“You can’t judge how well-valued a company is by how old it is or how many employees they have. You really have to value the company on how many customers they have and what those customers are likely to be worth.”
This quote from venture capitalist Ben Horowitz in an interview with BizJournals helps explain why the rate of large venture capital deals – those of at least $100m – seems to be increasing. In the first quarter, at least 10 deals of at least $100m involving CVCs have been struck, more than a third of last year’s total of 29.
Notably many of these large deals this year are now happening in China rather than in the US, potentially reflecting its larger market for internet users and competitive ecosystem, and a sharp reversal of previous years.
In the past week have been two such large deals in China.
Tencent, a Hong Kong-listed media company, has agreed to pay $215m to acquire a 15% stake in China-based electronic commerce company JD.com, formerly known as 360Buy.
As part of the deal, Tencent has also agreed to buy stock at JD.com’s flotation for an additional 5% of post-initial public offering (IPO) dilution.
In January, JD.com, which had raised $2.2bn in the past six years from investors including US retailer Wal-Mart, Ontario Teachers’ Pension Plan and Saudi prince Alwaleed bin Talal’s Kingdom Holding Company, filed for a $1.5bn IPO.
Through the latest deal, JD.com will take on several of Tencent’s e-commerce businesses and gain a minority stake in 51Buy.com, known as Yixun, which specializes in consumer electronics.
TutorGroup, a China-based online language learning platform, also raised an undisclosed amount from Japan-based media conglomerate SoftBank’s affiliated SBI Group. SBI’s backing came weeks after TutorGroup raised nearly $100m in its series B round from local online auction company Alibaba Group, Singapore state-backed fund Temasek and venture capital firm QiMing Venture Partners.
The backdrop to such large deals is the speed and scale that relatively young companies can reach.
Last month, Temasek, along with venture capital firm Ceyuan, US-based media group IDG’s corporate venturing unit, and Softbank’s SAIF venture unit invested $100m in China-based Vancl.
Other large deals in China in the past year have been the:
- $120m for app stores Wandoujia from Softbank and including existing investors, VC firms DCM and Innovation Works Development Fund;
- $100m investments in consumer services firm Beijing Xiaoju Technology Company’s series C round;
- December’s $102m investment in transport business *Ehi Auto Services from VC firm Ignition Partners and Ctrip, a local online travel website; and
- the $100m B round for taxi-finding mobile application business Hangzhou KuaiZhi Technology Company in November.
Xiaoju, which makes the taxi-finding service Didi Dache, is backed by bank Citic’s private equity unit and Tencent, while *KuaiZhi was funded from a consortium including Alibaba Group.
Alibaba has also in the past week bought 60% of Hong Kong-listed e-commerce firm ChinaVision Media Group for $804m, and at the end of last year invested $364m investment in appliance maker Haier. Alibaba’s latter investment was spread across Haier Electronics ($124.5m) and its Goodaymart subsidiary ($240m).
Along with the investment in Hong Kong-listed Haier, Alibaba is partnering with its Goodymart subsidiary, which has about 26,000 stores and distribution sites across 2,800 Chinese counties.
Both Tencent and Alibaba have begun to increase their international corporate venturing activity. Alibaba has been using local US banks to help try and source mobile payment entrepreneurs as part of its strategy against Tencent, insiders said, and last year ShopRunner, a US-based members-only online retailer, saw Alibaba buy out online auctioneer peer eBay’s 30% stake for $206m in October.
Tencent was rumoured in November to be interested in investing in California’s Snapchat, and has a large office in the heart of Silicon Valley, Palo Alto.
The dynamics of China’s internet economy being dominated by a handful of companies – Baidu, Alibaba, Tencent and Sina – is similar to the battle between Facebook, LinkedIn, Amazon, Google in the US, although the size of the US economy and its longer free-market development means more traditional companies are also providing more effective competition.
Newswire Reuters, in a piece on why Tencent partnered with JD.com, said Tencent took aim at dominant rival Alibaba’s Achilles heel – its weakness in mobile and was “a move set to reshape the country’s [$180bn] e-commerce industry”.
Its importance was because JD.com now had “a headline slot on Tencent’s WeChat app that dominates China’s smartphones, an entry into eBay-style consumer-to-consumer shopping and a backer with the muscle to help it make the most of a logistics infrastructure that Alibaba lacks”.
Outside of China, a similar potential for ecommerce saw India-based SnapDeal raise $134m in February and Malaysia-based Lazada, which operates ecommerce sites across Indonesia, Malaysia, the Philippines, Thailand and Vietnam, raise $100m in June and a further $250m round led by UK-based retailer Tesco in December.
Press reports said Tesco might also invest in Lazada’s peers from the Rocket Internet incubator operated by Germany’s Samwer brothers, including Lamoda in Russia, Namshi in the Middle East, Mobly in Brazil and Jumia in Africa.
But the US has seen a number of large deals this year, including
- enterprise intelligence service Domo’s $125m;
- $101m for IT infrastructure provider Nutranix;
- View, formerly called Soladigm, in which Madrone, a fund affiliated with the Walton family of Wal-Mart Stores, invested $100m as the largest for a private clean-tech manufacturing business backed by venture capital in more than 12 months; and
- One Kings Lane, which raised $112m from Mousse Partners, two “global institutional investors” and all existing investors, including Scripps Networks Interactive, Kleiner Perkins, Greylock Partners, IVP and Tiger Global Management.
Horowitz put it: “The change in the size of the end markets has been real. Facebook is 10 years old and they are doing $10bn in revenue this year. That kind of defies the laws of business physics up until this point. I don’t know of another company that at 10 years old got to $10bn in revenue.
“The reason for that is that in 10 years they got to over a billion customers. Nobody had ever done that before. WhatsApp [which Facebook has agreed to buy for $19bn], which is talked about as kind of the ‘overvalued’ thing of the day — and I am putting quotes around overvalued because it’s not what I think, it’s what people are saying — they got to 450 million customers in literally no time and they are adding a million customers a day. That’s just different.”
The global nature of the internet as a platform for communication through letting people to effectively all use it in the same way, adjusted for cultural preferences, allows businesses to become international from day one if they meet a need. SoftBank has been active in the games and education business sectors around the world, investing in Japan’s GungHo Entertainment, using its Softbank Ventures Korea corporate venturing unit to back US-based studio Turbo and paying $1.53bn for a 51% stake in Supercell, the Finland-based company that makes Hay Day and Clash of Clans.
And this platform for growth is expanding, creating new opportunities.
In his interview, Horowitz, a former manager at internet service provider Netscape, said: “The thing that people miss is that in 1998 Netscape had a 90% share of the browser market share and we had 50 million customers. So there were 55 million people total on the web. Today there are 2.5 billion. Back in those days, half of those 55 million were on dial-up. What kind of business could you build on that? It’s just not the same scale of business that we have today with 2.5 billion on the internet. And that is going to grow to 5 billion.”
Chinese and American users dominate the current internet but future growth is likely to come from other, emerging markets given Sino-US penetration rates are about 75% and 90%, respectively.
This globalisation of the internet is boosting the rate of large dealflow. There were 29 deals of at least $100m in size last year involving corporate venturing units versus 25 in 2012, according to Global Corporate Venturing.
More recent large deals have come in enterprise IT and ecommerce rather than clean-tech that were in 2012’s list:
Woodman Labs, Intarcia, Deezer, Square, Fisker, A123, Flipkart, Neotope, Adeptra, Mapper Lithography, Xiaomi, Nook, Pinterest, Castlight, Sapphire Energy, Legendary Entertainment, Harvest Power, Conduit, Evernote, Monitise, Lifelock, Greatpoint Energy, Avila Therapeutics, Trendy and Tamar Energy, according to Global Corporate Venturing.
And while the majority of large deals involve corporate venturing units, particularly in North America, other large deals occur without a corporation being involved including:
- AirWatch, which helps enterprises manage software and ensure networks are secure, raised $200m in its A round in February last year, led by venture capital firm Insight Venture Partners, and added another $25m to in May from VC peer Accel Partners;
- Juno Therapeutics, a spin out of the Fred Hutchinson Cancer Research Center, Memorial Sloan-Kettering Cancer Center and Seattle Children’s Research Institute, which closed a $120m round in early December from the three research centres, VC firm Arch Venture Partners and the Alaska Permanent Fund;
- Wayfair’s $157m round primarily from mutual fund managers such as T Rowe Price; and
- Canada-based Shopify, which raised $100m to expand its software for retailers to use in their physical stores from Omers, the pension fund for Ontario municipal employees, along with VC firms Bessemer Venture Partners, FirstMark Capital, Georgian Partners and Felicis Ventures.
But the importance of corporations in high-value deals is clear, as a number are increasingly involved in minority deals in high-valued companies, such as Renaissance Learning, a K-12 assessment and learning analytics company based in the US that received $40m from Google Capital at a valuation of $1bn. This week, private equity firm Hellman & Friedman agreed to buy Renaissance for $1.1bn, a deal that includes the Google Capital stake, but the companies are discussing a potential investment by Google in the H&F-owned entity, according to newswire Reuters. The companies are also discussing continued collaboration between Google Play and Renaissance, the newswire added.
However, as a New York Times piece on rise and fall of $1bn-valued companies makes clear, backing high-valued and/or large-round deals can be a recipe for poor financial returns, although it might spur larger exits. Research by news provider Wall Street Journal in a piece on increasing trade acquisitions of VC-backed companies identified 20 in 2013 versus 11 in both 2011 and 2012.
VC firm Correlation Ventures’ data published by LifeSciVC here showed that of the 7976 exits during the 2003-2013 period, the top decile (821) generated a five-times return or greater. The annual trendline is getting better as, according to Correlation Ventures, an average of 29 companies per year delivered over 10x multiples for at least one VC, but the figures in 2010, 2011, and 2012 were 40, 35, and 63, respectively. But only about 6% generated net gains for at least one investor of over $50m, implying that lots of 5x deals were multiples of small amounts of capital.
And, more broadly, corporate-backed companies have seen relative success versus peers just backed by VC firms.
According to data provider CrunchBase in November, a full third of venture-backed companies that have received funding from at least one corporate venturing investor have been acquired, compared to just 10% of startups only receiving funding from VCs.
This seems to be partly reflected in the VCs’ fundraising statistics.
Venture capital funds distributed $6.3bn to limited partners in the third quarter but capital calls were about half this rate, according to consultants Cambridge Associates. Cambridge said venture distributions rose 25%, boosted by a healthy exit environment and strong aftermarket performance for newly public companies, although skewed to deals done in six vintage years – 2000 and the years 2004 through 2008, which accounted for more than three-quarters of distributed capital.
Table: Deals of at least $100m since January 2013
Mar
JD.com, formerly known as 360Buy (China)
In Feb
Snapdeal (India)
Domo (US)
Tutorgroup (China)
Vancl (China)
In January:
Nutranix (US)
Wandoujia (China)
Didi Dache (China)
One Kings Lane (US)
View, formerly called Soladigm (US)
December:
Ehi Auto Services (China)
Box (US)
Lazada (Malaysia)
Haier (China)
Nov
Spotify (Sweden)
Hangzhou KuaiZhi Technology Company (China)
Oct
Pinterest (US)
MongoDB (US)
Evolent Health (US)
ShopRunner (US)
Aug
Uber (US)
Pure Storage (US)
July
Mobileye (Netherlands)
Flipkart (India)
Cloudary (China)
Acetylon (US)
June
Fab (US)
Ibibo (RedBus) (India)
LaModa (Germany)
Skyonic (US)
May
Autonavi (China)
Bloom Energy (US)
Lending Club (US)
Zalora (Singapore)
April
Pivotal (US)
Mar
Mesoblast (Australia)
Feb
360 Buy (China)
Pinterest (US)
Jan 2013
Surveymonkey (US)
Source: Global Corporate Venturing