Photo: Kevin Krejci via Flickr
If someone told you a personal investment would double next week, you’d be thrilled.But in the venture capital world, a 2X return is not ideal.
A few Instagram investors, Thrive Capital, Greylock Partners and Sequoia Capital, gave Instagram $50 million last week at a $500 million valuation.
Sources say they had no idea it would be acquired one week later for $1 billion, or a 2X return on investment. Facebook swooped in and the deal came together in the last 48 hours or so, sources say.
The firms aren’t exactly upset over doubling the value of their investments in a matter of days. But they were probably hoping for a much higher return when they wrote their checks.
The best funds in history have an average hold time of ~ 7 years per investment. And in most cases, investors seek a minimum of a 3-5X return on their entire fund and often seek returns of 10X+ on individual deals to get there.
It’s unclear how Kevin Systrom, Instagram’s CEO, played his hand. Without the recent $50 million investment, there’s no way its buy price would have been valued at $1 billion. Prior to last week, Instagram had only raised $7.5 million at a valuation north of $20 million. But with $50 million behind it, Instagram could have become a real threat to Facebook. So Facebook panicked and took it out.
It would have been smart for Systrom to turn to potential investors and say, “I’m thinking about selling to Facebook. If you invest now, you’ll double your money and we’ll sell for more.” But most sources indicate that everyone was caught off guard by Facebook’s offer.
Either way, it doesn’t matter. A $1 billion exit is a happy ending for everyone.
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