Groupon just bought Pelago, the maker of iPhone app Whrrl, which tried to compete with Foursquare and didn’t get very far.
Pelago’s first investor was famed Silicon Valley VC firm Kleiner Perkins, which is also an investor in Groupon.
It’s a great example of “parking”, a crucial VC skill that VCs don’t like to talk about.
What is parking? It’s finding a good acquisition for a startup that didn’t do as well as you expected.
Venture capital is described as a “hits business” and that’s true enough: a few exits produces the majority of the returns. 80% of VC profits comes from 2% of deals, a top European VC told us.
But that’s only part of the story. A rule of thumb is that to be considered a good performer, a VC fund has to return three times its capital. But in many a VC fund, while 2X will come from the big hits, the third piece will come from smaller “long tail” exits, which individually might not make a big difference to the fund, but when added up can make or break it.
So “parking well” is a very important VC skill. And it comes down to the VC to park a company that hasn’t been performing as well as expected, because most often they’re the ones who have the industry relationships and the M&A experience, not the entrepreneurs.
VCs don’t like to talk about parking because they’d much rather talk about helping startups grow into huge blockbusters than mitigating losses on underperforming investments.
And Kleiner Perkins is known in the industry for being great at parking.
In a talk at Stanford, when talking about how VCs need to be good at finding exits for their companies, straight-talking VC Mark Suster phrased it thus: “Are you Kleiner? Can you get $400 million for ngmoco when it probably wasn’t worth it?,” adding jokingly: “Oh, maybe it was worth it.”
The point here isn’t to diss mobile gaming company ngmoco (your writer enjoyed many wasted hours on Rolando, one of their hit games), but it pivoted several times in search of a business model and when the acquisition happened, many eyebrows were raised at both the price and the acquirer, DeNA, a big Japanese gaming company that had done practically no US acquisitions to date.
In the case of Pelago, it probably works out for everyone. Groupon gets a great team who understands mobile, one of its big growth areas. The entrepreneurs get pre-IPO stock options into one of the hottest companies on Earth, and maybe even some cold hard cash if they weren’t too diluted and/or didn’t have too harsh liquidation preferences. Kleiner gets a small but valuable notch on its belt and helps talented entrepreneurs get a good save, who probably won’t forget that the next time they go raise money.
Parking is crucial for VCs, and Kleiner shows how it’s done. Kudos.
Another Crucial VC Skill? NO CONFLICT, NO INTEREST: John Doerr, Twitter And The Raise Of Private Secondary Markets →
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