I'm really confused, auralex - what are you not getting about what I'm saying?

If you're saying that the Sequoia GP is psyched because he made 2x in a week, you are dead wrong. If he went in with eyes wide open knowing he'd only get 2x... his limited partners (the guys who you know capitalize his fund) would be pissed. This is especially if he invested thinking he had 10x in the bag- because now, he has to go find that 10x, which is really difficult to do.

Now, if you're saying that the Sequoia GP is psyched because he didnt' lose money on the investment.... ok, that's probably not exactly true, but making some money vs. losing some is alwasy better, I can agree with that!

(Caveat: I will say I could envision a "relationship" investment from Sequoia here, knowing they'd only get 2x but supporting the whole FB venture ecosystem, seems def plausible - but it woiuld not be for economic fund driving reasons.)

Hm - I'll take one more stab at explaining what I mean, sorry if this is confusing.

The singles and doubles in a venture portfolio (like Instagram is to say Sequoia's fund) are not *meaningful* drivers of the economics. They are obviously positive economics, but not enough to be a driver in the overall fund performance. That is what is meant when you describe somethihng as a "homerun" model. So sure, it's def better to be in the "singles/doubles" bucket vs. the "fail" bucket, but it doesn't really make much of a difference in the fund economics at the end of the day (based on the rate of return venture promises investors).

Now, if Rothko were correct, and venture capital partnreships were structured as an open-ended investment vehicle (meaning Sequoia could reinvest their double up in Instagram), you guys would be more correct for sure. But that's not how it works.

I understand what you're saying, we just disagree...

You can't look at it in terms of 10x, 20x, 2x...you have to look at ROI,,,use actual dollar amounts.

Do you think a firm as sophisticated as Sequoia didn't have a good idea that this was going to happen? These negotiations were occurring concurrently, FB had been talking about acquiring Instagram since last summer,,Sequoia was neither blindsided nor disappointed in the result...I guess we'll just have to agree to disagree

aura - I am probably overstating my "zomg it's a homerun model!" point... I have a CFA... haha I mean I get the mindblowing IRR on making 2x your money in a week. I think Sequoia dropped $25 mil? Yeah... not too shabby...

I'll ask around to my former venture colleagues... I'm sort of curious myself would be cool to hear some inside baseball on how this deal went down.

(Fwiw IRR is the preferred metric over ROI for venture firms...)

Note: was Sequoia the lead first roundi investor as well? I'm assuming Sequoia only provided follow on capital in the most recent round of finanicng (hopefully taht is obvious from the above.)

There are probably a hundred different ways to value FB's stock. You are simply assuming they use the one that is most transparent to you.

In a vacuum, "company X" and not knowing the performance of the fund as a whole, 2x return is ok (ie, LP's are content). When considering the company is Instagram and their growth rate and the LP's exit potential, the LP's can't be pleased.

Initial investors: Benchmark Capital, Adam D’Angelo, Jack Dorsey, and angel investors Chris Sacca of Lowercase Capital and Steve Anderson of Baseline Ventures.

Sure, no one can argue with that.

I'm probably missing something basic you're addressing - you said something like "well we don't know what the equity portion of the Instagram acquisition is worth"... but instagram does. And FB does. Sure, it's more of a negotiation because it's not publicly traded, but I doubt the Instagram founders got screwed on the equity portion (is that what youre implying?) in large part because there is at the very least a secondary market around FB shares. I mean, if anything, the founders have some serious upside in FB equity and probably wanted it weighted more to that v. cash. If you think the FB IPO won't be successful, I guess the equity piece is more scary... but I think owning a piece of FB and geting in today is probably a good move...

This is all I was trying to say! Ty for being more succinct than me.

Thanks. Jack Dorsey's public persona seems sort of d-baggey but damn can this guy pick/found companies.

WTF? How can you say 100% return in a week is not good? That is 5200% annualized return. Also, VCs investments are not all homeruns or nothing. There's usually a bunch of nadas a couple 2x or 3x their money over a period of YEARS and a couple homeruns. For a company with no business model and nada for revenue, do you really think they were going to go from a 500M company to 5B in a year?

lol jfc i forgot - FB filed a freakin' S-1

http://sec.gov/Archives/edgar/data/1...d287954ds1.htm

Pretty sure there are ways for 2 parties (in conjunction with a secondary market of trades, as well as private FB investors who have paid in at valuations during the past) to come to an agreed upon, and fair FB valuation today...

Yes - no one said they were all homeruns. They need the homoeruns to drive any return whatsoever because the failure rate is like 80% for early stage startups, and a couple 2x or 3x doesn't cut it. So if you put your capital to work in a potential homerun, and it gets quickly snapped up and you only make 2x... you can see how that would be disappoinitng?

You have to imagine if FB snapped it up with a 100% takeover premium today... and with Instagram growing their userbase wildly... even with zero revenues but say double the users six months from now, and a very tarnsparent market of buyers (Google, FB)... I think it could be worth much more, so the below still stands, imo.

fb stock was selling at about 100 bil valuation a week ago on sharepost fwiw

2x return is pretty good for a company considered wildly overvalued a week ago with no signs of knowing how to monetize

also mobile hasnt been advertiser friendly platform yea, could be years before advertising catches up ...but i do agree if instagram shows wild growth like it ht has , it had potential to be worth more , still a big if .

edit / semigrunching on my phone hvent read all previous posts

Agreed. And we don't know what it is. We only know this $1B that they are putting out.

All I'm saying is that if Facebook comes to you and says "Here's $200M in cash and 0.5% of our company, and that's $1B of value," much like if someone asks if you are a God, you say "Yes!"

it's actually a 450359962737049500% annualized return. annualized return is clearly the relevant metric here.

I would disagree only because the monetization wasn't the metric defining Instagram's takeover price. It was users. Just like with Netflix, whose entire valuation runup was 100% based on increased subscribers, and not their 1) financials or 2) the fact that their business model was very threatened.

I work in TV these days, and focus on distribution where we're learning to monetize ads across all platforms - I am fairly sure everyoen and their mother is wildly overvaluing the "mobile monetization opportunity" from an advertising dollars perspective. I think the one thing people always miss is that companies are not going to spend more (as a total universe of dollars) on advertising. It's just huge market shifts, and there's only so many ad dollars to go around.

Haha yeah - I'm pretty sure I missed your basic point in my crazy zomg homerun model spiel, thanks for the clarificaitno.

Aloysius is right. We all recognize that 2x in a week is awesome in a vacuum, but it isn't great as a VC investment.

Imagine that a fund makes 25 investments of equal size. Out of those the results are as follows:

5 are zeroes
5 are 1x
4 are 2x
4 are 5x
4 are 10x
3 are 25x

The net result of all of this is that you have made 5.9x your initial investment which would be solid performance.

Lets assume you were hoping for a 25x return on Instagram and only end up with 2x so you now only have 2 total 25x investments. This means that your return falls by 0.9x to 5.0x. Even if you had only hoped for a 10x on Instagram your return still falls by 0.3x to 5.6x.

If this happens a couple of times a 25% IRR can quickly fall into the low double digits and is even more exacerbated if Instagram was a significantly larger that the funds usual size.

Obviously a 2x is much better than a 0x but in terms of overall fund performance isn't ideal given they can't reinvest the proceeds.

This is super results oriented, it's not like some you expect to be 25x and some to be 0x. You expect all of them to be homerun potentials. You need to subtract 5.9x or whatever the EV was, not what your hoping for on Instagram.

Chris Sacca aint' bad either: Twitter, Uber, Turntable.fm, Oink, Facebook, bitly, and many more.

Check out this old interview with Instagram CEO. The interview is only weeks after Instagram started in 2010.

What is interesting is how Systrom states that all social networks start with a small niche audience, in Facebook's case university students and in his case photographers. Does that mean he thinks Instagram may become a social-network-to-be for mobile?

lololol at 5.9x being "solid performance"

You would become a name VC and never have trouble raising another fund.

Google had to pay $1.65 billion for youtube back in 2006. Makes this Instagram deal sound even more crazy.

I know that have been planning to expand to include video clips on top of photos.

Sorry, but you are wrong. Referring to 5.9x as "solid" is completely appropriate.

Elite venture firms routinely return >>10x multiple on their funds with 100%+ IRR. Those are the guys that will never have trouble raising money.

There are plenty of independent, easily available studies done on venture fund LPs (it's harder to get the stats from the top venture firms, but I have seen them for most of the top shops vintages 1996 through mid 2000s, as I had access to these stats when I worked in venture). If you should pull these venture LP studies, you will see stats like 4x-6x as averages for the industry for the funds they were in.

For the 1996/1997 vintage funds... the multiple and IIR industry averages are insanity - IIRC the *entire* venture industry returned >10x for for those vintage year funds.

sorry for my stupid question: if your talking about the stock part I get it, but why can't they reinvest the cash part?