the sting off that memory. As well as not being invited to invest in another one of the top VC deals of all time — 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 $87.5M 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 $468M.
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 compare 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.”
Today especially, it can be hard to see how Facebook was ever “overvalued.” While Facebook’s 2B active users is impressive, the company’s early exponential growth is even more impressive.
On the other hand, imagine looking at Facebook’s monthly active user growth from the perspective of a potential investor in their Series C in 2006.
With the data points you had available then, Facebook did not look like a sure bet:
Facebook had about 12M users as of 2006, when it was still focused on the college market. Given that between 15 – 20 million people attend college every fall, there was still a reasonable chance (at this point) that Facebook would remain in an academic niche and fizzle out when introduced to the wider world.
Investors had no way to know that people would stick around after graduating. They couldn’t know it would catch on outside academia, and later, in other countries. That’s why Accel and Breyer’s investment at $87.5M seemed like an overvaluation to Thiel and others.
For Thiel, in hindsight it’s clear Facebook’s growth wasn’t following a predictable, linear model. In fact, because it was actually growing exponentially, and the company was undervalued.
“Whenever a tech startup has a strong round led by a top-tier investor (Accel counts), it is generally still undervalued. The steeper the up round, the greater the undervaluation,” Thiel later wrote.
Of course, Thiel is in part being provocative. It’s also possible for there to be pricey rounds that don’t shake out.
It comes down to conviction. An investor must have strong convictions about a company to follow on in the face of a steep valuation jump.
When you have strong convictions, you can do whatever you need to do to expose yourself to as much of the upside as possible — as Eric Lefkofsky did after he helped found 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.
|Angel||Eric Lefkofsky, Brad Keywell||$1M|
|Series B||NEA, Accel||$30M|
|Series C||Battery Ventures, Holtzbrinck Ventures, DST Global||$135M|
Lefkofsky 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.
In his roles as co-founder, chairman, and earliest investor, Lefkofsky assumed the plurality of ownership in the company and saw astronomical returns.
|Shareholder||Ownership at IPO|
Lefkosky cashed out part of his stake early on. $120M of the $130M Series C round and $810M of the $950M+ Series D round went to stock redemptions for existing shareholders.
Lefkofsky received $386M of that amount via two of his investment vehicles, Green Media LLC and 600 West Partners II LLC. What’s more, he only paid $546 in total for those shares, turning literally hundreds of dollars to hundreds of millions in pre-IPO redemptions — and later, billions at IPO.
Lefkofsky’s position as both co-founder and investor may sound like an unusual strategy, but “playing for both sides” is actually a longstanding practice in Silicon Valley. In the 1990s, it was the model behind the huge success Kleiner Perkins Caufield & Byers had with the telecommunications company Cerent.
When Cisco acquired Cerent in 1999, the $6.9B deal was the biggest acquisition ever for a tech company. And for Kleiner Perkins Caufield & Byers, which invested $8M in the company, it resulted in a huge multibillion-dollar payday.
Cerent sought investment from a few other firms for its Series C and D rounds — including Norwest Venture Partners, Integral Capital, Advanced Fibre Communication, TeleSoft Partners, and Kinetic Ventures. Meanwhile Cisco invested about $13M to acquire 8.2% of the company pre-acquisition.
No investor did better, however, than Kleiner Perkins Caufield & Byers, whose 30.8% stake became valued at about $2.1B after the stock switch.
Notably, Cerent itself was co-founded and led by Kleiner Perkins partner Vinod Khosla. In this, there were parallels to an earlier Kleiner Perkins home run, Genentech. Genentech was co-founded by Robert Swanson, who was also a former Kleiner Perkins partner.
Thanks to Kleiner Perkins’ reputation and deal flow, Khosla knew the best engineers in Silicon Valley, and he had a keen awareness of what the market needed. The idea for Cerent practically walked into his office; he just needed to find the right people to execute on it.
It started with Raj Singh, who came to Kleiner Perkins Caufield & Byers in 1996 with an idea for a special Java-specific computer chip. Khosla, who’d invested in Singh’s previous company NextGen, was merely “lukewarm” to the idea. But he had another idea he wanted to pitch to Singh.
“Mr. Khosla told me there was no money to be made in Java, but we talked about doing a [optical] hardware box,” recalled Singh.
Khosla’s view was that the sharp increase in Internet traffic would create a market for a device that could handle large amounts of voice and data.
Khosla had been able to see, from his experience as a VC and from the various companies that came through the Kleiner office, that telecom networks were changing. There was an opportunity to provide a better solution to the problem of connectivity — something cheaper and more flexible that could respond to growing demand.
What Cerent’s technology did was help connect long-haul communications lines and the local telephone and data network. This made it faster and easier for phone companies to transmit data.
And as the number of internet hosts increased, according to a study by the Internet Systems Consortium, the need for efficient optical network technology did, too.
Kleiner Perkins’ 1998 investment marked the beginning of an optical technology bubble, where company valuations skyrocketed and investments flowed. Singh and Khosla staffed out the rest of the company, and within two years, Cisco had purchased them for $6.9B.
As one analyst put it, “Everyone looked at Kleiner Perkins Caufield & Byers’ $8M investment in Cerent, and its returns, and it was difficult not to hear the cha-ching!”
Both Lefkofsky (with Groupon) and Kleiner Perkins (with Cerent) were able to win so big in part because they had hands-on operational roles in their investments. By doing so, they were able to expose themselves to much of the upside of their own work.
When Snap Inc. went public in March of 2017 at a $25B valuation, it was the second-highest valuation at exit of any social media and messaging company since 1999.
At the time, the stake held by VC firm Benchmark Capital Partners became worth about $3.2B. The IPO also capped a highly productive series of deals for Lightspeed Venture Partners, whose investment of about $8M grew to be worth $2B.
Lightspeed Venture Partners made its first investment in Snap by backing a $480K seed round in May 2012. Nine months later, Benchmark invested $13.5M in the company’s Series A, as the sole investor in the round. Notably, Benchmark’s investment was led by partners Matt Cohler and Mitch Lasky, the latter of whom would become a mentor to Snap founder Evan Spiegel.
In part, Lasky was able to build this relationship because of a dispute between Spiegel and Lightspeed, which is not uncommon in the pressure-cooker world of early-stage startups, ambitious founders, and seasoned VCs.
Later, in a move reminiscent of Facebook, Snap’s $60M Series B brought a bevy of new investors to the table — among them, General Catalyst, SV Angel, Tencent Holdings, Institutional Venture Partners, and SF Growth Fund. None would see returns as high as Benchmark or Lightspeed.
The key to Benchmark’s success with Snapchat was the firm’s ability to see beyond the app’s public perception. Where others saw a fad, they saw a company.
As late as 2013, Snapchat was thought of as little more than an app for college students to send each other naked photos. When Bloomberg Businessweek did a feature story on the company early that year, the piece included a GIF “cover” showing racy photos that disappeared after a few seconds.
While the public and the media were underestimating what Snapchat would become, Mitch Lasky and Benchmark saw something very interesting going on. When they talked to people about the social media they used, they heard Snapchat mentioned in the same breath as companies like Facebook, Instagram, and Twitter.
After learning more about the company and its founder, Benchmark became convinced that this supposed “sexting” app had a bright future.
“At Benchmark we search for entrepreneurs who want to change the world, and Evan and Bobby certainly have that ambition,” Lasky later wrote on his blog, “We believe that Snapchat can become one of the most important mobile companies in the world, and Snapchat’s initial momentum — 60 million shared “snaps” per day, over 5 billion sent through the service to date — supports that belief.”
“Snapchat’s ramp reminded us of another mobile app Benchmark had the good fortune to back at an early stage: Instagram,” he added.
For investors like Mark Suster at Upfront Ventures, the associations with illicit activity were too much to get over.
“I had just seen (maybe 6 months before) a project called TigerText,” Suster later wrote on his blog. “It was a ‘disappearing text app’ where the founders told me that they named the company because the idea came from how Tiger Woods got caught cheating on his wife because all of his mistresses had evidence that he cheated because they saved text messages from him… That narrative was fresh in my head when I first had the discussion about Snapchat.”
Suster didn’t want to support any app that seemed like its primary audience was cheating husbands. He admits that this was a failure of imagination and a mistake.
“People assume that porn is the first use-case for many new kinds of Internet services, and sometimes it is,” Susan Etlinger at Altimeter Group told the New York Times, recently. That doesn’t necessarily mean, however, that it will be the only, or even primary use case.
One of the first successes for Snapchat came when Spiegel realized that the app’s usage levels were spiking at a small high school in Orange County every weekday between the hours of 8am and 3pm. Spiegel’s mother had told his cousin, a student at the school, about the app. It had spread from there — the kids were using it, in Spiegel’s words, as a “digital version of passing notes in class.”
That was the app that Lasky and Benchmark invested in — not an app for sexting, but one that had undeniable virality and engagement levels even at an early stage.
As the examples of Benchmark with Snap and Accel with Facebook show, coming in early with a large offer and actively guiding an investment to success can be a great strategy.
As we see from the example of King Digital Entertainment, however, that kind of investment doesn’t always take a linear path.
6. King Digital Entertainment
Activision’s 2015 acquisition of King Digital Entertainment — the makers of Candy Crush Saga — helped grow the conglomerate company into the largest game network in the world, with over 500 million users. The $5.9B acquisition price also made the deal a big success for Apax Partners, the buyout firm that owned 44.2% of King Digital at the time.
The previous year, King’s 2014 IPO was hotly anticipated. King set out a plan to sell 22.2 million shares at a total valuation of $7.6B. The company’s valuation wound up closer to $7.1B, at $22 per share.
Index Ventures, which invested in King in 2005, cashed out shortly afterward, for a return of about $560M on their 8% stake.
Apax Partners also first invested in King Digital in 2005, when the company was still distressed from a point of near-bankruptcy in 2003. It was still 9 years away from its biggest cash cow game, Candy Crush Saga, and the venture capital market for consumer startups was still in a “hangover” from the bursting of the dot-com bubble a few years prior.
Due to a combination of these factors, Apax was able to take a huge stake of King Digital, paying around $36M for 45% ownership in the company.
King Digital’s popularity skyrocketed when the company released Candy Crush Saga in 2012. The app had over 10 million downloads by the end of the year. Within two years, it had 97 million active daily users.
At the time of the company’s IPO 2014, Apax’s stake was worth about 100x what they paid in 2005. This made King Apax’s most successful investment to date.
And King Digital’s total MAUs kept growing:
This growth caught the attention of Activision, a large game maker known for games like “Call of Duty” and “Guitar Hero.” In 2015, Activision approached Apax to ask if the investor would consider selling its shares in publicly-traded King.
However, Apax didn’t just want to sell: the company saw the potential for a wholesale acquisition of publicly-traded King, and its huge 44% stake allowed it to have a significant say in the deal. Apax brought King’s chief executives into their conversation with Activision. The resulting deal happened at a premium to the price at which King had been trading.
Apax maximized the return on its investment by taking an active role in negotiating King’s exit.
Alibaba’s acquisition of UCWeb bears some similarities to this deal: one investor (Alibaba) grew its stake in the company over time and gained a lot of influence. The critical difference is that Alibaba didn’t sell their investment; rather, this investor acquired the company themselves.
Alibaba’s acquisition of mobile browser company UCWeb in 2014 was the largest-ever internet deal in China at the time. The deal valued UCWeb at around $4.7B — and additionally played a role in helping Alibaba find its feet in mobile and propel its valuation from $80B to $230B+, a 3x increase.
Prior to the deal, UCWeb CEO Yu Yongfu had famously proclaimed that, despite significant interest, UCWeb would never sell. It took years of effort by Alibaba founder and CEO Jack Ma to change that.
Over the course of 6 years, from 2008 to 2014, Alibaba built a relationship with UCWeb by strategically investing hundreds of millions of dollars and ultimately accumulating a 66% stake in the company. In the end, this relationship paid off in spades.
UCWeb’s earliest VC investors were Morningside Ventures and Ceyuan Ventures, who collectively put $10M into the company in its Series A back in 2007.
At the time, UCWeb had already been working on mobile browsing for a few years, but was generating no revenue from various consumer mobile implementations.
In addition, UCWeb was white-labeling custom mobile browsers and doing consulting for Chinese telecommunications companies. Yongfu made the decision to sell the profitable B2B unit, to allow the company to focus more strictly on consumer technology.
To do that fully, UCWeb needed investment.
In 2008, Jack Ma and Yu Yongfu met for the first time. Alibaba first invested soon afterward, participating in the company’s $12M Series B in 2009. In March 2013, Alibaba made another investment of about $506M in the company — and in December 2013, invested $180M more, in a deal that gave Alibaba a 66% stake in the company.
Rumors soon arose that Morningside wanted out, with Chinese search giant Baidu was looking to buy up their shares.
Yu Yongfu told the media that despite rumors, UCWeb had no interest in selling the business. He rejected the offer from Baidu that reportedly would have valued the company at about $800M, instead insisting that UCWeb would acquire other businesses.
Nevertheless, by 2014, Alibaba would come to own two-thirds of the mobile browsing company now considered “one of the last good acquisition targets” in China, and Ma had scored a board seat.
“Jack Ma has, of all people, one of the best high-level strategic views of the industry,” Yongfu told The Next Web at the time. A few months later, Ma made an offer to buy the company outright, and two months after that, the deal was finalized.
When asked why he was selling now, after years of naysaying, Yongfu told reporters that he trusted Ma: “We share the same vision and the same dream together.”
The acquisition was a strong strategic move for Alibaba, which at the time of its IPO had made it clear that the rise of mobile was something it needed to reckon with as a business. If it could not adapt, Alibaba would be overtaken by companies with stronger mobile offerings, such as Tencent (owner of WeChat) and Baidu.
The acquisition UCWeb was also especially powerful in cutting off a profitable line of business for Baidu, who had previously benefitted from being the default search engine on the UCWeb mobile browser.
Finally, the acquisition also seemed to help prove to investors in Alibaba’s upcoming IPO that the company knew its own shortcomings and was working aggressively to shore them up. While the UCWeb acquisition wasn’t the only factor at play, Alibaba’s valuation did soar from $35B in 2012 to $168B in its 2014 IPO.
The UCWeb acquisition was a multi-pronged success for Alibaba
Crucial to Alibaba’s success in acquiring UCWeb was the fact that Jack Ma had become a trusted partner that had worked with the company for 6 years. This was someone who had believed in UCWeb from the beginning, and not just since the company gained traction. It was also someone who knew the work involved in building a company in an emerging market, and who had done it himself with Alibaba.
In 2014, Alibaba sold $22B of stock in what was, and still is, the biggest IPO on record. Fourteen years earlier in 2000, Japanese telecom giant SoftBank had invested $20M for 34% of Alibaba. The IPO gave Alibaba a market cap of $231B — and valued SoftBank’s stake in the company at well over $60B.
Alibaba was pre-revenue and pre-business model when Softbank invested. Masayoshi Son, SoftBank’s founder, made the decision to invest because he knew the internet was about to transform China, as it had already transformed Japan and the United States. He met with 20 prospective Chinese internet entrepreneurs in 1999, ultimately picking one to invest in. His name was Jack Ma.
“We didn’t talk about revenue, we didn’t even talk about a business model, we just talked about a shared vision,” Ma would later say.
“I invested based on my sense of smell,” said Son.
By 1999, Son and Softbank had already made two big investments in the internet. Both companies had been huge successes:
- Yahoo!: Softbank invested $2M in Yahoo! in 1995. Three years later, Yahoo.com was the most popular starting point for internet sessions around the world, garnering 100 million page views a day according to BBC news.
- Yahoo! Japan: The Japanese spinoff of Yahoo! first went live in 1996. By the beginning of 2000, its stock was the first in Japan to ever trade for more than ¥100M per share.
When Ma and Son first met a few years prior to the investment in Alibaba, Yahoo! Japan was growing quickly. Ma, inspired, started working on his own web portal for the Chinese market.
In 2000, Son rediscovered Alibaba during the above-mentioned scouting trip in China and officially put his support behind Ma’s project.
Fourteen years later, Alibaba’s IPO prospectus listed Softbank as the biggest shareholder with a 34.1% stake. This made Son incredibly wealthy — today, he is Japan’s richest man, with a net worth of $21.6B.
Forbes says that the dot-com crash in 2000 “wiped 99% off of SoftBank’s market cap and close to 90%” off Son’s net worth. Fortunately, his stake in Alibaba has done alright since then — today it would be worth $130B.
The value of the Alibaba stake allowed Son to keep taking out debt to finance Softbank’s operations (and acquisitions), arguing that “SoftBank is a goose that eats debt in order to lay golden eggs.”
Today, Softbank Group is arguably the world’s biggest investor in private companies, thanks to its $93B Vision Fund (which is also backed by deep-pocketed investors like Saudi Arabia and Apple).
Alibaba rode the first wave of the growing Chinese e-commerce market. To onlookers, their success signaled huge market potential. Soon other entrepreneurs and other investors wanted a piece of the pie.
Some time later, the venture firm Capital Today put their support behind a new Chinese e-commerce company: JD.com.
In 2006, the founder of the Chinese e-commerce company JD.com, Richard Liu, sought a $2M investment to shore up his company’s finances. To do so, he turned to the Chinese private equity firm Capital Today. Instead, Capital Today decided to invest $10M. The decision to invest 5x as much as Liu was asking for proved to be a smart move.
When JD.com went public in 2014, that stake was worth $2.4B.
In the years following Capital Today’s initial investment, Chinese e-commerce exploded — and many other firms began to take notice of JD.com.
Walmart participated in a $1.5B round to the company in 2011. Later, the retail giant sold its entire e-commerce operations in China to JD.com. By February 2017, Walmart’s stake in JD.com reached 12%.
The Ontario Teacher’s Pension Plan Board also invested, participating in a $400M private equity round in November 2012. After JD.com went public, the value of those holdings increased to $630M.
For its part, Capital Today succeeded by investing in a tiny upstart in a market that had just lost a giant incumbent. In 2006, eBay had just fled China, after competitor Taobao had taken over the market after a very expensive battle.
Following the Taobao vs. eBay battle was a decade of steady, 25%+ annual growth in the Chinese e-commerce industry, and a huge win for JD.com’s investors.
By 2006, however, JD.com’s money was running low as the company sought to gain its footing in the bruising local e-commerce market. Even so, JD.com’s cash-strapped chairman and chief executive Richard Liu wanted to expand the company’s offerings and build new software.
That was when he approached Capital Today, pitched his vision of a “full-service online retailer,” with a focus on logistics, and asked for $2M.
Capital Today invested $10M, seeing that an internet giant-sized hole had just opened up in the Chinese e-commerce market. JD.com didn’t need to destroy Alibaba and Taobao; it could take only a small percentage of the market and generate a huge return.
The investor’s faith in the company and the market paid off. Today, JD.com continues to grow and take a greater share of the B2C online shopping market in China.
Though JD.com and Alibaba are still technically competitors, they are both growing and trying to capture different niches.
Of course, sometimes startups and investors stand to gain more if they sell to more dominant competitors.
This is what happened when Delivery Hero and Foodpanda butted heads. Delivery Hero won out, but the investors in Foodpanda got a nice consolation prize.
10. Delivery Hero
The European takeout service Delivery Hero went public in 2017 at a valuation of $5.1B. It was a big moment for one of Delivery Hero’s former rivals and biggest investors, Rocket Internet, who acquired a 30% stake in the company two years prior, in 2015. That stake cost them around only $560M, making for a nearly 3x paper return on their investment.
There were plenty of earlier investors in Delivery Hero, including Holtzbrinck and Team Europe as well as Point Nine Capital, WestTech Ventures, Kite Ventures, and ru-Net, among others.
Interestingly, “startup studio” Rocket Internet and Delivery Hero had been rivals once. Rocket had backed a company called Foodpanda that competed with Delivery Hero in the food takeout space.
Until the end of 2016, the two companies both focused on expansion, in different parts of the world:
- Delivery Hero focused on markets in Europe, Latin America, and Asia
- Foodpanda focused on markets in India, Mexico, Southeast Asia, Russia, and Brazil
In late 2016, Rocket sold Foodpanda to Delivery Hero, its former rival. The sale was funded by issuing new shares of Delivery Hero to Rocket, increasing their stake to that of 37%. This later translated to a 7.5x return on their money by selling the struggling company to the stronger one.
Instead of competing with Delivery Hero in the crowded food delivery market, Foodpanda was able to join forces with the company — like Uber and Didi Chuxing did in China — to get a bigger win together.
The merger gave Delivery Hero a dominant worldwide position in the takeaway industry.
In 2017, Delivery Hero has seen growth across all regions, with revenue in Europe growing 44% in Q1’17. That success suggests a new model for international companies.
When you try to expand one company across the globe, it can set you up to fight a continual series of guerrilla battles with local competitors. You may have higher odds bringing together many smaller companies with tight, regional network effects.
Rocket — a publicly-traded holding company in Germany run by the Samwer Brothers — have cloned US businesses across many categories and across the globe. The company has found success by thinking about the bigger strategic picture and being able to concede defeat in one battle in pursuit of maximizing returns where it counts, simply in terms of dollars invested. Not from an ego boost that might come from “winning a market.”
This approach has let Rocket Internet achieve huge returns even in spaces where it’s lost market share to competitors. As tech entrepreneurship takes hold across China, India, and the rest of Asia, in addition to Europe, Rocket Internet has seen big wins balance out its losses.
Consolidation across different regions and countries can generate big wins for companies, as well as offering more value to customers. This is exactly what Zayo did with another niche but burgeoning market: local fiber optics providers.
The American fiber carrier Zayo’s IPO in 2014 represented a huge turnaround for the fiber optics industry. The company exited at a valuation of $4.5B — an encouraging public offering in an industry that had been lagging in the previous decade. That made lead investor Columbia Capital’s stake in 11.4% of the company about $500M.
Zayo’s primary value proposition was how well the company was able to aggregate the offerings of different fiber providers. At the time, the American fiber optics market was made up of regional players. Many had their growth stunted by the 2000s dot-com boom and bust. They were fragmented and mostly undifferentiated.
Zayo came in and began consolidating the industry. They raised aggressively to acquire other fiber network and infrastructure companies, buying a total of 32 companies by the time of their IPO.
More than five firms invested in Zayo’s $225M Series A in 2007, among them were Oak Investment Partners, Battery Ventures, and Columbia Capital. This was just as the optical networking market was beginning to recover from a post dot-com slump. The need for bandwidth (from corporations and homes alike) was increasing rapidly, but most of the companies building out that bandwidth infrastructure were small, straggling, and local.
This created what Zayo called “fiber orphans” — regional fiber networks, disconnected from their neighbors, that couldn’t offer value across their borders. Zayo set out to buy and unite them.
Zayo could take advantage of low prices on companies that had been overbuilt and needed to sell, while remaining confident that there would be a need for their services in the years to come.
Bandwidth needs historically have grown at anywhere from 50% to 100% annually, after all, for many organizations.
Zayo capitalized on geographic opportunity. They identified a fragmented space and saw that companies were offering similar services. Then they consolidated those efforts and collected the returns.
Sometimes it pays to enter a crowded space, if a company has the means to buy up weak players, expand, and execute better than the companies that are already there.
In another part of the world, Mobileye and its investors were able to make history by recognizing another type of geographic opportunity. But instead of consolidating a crowded space, they started building where no one else was looking.
Mobileye was one of the first companies to recognize the future in autonomous driving. The company started building self-driving car technology 10 years before Google launched its self-driving efforts in 2009. Mobileye went public in 2014 at a $5.3B valuation.
In 2017, amid mounting pressure from companies like Google and Uber, some predicted the company’s share price would soon correct — instead, they were acquired by Intel for $15.3B.
The company’s backers included several Israeli investors. In 2003, Mobileye raised $15M from various Israeli entrepreneurs and VCs, including FIBI Holding, Motorola Solutions Venture Capital, Colmobil Group, Lev Levayev, Delek Motors, Solid Investment Bank, Eldan, and Ari Steimatzky.
Colmobil was the only shareholder not to sell any shares after IPO — their 7.2% stake became worth about $1B at acquisition.
The company’s biggest US financial investor, Goldman Sachs, put about $100M into the company back in 2007, instantly giving some early investors in the company a tenfold return. Goldman then took an approximately 12.3% stake and sold nearly all of it when the company went public.
Despite coming to Mobileye significantly later than many of its Israeli VC counterparts, Goldman was still able to make a 10x return on its investment. And it did so by going outside the traditional hubs of startup investing and making a bold bet.
Historically, Jerusalem hasn’t been much of a hub of startup or venture activity— even within Israel. Even today, Tel Aviv is considered the “real” place to build a startup in Israel.
Mobileye, however, began its life in Jerusalem. Despite its reputation relative to Tel Aviv, the city of Jerusalem was actually a highly fertile place for a high-tech company like Mobileye to emerge from back in 2007.
Jerusalem is home to Hebrew University, one of the top-ranked universities for math and computer science in the world. It has a highly-skilled immigration population from Russia and elsewhere, which gave Mobileye a natural pool of talented engineers to pull early employees from.
And it was a professor at the School of Computer Science and Engineering who would go on to start the company: Amnon Shashua, who also studied machine learning at the university, would co-found and serve as CTO of the $15.3B company. Ziv Aviram, his co-founder, studied industrial engineering and management and was known for leading Israeli retail companies.
“During that period, Jerusalem had more resources than anywhere else in Israel – academia, a high-quality population, more funds and multinational corporations such as Teva and Intel. It was fertile ground for the high-tech and startup industry,” Israeli entrepreneur Elie Wurtman told Haaretz in 2016.
Tel Aviv may be the traditional “tech center” of Israel, but there were always good reasons for discriminating VCs to look to Jerusalem as well — the lower rents, easy access to a top university in Hebrew University, a highly-skilled immigrant population, as well as government tax incentives.
Entrepreneur Magazine named it as one of the top 5 places outside Silicon Valley to start a company in 2015.
But geopolitical and economic circumstances made it difficult for Mobileye to raise traditional venture backing. Mobileye was founded in 1999, right before the Palestinian uprising from 2000 – 2005 and the bursting of the dot-com bubble in 2002.
Mobileye weathered the harsh startup climate, and by 2013, had a $1.5B valuation.
Today, Jerusalem’s startup scene is growing quickly, and Mobileye’s IPO and subsequent sale to Intel will only accelerate it, as it is leaving billions in the pocket of founders and employees.
As has happened in countless fledgling startup hubs around the world, those fortunate employees — restless, experienced, and hungry — now have the dry powder to go start their own companies and make their own investments.
Companies with experienced founders already have a leg up. And as Semiconductor Manufacturing International (SMIC) has shown, when those founders have a chance to thrive in a needy market, they can knock it out of the park.
13. Semiconductor Manufacturing International
Dick Kramlich’s partners at New Enterprise Associates told him he was crazy when he recommended they invest $100M into Semiconductor Manufacturing International (SMIC), a Chinese semiconductor chip maker.
After SMIC raised $1.7B in its 2004 IPO, however, the deal made NEA many multiples in returns.
Kramlich and NEA got those returns by investing in the Chinese technology market when no other Silicon Valley VCs were taking it seriously.
In 2003, SMIC raised a $630M Series C that included NEA, Oak Investment Partners and Walden International, in addition to a lineup of mainly international firms: Vertex Ventures Israel, Temasek Holdings, H&Q Asia Pacific, Beida Microelectronics Investment, and Shanghai Industrial Holdings.
At the time, China had just recently opened its semiconductor industry to foreign investment, and most US investors had no idea what to expect. It was uncharted territory. There were no definite models to reference and plenty of what Kramlich’s partners called “geopolitical risks.”
Kramlich, however, insisted SMIC was a worthwhile investment.
First, there was China’s growth rate to consider. Even as it slowed down during the late 1990s, it held steady at about 7% or 8%. The US, for reference, grows at an average of about 3.22% per year.
Second, China was (at the time) consuming more semiconductors than any other country on earth. Their rate of semiconductor consumption was growing at 24.8% per year compared to a worldwide average of 3.8%.
Third, the team behind SMIC was made of semiconductor industry veterans from other Asian countries. They’d already built successful semiconductor businesses in Korea and elsewhere, and now it was finally possible to invest in them. The stars were aligned:
- A highly experienced team of semiconductor veterans
- The biggest and fastest-growing semiconductor market in the world
- An economy that was about to enter a period of 9%-13% growth lasting almost a decade
Kramlich and NEA saw this when they flew over to China for due diligence in 2002. Soon after, NEA signed for a $90M investment. Then, in 2003, the firm invested another $30M, for a total of $120 million before SMIC’s IPO.
By 2007, NEA had invested about $300M overall in bets on Chinese companies.
NEA’s success goes to show that the biggest opportunities are often found in risky places. When other investors are scared, that’s precisely when you should be doing your research and preparing your own move.
Knowledge of a local market’s nuances is precisely what led Sinovation Ventures to our next big VC deal — Meitu.
The 2016 IPO of Meitu, a Chinese photo editing app, was the largest IPO in Hong Kong in over a decade. The company was valued at $4.9B and raised $630M in the public offering. This marked a milestone for the Chinese technology market — and for early investor Sinovation Ventures, which saw up to 40x returns on its investments in the app.
Sinovation led the company’s Series A in 2013. In 2014, the investor was joined by Qiming Venture Partners in Meitu’s $10M Series B round.
What made Meitu a strong investment was that it wasn’t just a copycat. Investor fear of missing out (FOMO) tends to drive over-investment in “me-too” ideas in other markets. Having missed successes like Groupon in the US, investors will go hunting for a perfect copy overseas. These overseas investors tend to miss the local nuance around what it takes to make a product sticky and successful.
Meitu wasn’t simply a photo editing or “face-tuning” app.
Meitu rode in the very unique slipstream of two huge forces in Chinese culture.
First, there was mobile. Right around the launch of the Meitu mobile app, smartphone usage in China started to grow exponentially. That gave the app an organic engine for growth.
Second, there was a growing obsession with beauty. Around the time Meitu launched, China had a very low plastic surgery procedure per capita rate compared to its neighbors. By 2014, 7 million Chinese people were traveling outside the country to get work done.
Investor funding helped Meitu to expand on the back of photo retouching. They now have 23 products.
Meitu Inc’s six flagship apps are Meitu, BeautyCam, Meipai, Beauty Plus, SelfieCity, and MakeupPlus. They routinely fill the leaderboard in the Chinese app store.
As of October 2016, China Tech Insights reported that there were 456M users across all of Meitu, Inc.’s apps. There are significant users bases spanning several countries in Asia, including China, India, Indonesia, Japan, Malaysia, and Thailand.
The lesson here is to look at local markets and understand what will make a certain product sticky. Copycat companies only understand the idea for the company — context-specific companies can actually nail the execution.
With both Meitu and Semiconductor Manufacturing International, we saw context-specific companies that grew fast amidst bigger macroeconomic shifts in China. Whether it was opening up to foreign investment or the growth of smartphones, these companies rode larger waves to success.
Riding big waves is how many of the biggest companies on this list got to where they are. Those waves aren’t always visible from the outset, though, and they’re not without their abrupt breaks.
In 2000, the entire market for internet startups suffered in the dot-com crash. If you’d invested in Google’s Series A, the value of your investment would have taken a nosedive. It would have taken a lot of confidence in the underlying technology to stay with the company, but for the VC firms that had it, staying on meant a huge return.
In 1999, Google raised a Series B round of $12.5M each from Kleiner Perkins Caufield & Byers and Sequoia Capital. A year after Google’s IPO in 2004, those investors’ stakes were worth about $4.3B each — a 300x return.
It took real conviction in the potential of Google to get Kleiner and Sequoia through the market turmoil that came between initial investment and IPO.
Between 1999 and 2004, $1.8T in market value was lost in the crash — NASDAQ lost half of its entire value in 2001 alone.
Kleiner invested in Google in 1999 and the company would launch its initial offering in 2004. During that time, the Nasdaq index reached peak height and then fell sharply.
Kleiner Perkins and Sequoia held on through the turbulence, and even through Google’s IPO, when tech stocks were worth a quarter of what they’d been worth.
By 2004, Google had grown into a company that was worth $23B — absolutely astronomical at the time.
Part of the terms of the Series A investments for both Kleiner Perkins and Sequoia was that Google co-founders Larry Page and Sergey Brin bring in an external CEO to run the company.
When Page and Brin tried to backtrack on hiring a CEO for “adult supervision,” Kleiner Perkins partner John Doerr almost backed out and sold off his firm’s shares. But ultimately, Doerr chose to stick around, and instead convinced Page and Brin they needed a CEO — by asking if he could introduce them to successful CEOs to understand what the job demanded.
After meeting Steve Jobs, Andy Grove, Scott Cook, and Jeff Bezos, the Google co-founders decided that they also wanted to hire an external CEO. Doerr introduced them to Eric Schmidt, and in 2001 Schmidt was hired as Google’s first external CEO.
Under Schmidt, revenue grew to $1.42B by the time of the IPO and to over $30B by the time Page replaced Schmidt as CEO in 2011.
In later years, founders of other startups began rebelling against getting replaced by professional CEOs and executives. But it was critical that Doerr convinced two incredibly independent founders to bring in an experienced hand. Ultimately, Schmidt’s insight was absolutely essential in navigating the company through the dot-com crash, the most traumatic time in the internet’s history, as well as subsequent growing pains.
Investors like Doerr at Kleiner Perkins invest in theses. They don’t just believe that certain companies are going to be successful — they’ve developed specific beliefs about why those companies will succeed, and this helps them hang on when others might get out.
These principles have also been particularly important to Union Square Ventures in many of their investments. They beat out several other companies for an early investment in Twitter — all because the Twitter founders believed in their investment philosophy.
Twitter’s IPO raised $1.8B in 2013, valuing the company at about $14.2B. And thanks to a Series A investment, Union Square Ventures’ share of Twitter was valued at $863M.
While many different VCs (CRV, Kleiner Perkins, Benchmark, Insight Venture Partners) would join the later funding rounds for the early social media network, USV was able to get in early, leading the company’s $5M Series A in 2007.
USV beat out four other VC firms for the opportunity to invest largely because of their investment thesis. Founders Fred Wilson and Brad Burnham first decided in 2003 that their firm would “have a thesis, stick to it, and evolve it.” It would strictly set out how each fund’s money was spent — no money would be put in a company or sector that didn’t fit the thesis. And, importantly, they would write about it publicly.
USV’s early blog contained its partners’ takes on all kinds of companies and where the internet might be going. When the young USV analyst Charlie O’Donnell got obsessed with Twitter while attending SXSW in 2006, the rest of the firm did too, and Wilson ended up writing a post about it.
Meanwhile, Twitter was suddenly explosively popular and its infrastructure couldn’t handle it. The company had about 250,000 active users and a growing reputation as one of the most unique social networks out there. Presidential candidate John Edwards was tweeting from the campaign trail, and there were fake Bill Clinton and Darth Vader accounts. Local police stations and fire stations were tweeting.
But the service kept on buckling under the strain. The Twitter “fail whale” screen, featuring a whale held aloft by blue songbirds, appeared whenever the network was out of commission. The screen became well-known as a sign that Twitter was having serious scaling problems.
The Twitter team needed to raise money to hire engineers and fix their infrastructure. Co-founders Jack Dorsey and Ev Williams knew they were going to go with USV, because they’d already read about USV’s vision for Twitter on Wilson’s blog, AVC.
In April 2007, Wilson wrote a post where said he saw Twitter as the “status broadcasting system of the internet.” The web doesn’t have one yet, he wrote, and so Twitter “is going to be it.” It would thereby join companies like Amazon, eBay, and Facebook as one of the crucial services across the modern web stack.
Since they were in agreement on the central thesis, they could also agree that both revenue, and a business model, could be figured out later.
Wilson had already written about figuring out a business model “along the way” when he blogged about USV’s investment in del.icio.us. He later used some of the same language to explain the firm’s investment in Twitter:
“As we stated when we made our investment in Delicious, the question everyone asks is ‘What is the business model?’ To be completely and totally honest, we don’t yet know. The capital we are investing will go to making Twitter a better, more reliable and robust service. That’s where the focus needs to be right now. We’ll have plenty of time to figure out the business model and there are many options to choose from.”
Many VCs had already pulled out of potential deals into Twitter, citing the lack of revenue and lack of any plan to get to revenue. Negotiations for a possible acquisition by Yahoo! fell apart over the meager offer made — $12M — and so the need to fix the service’s uptime problems eventually brought Dorsey and company around to USV.
USV understood Twitter’s desires so well that when Dorsey defended the idea of Twitter during those acquisition talks with Yahoo!, he used Wilson’s own language to do it. From Hatching Twitter:
“I see Twitter as a utility,” Jack said in one meeting with Yahoo!. “A broadcasting system for the Internet.” Then he began to describe his vision for Twitter, noting that it was “like electricity.”
While Twitter confused Yahoo! and most VCs, it did not confuse USV. The firm made that abundantly clear on their blog, and when Twitter wanted to raise money, it came knocking.
Founders don’t have an indefinite amount of time to raise money. To the extent that a VC can make their underlying beliefs about the future and their investing thesis clear, they can encourage deal flow from a stronger, more self-selecting group of founders who are confident they’re teaming up with the right investor.
But a thesis doesn’t just help founders find you, it works the other way as well, as a lens that helps firms spot opportunities. For USV, it helps the firm find companies that the investors believe are growing along successful trajectories. Zynga — and its historically massive IPO — is the perfect case in point.
Zynga’s $7B IPO in 2011 made social gaming history — and was an important moment for Union Square Ventures, a Zynga investor, which owned a 5.1% stake worth $285.1M when the company went public.
USV’s success with Twitter was about identifying a nascent network and recognizing that powerful and fast-growing networks like Facebook could create equally, if not more profitable companies that grew atop their platforms.
Zynga was less than a year old when USV led their $10M Series A round in 2008. They were joined on the deal by Avalon Ventures, Foundry Group, and Clarium Capital, as well as by angels like Reid Hoffman and Peter Thiel, among others.
At this point, it was still early for the “platform era.” The idea of building on top of existing social networks wasn’t a no brainer.
But as USV partner Fred Wilson explained, Zynga’s aim to create web-based games on top of social networks was an untapped opportunity. He believed the company could quickly scale the game based on the network effects of existing social platforms.
This idea grew out of USV’s investing thesis: Invest in large networks of engaged users, differentiated by user experience, and defensible through network effects (the fact that networks become exponentially more valuable and unassailable as they grow larger).
“Building a game network on top of the social web is a big idea,” wrote Fred Wilson of USV. “It starts with great games, both real-time like poker and blackjack and turn-based like Scramble. But the most important thing is to plug into the APIs of the various social networks so that you can easily find out which of your friends are online and ready to play with you. Doing both well is hard and to date, no company other than Zynga Game Network has done that with multiple games on multiple networks.”
Zynga was in a good position to scale up their network by using data on consumer behavior to increase user engagement. Andrew Trader, one of the founding members of the Zynga team, says that the company’s focus on metrics is its most important corporate value.
Notably, Zynga pioneered event-based analytics to innovate and add sticky features and mechanics to their games. They also built their own internal analytics platform called ZTrack to do the heavy-duty analysis. In addition, they created models for analyzing the performance of games and features before they launched, so that they could use the behavioral data they gathered during gameplay to begin iterating immediately.
Zynga’s platform across multiple games meant they could collect user behavior across several different interfaces and encourage users to move from one game to another based on the features and behaviors that were most engaging.
Then, they used this data to inform how they monetized customers’ actions in games. Since many Zynga games are free-to-play and involve the purchase of virtual goods with real money, it was incredibly important for the company to figure out what game events and features users would pay to gain access to. They figured this out early by analyzing user data. This helped them to rapidly grow their revenue from virtual goods.
Zynga could echo the growth of Facebook and build a large, engaged network of their own. TechCrunch reported that Zynga had 1.6M daily active users on Facebook in 2008 and was cash flow positive. This is when other companies and investors started paying attention. This led to a $29M Series B led by Kleiner Perkins and Institutional Venture Partners. USV contributed again in this round.
Before Zynga went public, USV made $26M in share sales. Then they struck gold again in the $7B IPO, making for a 75 to 80x return on their money.
With Zynga, USV was one of the earliest investors and most steadfast believers in Zynga CEO and founder Mark Pincus. In comparison, USV’s investment in Lending Club came late. But their decision to invest in a later round with Lending Club provides a model for how a thesis-driven firm must sometimes rewrite their own rulebook.
18. Lending Club
When the marketplace lending startup Lending Club went public in 2014, its IPO was 20x oversubscribed and its stock jumped 56% during its first day of trading.
At the time of its exit, Lending Club had amassed many prominent backers. But it also had one investor that you might not have expected to see — not because this investor didn’t invest in networked consumer startups, but because it normally wouldn’t start investing in a company past the Series A round: Union Square Ventures.
Lending Club raised its $10.3M Series A in 2007 from Norwest Venture Partners and Canaan Partners. It added Morgenthaler Ventures for its $12 million Series B two years later, and Foundation Capital for its $24.5M Series C a year after that. It wasn’t until Lending Club’s $25M Series D in 2011 that Union Square Ventures invested.
By the time of its IPO, Lending Club’s $5.4B valuation translated to a $400M+ return for Union Square Ventures.
USV’s investment in Lending Club is remarkable because it was one of the first times that Union Square Ventures had invested in a late-stage company without having participated in earlier rounds of fundraising.
Previously, they’d limited themselves from considering these companies. They’d held strong beliefs about investing early and maintaining a large percentage of ownership. A late-stage investment obviously didn’t allow this.
USV had been aware of Lending Club since they were first founded. They’d built an online, peer-to-peer lending platform. Investors could come on Lending Club and lend out money, collecting on the interest, while borrowers could get a loan at a lower interest rate than they would from a bank.
They were interested in the idea of peer-to-peer lending, but initially, chose not to invest in the company. The service only seemed to be attracting risky borrowers. Lenders were losing money. There didn’t seem to be anything special that was keeping users around.
But later, Lending Club made changes to their business model that brought the company in line with USV’s thesis focused on network effects. It also opened the door for real growth for Lending Club. In 2011, Fred Wilson and his team decided to invest.
When Lending Club changed the rules on how it vetted new borrowers and lowered its overall approval rate on new loans to just 10%, it seemed to open the doors to virtuous cycles. Its investors started to see far better returns. Usage started to grow. Suddenly, there were real network effects to Lending Club. With more good borrowers, you’d get more good lenders, and the two would, in theory, grow in parallel. USV’s well-known thesis began to ring true for Lending Club:
Large networks of engaged users, differentiated through user experience, and defensible through network effects.
USV invested in Lending Club from the Opportunity Fund, which had been set up earlier that year. In a blog post, USV explained that their Opportunity Fund would allow them to invest more in their current portfolio companies in later rounds, and to invest in the later rounds of companies that they’d been following but were unable to invest in sooner.
Most investors accustomed to investing at an early stage don’t want to get in that late. It’s a lot harder to get solid returns when the first time you invest in a company is during its Series D. But according to Wilson and his team’s thesis —which Lending Club suddenly fit — it was still the early stages for Lending Club’s network-fueled growth. It would be very much worth the premium to get in.
From the time of USV’s investment in 2011 to the time of Lending Club’s IPO in 2014, Lending Club scaled up their lending rate from $20M/month in originations to $500M/month. In their IPO, they raised $870M.
Recently, USV invested in other marketplace lenders by backing a new credit startup called Upgrade. It’s another venture from Lending Club founder Renaud Laplanche. Earlier this year in 2017, USV led Upgrade’s $60M Series A funding round. In a blog post, USV called Upgrade “Lending Club 2.0” and says that they are excited to continue investing in the marketplace lending model.
USV’s thesis has always stayed the same. But a change in circumstances — the company’s direction and the market’s maturity — allowed USV to see Lending Club in a new light. By the time they invested in 2011, they knew they were making an investment that they had conviction about.
The firmness of conviction may sound like a hard-to-quantify feeling, and it is. But it’s crucial. Conviction helps investors to lean in, and in turn gives more support to growing companies. In fact, investor conviction was essential to fueling another company on our list — Genentech.
Genentech, a biotech company founded in 1976, made global headlines when it was acquired by Swiss healthcare company Roche in 2009 for $46.8B. As the company’s very first investor, Kleiner Perkins Caufield & Byers received what now-deceased founding partner Tom Perkins once called “one of the largest payoffs in history.”
Through his relentless effort to make Genentech a success, Perkins himself created a new mold for the entrepreneurial venture capitalist.
In 1976, when Perkins led the firm’s investment in Genentech, there was barely any “biotech” industry to speak of. With no expertise in the subject himself, Perkins had to teach himself the basics. Then he had to vet and doggedly nurture one of the most unusual companies to ever hit Silicon Valley.
All along, he considered it highly likely the investment would be a total loss for the firm. And yet, in the end, he felt it had gone perfectly: “I honestly think that if we had to do it all over again, we’d do it the same way,” he said, “I don’t think we made a single strategic error.”
In the mid-1970s, there was skepticism in both the scientific and VC communities on the commercial feasibility of genetic engineering, Genentech’s main focus. Today, there is no such skepticism. And the wider biotech sector drives hundreds of billions of dollars in revenue every year.
Perkins saw market potential for an emerging scientific field. And instead of relying on validation from other investors or companies, Perkins proactively sought out scientific advice from specialized researchers and used that to inform his investment decisions.
In doing this, he was able to help facilitate the growth of a company that everyone wrote off.
Genentech was started in 1976 by Herbert Boyer, PhD, and Robert Swanson, a venture capitalist and former investor at Kleiner Perkins. Both believed the new technology of recombinant DNA could be used in a mass-market therapy. But common scientific and business opinion at this time said this technology was 10 to 15 years away.
Boyer and Swanson began working together in April and funded their project with $500 each. After living on unemployment and a shoestring for a few months, they sought out investment capital. The two brought an 8-page business proposal to Swanson’s former boss, Tom Perkins.
According to an article from the Wharton School, Perkins did his research before making what might have seemed like a crackpot investment. He identified two technical questions that he felt underpinned the potential success of the company. Then he submitted these questions out to specialized researchers, and didn’t commit his $250K investment until he received positive results.
That began a long history between Perkins and Genentech. Perkins eventually went on to serve as Genentech’s chairman. The New York Times reports that he has called Genentech his favorite investment.
Media outlets like Fast Company have cited Perkins’ investment in Genentech as evidence of the firm’s “uncanny knack for signaling out the next big thing(s).” But this overlooks a key detail of the investment: the fact that Perkins nurtured the company’s unlikely vision from the firm’s very beginning and helped it to become the success that it was.
It also ignores Tom Perkins’ own hands-on work as chairman of Genentech. Perkins was known as a pioneer in the movement for VCs to take larger hands-on management roles in their portfolio companies. According to the Financial Times, Perkins’ other founding partners at KPCB, Frank Caufield and Brook Byers, said: “He defined what we know of today as entrepreneurial venture capital by going beyond just funding to helping entrepreneurs realize their visions with operating expertise.”
One thing that hasn’t changed since Kleiner’s investment in Genentech is the general reluctance, among many Sand Hill Road VCs, to invest in biotech. Unless, that is, the entrepreneurs involved can make their biotech company look like a software startup. That’s exactly how Stemcentrx helped Founders Fund make their first biotech investment their biggest exit ever.
In April 2016, the drug company AbbVie paid $1.9B in cash and $3B in stock to buy Stemcentrx, a small biotech startup. About $1.7B of that was reported to go directly to the company’s largest individual investor, Founders Fund, which invested about $200M in total into Stemcentrx. At the time of the AbbVie deal, the company reached a $10.2B valuation.
Stemcentrx also saw investment from a variety of other investors, many of whom (like Founders Fund) tend not to invest in biotech — among them Elon Musk and Sequoia Capital. Fidelity led the $250M Series G round in 2015.
For Founders Fund, however, this was one of the biggest investments the fund had ever made in a single company. That’s all the more notable due to the fact that Founders Fund is famous for looking for investments in companies and industries other VCs deem too risky. Biotech is a notoriously risky industry, arguably more so than software.
In software, code is always broken for a reason. If you figure out the error, you can make it work again. With human biology, there’s so much we simply don’t know that your entire project could be doomed without your knowledge.
You can put out a minimal viable product of most any software product after a few months and start iterating based on customer feedback. In biotech, you get one shot to make your product work, and you can never fully eliminate the risk that it will simply fail in clinical trials. That’s especially true in the development of cancer drugs, which are more difficult to test than others due to the scarcity of quality cell lines.
In 2013, a paper in Oral Oncology had to be retracted after it was discovered that the widely-used line of cancer cells in the study had been entirely contaminated by HeLa cells. Those cells (known as HeLa because they originated, infamously, in the body of Henrietta Lacks) were used for experiments across the globe before they started proliferating and “taking over” other cells used to study disease.
All around the world, trials have had to be retracted and retraced after discovering contamination in the cancer cells being used for experiments.
For a VC who invests primarily in software, this kind of randomness presents a massive risk. A software startup relies only on code (deterministic, clear) and developing an audience. Over the long term, it can provide unmatched returns on capital. A biotech company can too, but they require more capital upfront — and there’s a high possibility that it will all turn to smoke even with a brilliant team and a brilliant idea.
“You have to get through basic research, preclinical, Phase I, II, and III, and then marketing. So approaching it analytically, the question is how do you discount [the risk of failure at each step]. If you do half on each step, and there are six steps, that’s 2 to the 6th, or 64. So something worth a billion at the end means you start at [a value of] $16 million.
“The thing I don’t like about this as an investor is that the numbers are totally arbitrary. They are just made-up numbers. And our feeling with many biotechs is that people understate these probabilities. They say it’s half, but maybe it’s just one in 10. And even if just one of these steps is one in 10, you are really screwed. I would be very nervous to invest in a company where it gets pitched as a series of contingencies that ‘this has to work, and this has to work, and this has to work.'” — Peter Thiel
In Stemcentrx, however, Founders Fund found “a biotech company that looked like a software company.”
Stemcentrx did everything possible to get rid of those “probabilistic contingencies.” They did things like graft cancer cells into live mice — more expensive than studying them in culture, but far more reliable. Studying cells in culture opens you up to risk that you’re going to discover that you’re working with already-mutated, contaminated cells (like HeLa) without even realizing it.
While it’s more difficult and requires more work upfront to graft cancer into mice, it’s far more likely to generate results that can be extrapolated to humans. Still not anywhere near perfect — but better. The key, for Founders Fund, was seeing that Stemcentrx was devoted to reducing contingencies.
Brian Singerman, who led the investment, outsourced some of the due diligence on Stemcentrx to various biotech experts to ensure Founders Fund wasn’t being taken. He needed someone with experience to explain whether what Stemcentrx was doing could really be a success. When he did, they came back asking if they could invest in the company.
Founders Fund had started out with the same trepidations about biotech that every other investor in Silicon Valley had. They were able to overcome those trepidations by finding a biotech company that acted as if it was a Silicon Valley startup. They went hunting for de-risked investments in a land full of risk — and they found one.
While firms like Founders Fund tend to follow a strategy of finding great companies and allowing them to operate unimpeded, that’s not the only path to success. With Workday, Greylock Partners was about as far from a hands-off partner as you could have. That’s because the company was actually founded by a partner — one Aneel Bhusri.
Workday’s $637M raise at IPO in 2012 was the highest priced venture-backed public offering since Facebook’s. Unlike Facebook, however, which shrunk once exposed to the public markets, Workday’s stock soared from a starting point of $28 per share to about $50 a share on its first day of trading. For Greylock Partners, that meant turning an investment of about $80M into over $700M for a total 9x return.
The confluence between company and VC was strong in this case. Workday co-founder Aneel Bhusri, who was also a senior partner at Greylock, had noticed a huge transformation emerging in consumer technology. He started Workday, in part, as a bet on the idea that the same transformation would be coming to enterprise technology.
Bhusri’s main thesis was that it was becoming increasingly important to build applications with great user interfaces. There were so many options for software out there (and with the cloud, virtually limitless possibilities) that the user experience had to be good. Faced with the choice between a piece of software people wanted to use and one they didn’t—other things being equal—hiring managers would choose the former.
“From the early days we thought of ourselves as a consumer internet technology company from the underlying technologies we used, and we build enterprise applications on top of that,” he said. “I love to use the analogy that Amazon is a very complex order management system and has a nice user interface. There’s no training manual for Amazon, why should there be a training manual for HR and Finance?”
In human resources and finance, you see many intra-organization users needing to access their tools at key points. They need to check their benefits at the end of the year. They need to update their personal information when they move. Since everyone needs to do these things, Bhusri realized, it should be simpler. The same way that products like Facebook and Amazon made previously complicated processes like communicating with friends or buying products off the web simple, Workday would make these HR processes simple.
It was a thesis bolstered by several high-profile B2C investments that Greylock made in the years leading up to the Workday. Previously, Greylock had focused its investments on companies building core internet infrastructure and B2B companies. They invested in companies innovating on semiconductor design, building out broadband networks, and the sort. Then came 2004, and the consumer internet was in full swing. Friendster was fighting MySpace for social network supremacy. The press was obsessed.
Greylock invested in LinkedIn, which raised its Series B in October 2004. They invested in Wink, which raised its Series A in January 2005; Vudu, which raised its in June; and Digg, which raised its in October. They invested in Facebook, which raised its Series B in April 2006. Each of these companies built products that led with easy to use and clean user interfaces. They were intuitive products that didn’t require the user to “figure them out” the way so much pre-Web 2.0 technology did.
In the case of LinkedIn, they demonstrated that you could bring the style and ethos of the consumer internet to bear on the “professional” sphere. People would use a site that looked like Facebook at work if you told them it was for work. The key to adoption was making something people wanted to use.
At Greylock, Bhusri got this insider’s view on just how these products generated their growth — and he could apply their insights to Workday.
Conclusion: There’s no formula for a home run VC investment
After working through the data on the biggest VC exits of all time, we found that some of the best VC deals of all time didn’t come from tactics out of a playbook. They were the result of research, strong convictions, and committed follow-through.
The global startup market is constantly becoming more dispersed and more efficient. Companies come from countries all around the globe. Tools like AngelList have begun to level the playing field when it comes to “finding” the right companies, allowing individual investors to fish through startups for the next Uber or Facebook.
Initial Coin Offerings allow startups and individual investors to connect through decentralized token sales.
Some of the only real clear advantages left are the simplest, and most challenging — doing the research and actually putting in the work to help the companies that you invest in succeed.