Question of whether senior management can invest counter-cyclically and stay the course if the investment thesis remains true even if economic conditions turn sour.
This week’s Big Deal analysis looks at perhaps the hardest art in venture investing: when to sell and when to stick.
According to Ancestry.com, internet service provider AOL, computer server maker Compaq (now owned by Hewlett-Packard), and chip company Intel all have a common relation in their family tree; Miss. D. Opportunity.
The US-based family timeline website Ancestry.com agreed earlier in the week to be acquired by private equity firm Permira Advisers. Set to make multimillionaires out of Ancestry’s chief executive and chief financial officer, the deal is reportedly worth $1.6bn, with Permina and other investors supplying $503m in equity according to an SEC filing at the regulator.
On the surface of things, most would think Intel, which came in during a $10m series A round in 1998, and AOL and Compaq, which the Utah state-based firm attracted $33.2m from in series B funding the following year, may be reaching for the champagne.
Unfortunately for the corporate venturing units, the firms collectively sold shares in the genealogy website in 2003 and 2004 to private equity firm Spectrum Equity, according to news provider PEHub.
In 2009, Ancestry went on to host a very successful flotation, which saw it break its target of $100m by a further $15m. By mid-2011, the stock went on to triple in value, and went onto retain most of that value ahead of its acquisition, which will be taken private at $32 a share, delivering a 10% premium on Friday’s closing price of $29.18.
Spectrum, which owned 31.1% of the firm (worth around $424m) ahead of the acquisition following secondary offers in 2010 and 2011, is looking at making seven times its original investment in Ancestry. Its initial estimated investment of $113m is now worth $784m in realised and unrealised gains, according to PEHub.
In hindsight, the corporate investment would’ve likely grown in similar fashion. But hindsight can be fickle as, conversely, online retailer Amazon looks to stick to its corporate venturing guns despite its earnings for the third quarter, which the firm released this week, revealing figures below analysts’ expectations.
The company said: “Net loss was $274m in the third quarter, or $0.60 per diluted share, compared with net income of $63m, or $0.14 per diluted share, in third quarter 2011. The third quarter 2012 includes a loss of $169m, or $0.37 per diluted share, related to our equity-method share of the losses reported by LivingSocial, primarily attributable to its impairment charge of certain assets, including goodwill.”
Although the $169m hit on LivingSocial isn’t exactly cause for celebration, certainly when compared previous talk of a $15bn valuation for the business, Amazon looks to take it in its stride, simultaneously reporting $13.2bn in revenue (which marks a growth of 27%).
If anything, the loss demonstrates that while a corporate is exposed through venturing, it is in a stronger position to bounce back than others as long senior management can invest counter-cyclically and stay the course if the investment thesis remains true even if economic conditions turn sour.