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Venture Firm Shares a YouTube Jackpot

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The biggest winners in the $1.65 billion acquisition of YouTube by Google are YouTube’s founders, Chad Hurley and Steve Chen, who have parlayed their stakes in the 19-month-old start-up into Google shares that are probably worth... See more » The biggest winners in the $1.65 billion acquisition of YouTube by Google are YouTube’s founders, Chad Hurley and Steve Chen, who have parlayed their stakes in the 19-month-old start-up into Google shares that are probably worth tens of millions. YouTube’s roughly 60 employees are no doubt celebrating as well. But only one venture capital firm — Sequoia Capital — got in on what has turned out to be one of the hottest Internet deals since Google went public in 2004. Sequoia, which is among the most successful venture firms in Silicon Valley, invested a total of $11.5 million in YouTube from November 2005 to April 2006. It may be walking away with more than 43 times that amount. Its stake in YouTube has been estimated at roughly 30 percent, which would give it a value of $495 million. That kind of payday, especially for an investment that is less than 12 months old, is unusual even in Silicon Valley. But it is not likely to rank among Sequoia’s biggest. The firm, which was founded in 1972, has backed a roster of technology superstars including Apple, Cisco, Oracle, Yahoo and Google itself. Sequoia’s go-it-alone investment in YouTube represents the kind of aggressive move for which Sequoia is known. A more traditional and safer approach would have been to share the risk and rewards with other investors. That is especially true with an early-stage investment in a company that since its inception has faced the prospect of costly lawsuits over the copyrighted material that peppers the site. “They had an absurdly high level of confidence with what they were doing,” said Paul Kedrosky, a venture capitalist and author of the blog Infectious Greed. Sequoia did not return calls seeking comment. The connection between Sequoia and YouTube can be traced back to Mr. Chen’s and Mr. Hurley’s days at PayPal. After PayPal was bought by eBay, the two men were looking for a new company to start. They hit upon the idea of a site that would help users exchange video files. In the summer of 2005, the pair showed their site to another PayPal alumnus, Roelof Botha. Mr. Botha, who had been chief financial officer at PayPal, was by then a partner at Sequoia. In November 2005, he agreed to invest $3.5 million in YouTube. Five months later, Sequoia put an additional $8 million into the site. “It wouldn’t be surprising if they owned 30 percent,” said Michael Kwatinetz, a founding general partner at Azure Capital Partners. The fact that the man who is perhaps Sequoia’s best-known partner, Michael Moritz, sits on the board of Google could have given the search giant more insights into the legal risks associated with YouTube, and therefore more confidence in pursuing a deal, Mr. Kedrosky said. The deal by firms that share an investor is right out of the playbook of Kleiner Perkins Caufield & Byers, the venture firm that imported from Japan the notion of a keiretsu, or network of companies with interlocking relationships, Mr. Kedrosky said. “The whole idea of the keiretsu was friends selling to friends,” he said. “The model worked gangbusters for Kleiner Perkins.” Venture firms like Sequoia typically raise funds from large institutional investors like pension funds and university endowments. They then invest those funds in promising start-ups, although they often end up with more misses than hits. At successful venture firms — and Sequoia ranks among the most successful — hits on the scale of YouTube more than make up for the misses. A venture firm makes money only when the start-ups it has financed are sold or go public. It then splits profits among its investors after taking a share, which can be 20 to 25 percent. The YouTube deal was the first major acquisition in the booming Internet video sector. In a conference call, Eric E. Schmidt, Google’s chief executive, called it “one of many investments that Google will be making to make sure that video has its proper place in people’s online lifestyle on the Internet worldwide.” A Google spokesman said Mr. Schmidt was not necessarily talking about more acquisitions. But the prospect of more deals still has See less »

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deal, google, new media, venture capital, you tube

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Venture Firm Shares a YouTube Jackpot

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