These venture bets on startups that “returned the fund,” making firms and careers, were the result of research, strong convictions, and patient follow-through. Here are the stories behind the biggest VC home runs of all time.
In venture capital, returns follow the Pareto principle — 80% of the wins come from 20% of the deals.
Great venture capitalists invest knowing they’re going to take a lot of losses in order to hit those wins.
Chris Dixon of top venture firm Andreessen Horowitz has referred to this as the “
Babe Ruth effect
,” in reference to the legendary 1920s-era baseball player. Babe Ruth would strike out a lot, but also made slugging records.
Likewise, VCs swing hard, and occasionally hit a home run. Those wins often make up for all the losses and then some — they “return the fund.”
Please click to enlarge.
Fred Wilson of Union Square Ventures recently wrote that for his fund, this translates to needing at least two $1B exits per fund:
“If you do the math around our goal of returning the fund with our high impact companies, you will notice that we need these companies to exit at a billion dollars or more,” he
is the important word. Getting
at a billion or more does nothing for our model.”
We analyzed 40 of the biggest VC hits of all time to learn more about what those home runs have in common.
To do so, we pulled data and information from web archives, books, S-1s, founder interviews, the CB Insights platform, and more.
For each company, we dove into the remarkable numbers they posted before their IPOs and acquisitions, the driving factors behind their growth, and the roles of their most significant investors. Below, we’ll show you our analysis on each specific case.
Note: Unless specifically stated, the “returns” discussed in the sections below are calculated based on the nominal value of the company at IPO or at acquisition. Earn-outs (such as those that apply to, for example, Stemcentrx) and lockups are not factored into those calculations.
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Facebook’s $22B acquisition of WhatsApp in 2014 was (and still is) the largest private acquisition of a VC-backed company ever. It was also a big win for Sequoia Capital, the company’s only venture investor, which turned its $60M investment into $3B.
Sequoia’s success was built on its exclusive partnership with WhatsApp founders Brian Acton and Jan Koum.
Typically when early-stage investors put cash into a company, they want to bring on additional investors to drum up more buzz and validate their investment. Startups can end up with as many as five or six different VCs in their cap table. This is common enough that these rounds are often referred to as “party rounds.”
WhatsApp and Sequoia Capital followed a different strategy: Sequoia was the sole investor in WhatsApp’s $8M Series A round in 2011, which valued the company at $78.4M.
Sequoia was the sole investor in the subsequent Series B round as well.
WhatsApp’s founders are known to be iconoclastic. For example, pretty early in the company’s history, they wrote a manifesto against advertising and vowed they would never make money from placing ads in the service and mucking up users’ experience with the app.
So it’s not shocking that they chose to cultivate a single VC as an outside source of capital while raising only $60M of outside equity financing.
Sequoia, for its part, signaled its conviction in WhatsApp’s bright future even as the app scaled to hundreds of millions of users with negligible revenue.
When firms invest with that kind of conviction, they get a large share of ownership — as opposed to when they join a deal with a crowded field of other VCs.
For example, by the time Twitter had raised $60M, it had brought in well over a dozen outside investors. At exit, lead Series A investor Union Square Ventures owned just 5.9% of Twitter.
WhatsApp vs. Twitter funding
# of investors
# of investors
# of investors
In contrast, WhatsApp had expressed a desire to only work with a single firm from the beginning.
Sequoia’s well-known trajectory as a Silicon Valley kingmaker and its deep pockets helped it beat out micro-VC fund Felicis Ventures and others for the deal. After an initial $8M investment in WhatsApp’s Series A in April 2011, Sequoia put in an additional $52M in July 2013.
WhatsApp funding & valuation
When Sequoia invested that additional $52M at a $1.5B valuation, WhatsApp was doing $20M in revenue — meaning Sequoia paid for their shares at an eye-popping 75x+ revenue multiple.
It paid off. By the time Facebook acquired WhatsApp for $22B, Sequoia had invested a total of $60M for around 18% ownership. Their share was worth more than $3B, a 50x return overall.
For Sequoia, the fact that WhatsApp was acquired by Facebook was a satisfying win for another reason.
Ten years prior, Mark Zuckerberg (egged on by Sean Parker, who held a grudge against partner Michael Moritz) had shown up deliberately late to a pitch meeting with Sequoia.
The meeting was meant as a prank — Zuckerberg never intended to let Sequoia invest. He arrived in his pajamas and presented a Letterman-inspired anti-pitch deck entitled “The Top Ten Reasons You Should Not Invest.”
“I assume we really offended them and now I feel really bad about that,” Zuckerberg later told journalist David Kirkpatrick.
Making $3B+ off selling WhatsApp back to Mark Zuckerberg surely took some of the sting off that memory. As well as not being invited to invest in another one of the top VC deals of all time — Facebook.
Facebook’s $16B IPO at a massive $104B valuation was a huge success for early investors Accel Partners and Breyer Capital. The firms led a $12.7M Series A into Facebook in 2005, taking a 15% stake in what was then called “Thefacebook.”
At the time of the investment, the company had what was considered a sky-high $87.5M valuation.
It wouldn’t be until almost exactly one year later that investors really started flocking to the early social media startup.
In 2006, amidst high user growth and revenue numbers, several firms took part in Facebook’s Series B: Founders Fund, Interpublic Group, Meritech Capital Partners, and Greylock Partners backed the $27.5M round, which put Facebook’s valuation at $468M.
Even after selling off $500M in shares in 2010, Accel’s stake was worth $9B when Facebook went public in 2012, ultimately giving Accel Partners an enormous return on its investment. This bet made Accel’s IX fund one of the best-performing venture capital funds ever.
It was also a bet that Peter Thiel, the very first investor in Facebook, missed out on.
Thiel became an outside board member with his $500K seed investment in Facebook in 2004. At the time, Facebook had what Thiel called “a very reasonable valuation” and about a million users.
Thiel saw Facebook’s unprecedented popularity firsthand. He didn’t invest again alongside Accel and Breyer simply because he felt the company was overvalued. When Facebook raised its subsequent Series A just 8 months after Thiel’s initial investment, he (and much of Silicon Valley) felt that Accel had vastly overpaid.
Thiel made a classic misstep: he failed to perceive exponential growth.
For context, Facebook would turn out to actually look
at IPO in retrospect, when its IPO valuation to trailing revenue ratio is compare to that of later exits Twitter and Snap.
Thiel would later call missing out on the Facebook round his biggest mistake ever — and the one that taught him the most about how to think about a company that “looks” overvalued. As he later wrote,
“Our general life experience is pretty linear. We vastly underestimate exponential things. . . When you have an up round with a big increase in valuation, many or even most VCs tend to believe that the step up is too big and they will thus underprice it.”
Today especially, it can be hard to see how Facebook was ever “overvalued.” While Facebook’s 2B active users is impressive, the company’s early exponential growth is even more impressive.
On the other hand, imagine looking at Facebook’s monthly active user growth from the perspective of a potential investor in their Series C in 2006.
With the data points you had available then, Facebook did not look like a sure bet:
Facebook had about 12M users as of 2006, when it was still focused on the college market. Given that between 15 – 20 million people attend college every fall, there was still a reasonable chance (at this point) that Facebook would remain in an academic niche and fizzle out when introduced to the wider world.
Investors had no way to know that people would stick around after graduating. They couldn’t know it would catch on outside academia, and later, in other countries. That’s why Accel and Breyer’s investment at $87.5M seemed like an overvaluation to Thiel and others.
For Thiel, in hindsight it’s clear Facebook’s growth wasn’t following a predictable, linear model. In fact, because it was actually growing exponentially, and the company was
“Whenever a tech startup has a strong round led by a top-tier investor (Accel counts), it is generally still undervalued. The steeper the up round, the greater the undervaluation,” Thiel later wrote.
Of course, Thiel is in part being provocative. It’s also possible for there to be pricey rounds that don’t shake out.
It comes down to conviction. An investor must have strong convictions about a company to follow on in the face of a steep valuation jump.
When you have strong convictions, you can do whatever you need to do to expose yourself to as much of the upside as possible — as Eric Lefkofsky did after he helped found Groupon.
Groupon’s IPO in 2011 was the biggest IPO by a US web company since Google had gone public in 2007. Groupon was valued at nearly $13B, and the IPO raised $700M.
At the end of Groupon’s first day of trading, early investor New Enterprise Associates’ 14.7% stake was worth about $2.5B. But the biggest winner from that IPO was Groupon’s biggest shareholder, Eric Lefkofsky.
Lefkofsky had been involved in Groupon as a co-founder, chairman, investor, and biggest shareholder. He positioned himself on both sides of the Groupon deal through various privately-owned investment vehicles and management roles. The way he did this was controversial. In the end, however, he owned 21.6% of the company. When Groupon went public in 2011, his share was worth $3.6B.
It all started when Lefkofsky helped get Groupon off the ground. He met Groupon co-founder Andrew Mason when Mason started working for Lefkofsky doing contract work. In 2006, Mason told Lefkofsky about his idea for a crowd-sourced voting site called The Point.
In 2007, Lefkofsky and Brad Keywell seeded The Point with $1M. By 2008, The Point was struggling. Lefkofsky noticed some users had used the platform to buy something together in a big group and get a discount. Seeing that this one-off use case could spin out into a much more successful business, Lefkofsky helped Mason pivot The Point into the company that we know as Groupon.
Groupon’s subsequent rounds of funding saw the company bring on New Enterprise Associates (NEA) for its Series A, Accel for its Series B, DST for its Series C, and Greylock Partners, Andreessen Horowitz, Kleiner Perkins Caufield & Byers, and more for its $950M+ Series D. But none of those investors did as well as Lefkofsky at IPO.
Eric Lefkofsky, Brad Keywell
Battery Ventures, Holtzbrinck Ventures, DST Global
Lefkofsky amassed 21.6% of the company by the time of the IPO, 1.5x more than the second-largest investor NEA, and 2.8x what co-founder and CEO Andrew Mason received.
In his roles as co-founder, chairman, and earliest investor, Lefkofsky assumed the plurality of ownership in the company and saw astronomical returns.
Ownership at IPO
Lefkosky cashed out part of his stake early on. $120M of the $130M Series C round and $810M of the $950M+ Series D round went to stock redemptions for existing shareholders.
Lefkofsky received $386M of that amount via two of his investment vehicles, Green Media LLC and 600 West Partners II LLC. What’s more, he only paid $546 in total for those shares, turning literally hundreds of dollars to hundreds of millions in pre-IPO redemptions — and later, billions at IPO.
Lefkofsky’s position as both co-founder and investor may sound like an unusual strategy, but “playing for both sides” is actually a longstanding practice in Silicon Valley. In the 1990s, it was the model behind the huge success Kleiner Perkins Caufield & Byers had with the telecommunications company Cerent.
When Cisco acquired Cerent in 1999, the $6.9B deal was the biggest acquisition ever for a tech company. And for Kleiner Perkins Caufield & Byers, which invested $8M in the company, it resulted in a huge multibillion-dollar payday.
Cerent sought investment from a few other firms for its Series C and D rounds — including Norwest Venture Partners, Integral Capital, Advanced Fibre Communication, TeleSoft Partners, and Kinetic Ventures. Meanwhile Cisco invested about $13M to acquire 8.2% of the company pre-acquisition.
No investor did better, however, than Kleiner Perkins Caufield & Byers, whose 30.8% stake became valued at about $2.1B after the stock switch.
Notably, Cerent itself was co-founded and led by Kleiner Perkins partner Vinod Khosla. In this, there were parallels to an earlier Kleiner Perkins home run, Genentech. Genentech was co-founded by Robert Swanson, who was also a former Kleiner Perkins partner.
Thanks to Kleiner Perkins’ reputation and deal flow, Khosla knew the best engineers in Silicon Valley, and he had a keen awareness of what the market needed. The idea for Cerent practically walked into his office; he just needed to find the right people to execute on it.
It started with Raj Singh, who came to Kleiner Perkins Caufield & Byers in 1996 with an idea for a special Java-specific computer chip. Khosla, who’d invested in Singh’s previous company NextGen, was merely “lukewarm” to the idea. But he had another idea he wanted to pitch to Singh.
“Mr. Khosla told me there was no money to be made in Java, but we talked about doing a [optical] hardware box,” recalled Singh.
Khosla’s view was that the sharp increase in Internet traffic would create a market for a device that could handle large amounts of voice and data.
Khosla had been able to see, from his experience as a VC and from the various companies that came through the Kleiner office, that telecom networks were changing. There was an opportunity to provide a better solution to the problem of connectivity — something cheaper and more flexible that could respond to growing demand.
What Cerent’s technology did was help connect long-haul communications lines and the local telephone and data network. This made it faster and easier for phone companies to transmit data.
And as the number of internet hosts increased, according to a study by the Internet Systems Consortium, the need for efficient optical network technology did, too.
Kleiner Perkins’ 1998 investment marked the beginning of an optical technology bubble, where company valuations skyrocketed and investments flowed. Singh and Khosla staffed out the rest of the company, and within two years, Cisco had purchased them for $6.9B.
As one analyst put it, “Everyone looked at Kleiner Perkins Caufield & Byers’ $8M investment in Cerent, and its returns, and it was difficult not to hear the
Both Lefkofsky (with Groupon) and Kleiner Perkins (with Cerent) were able to win so big in part because they had hands-on operational roles in their investments. By doing so, they were able to expose themselves to much of the upside of their own work.
When Snap Inc. went public in March of 2017 at a $25B valuation, it was the second-highest valuation at exit of any social media and messaging company since 1999.
At the time, the stake held by VC firm Benchmark Capital Partners became worth about $3.2B. The IPO also capped a highly productive series of deals for Lightspeed Venture Partners, whose investment of about $8M grew to be worth $2B.
Lightspeed Venture Partners made its first investment in Snap by backing a $480K seed round in May 2012. Nine months later, Benchmark invested $13.5M in the company’s Series A, as the sole investor in the round. Notably, Benchmark’s investment was led by partners Matt Cohler and Mitch Lasky, the latter of whom would become a mentor to Snap founder Evan Spiegel.
In part, Lasky was able to build this relationship because of a dispute between Spiegel and Lightspeed, which is not uncommon in the pressure-cooker world of early-stage startups, ambitious founders, and seasoned VCs.
Later, in a move reminiscent of Facebook, Snap’s $60M Series B brought a bevy of new investors to the table — among them, General Catalyst, SV Angel, Tencent Holdings, Institutional Venture Partners, and SF Growth Fund. None would see returns as high as Benchmark or Lightspeed.
The key to Benchmark’s success with Snapchat was the firm’s ability to see beyond the app’s public perception. Where others saw a fad, they saw a company.
As late as 2013, Snapchat was thought of as little more than an app for college students to send each other naked photos. When Bloomberg Businessweek did a feature story on the company early that year, the piece included a GIF “cover” showing racy photos that disappeared after a few seconds.
While the public and the media were underestimating what Snapchat would become, Mitch Lasky and Benchmark saw something very interesting going on. When they talked to people about the social media they used, they heard Snapchat mentioned in the same breath as companies like Facebook, Instagram, and Twitter.
After learning more about the company and its founder, Benchmark became convinced that this supposed “sexting” app had a bright future.
“At Benchmark we search for entrepreneurs who want to change the world, and Evan and Bobby certainly have that ambition,” Lasky later wrote on his blog, “We believe that Snapchat can become one of the most important mobile companies in the world, and Snapchat’s initial momentum — 60 million shared “snaps” per day, over 5 billion sent through the service to date — supports that belief.”
“Snapchat’s ramp reminded us of another mobile app Benchmark had the good fortune to back at an early stage: Instagram,” he added.
For investors like Mark Suster at Upfront Ventures, the associations with illicit activity were too much to get over.
“I had just seen (maybe 6 months before) a project called TigerText,” Suster later wrote on his blog. “It was a ‘disappearing text app’ where the founders told me that they named the company because the idea came from how Tiger Woods got caught cheating on his wife because all of his mistresses had evidence that he cheated because they saved text messages from him… That narrative was fresh in my head when I first had the discussion about Snapchat.”
Suster didn’t want to support any app that seemed like its primary audience was cheating husbands. He admits that this was a failure of imagination and a mistake.
“People assume that porn is the first use-case for many new kinds of Internet services, and sometimes it is,” Susan Etlinger at Altimeter Group told the New York Times, recently. That doesn’t necessarily mean, however, that it will be the only, or even primary use case.
One of the first successes for