Friday, February 18, 2011

A Lot of Horn Tooting over a Kazoo sized deal

The LinkedIn acquisition of CardMunch a few weeks ago caught my attention. Techcrunch called it one of the "most like-minded and forward-thinking acquisitions I’ve ever seen"

I met with the founders of CardMunch several months ago when they were out raising their Series Seed round. They have a cute little app that takes a picture of a business card, populates your contact database and data is confirmed through crowd sourced labor. This is a cool way to solve the stack of business cards sitting on your desk and through geocoding lets you know where you met. You can also spread dozens of cards across a conference table and snap away.

I liked the founders (Bowei and Sid) a lot more than the business. CardMunch seemed like a nice feature and wasn't clear if there was even a product, let alone a business. It was going to be challenging to get scale with a model that charged on a per business card basis, a requirement given the amount of funding and cost for the crowdsourced labor. I generally only invest when I can think of at least half a dozen potential acquirers off the top of my head. In this case, LinkedIn was the only logical one that came to mind and didn’t see a viable business model short of that result.

Given that, I wasn't completing surprised when Linked-in announced the acquisition last month. I assumed they weren't able to raise funding and early exits often work out great for the founders, although not necessarily investors. However, after reading some of the press and tweets by investors, I began to wonder if this was a much bigger outcome than I would have guessed. A stock acquisition is a bet that would provide significant upside (and possible downside) opportunity.

I was curious about the sale price (not announced in any of the acquisition articles), but was disclosed in Linked-In's S1 filing at cash proceeds of $2,394,000. Seemed like a good time for ProfessorVC to do a little digging to see if there was more than met the eye.

I first contacted my friend, Manu Kumar, who incubated the company, coming up with the idea and finding the founders to build the product. He obviously has a founder's common stock stake along with cash invested. I asked him how the deal came out for investors since the sale price was significantly lower than the valuation on the round they were raising when we met. It looked like the preferred investors would get their money back and the founders would get a nice payday for a year's work. Nothing wrong with that and something that Basil Peters writes extensively about in Early Exits.

However, Manu's response made it sound like there was more there (or possibly a shovel involved):


There was *a* number reported in the LinkedIn S-1, but that doesn't tell the complete story. Other than complying with the filing requirements for the S-1, the terms of the CardMunch deal are private, and we are not allowed to discuss them.

At the time when you met with the CardMunch team, we'd already raised some amount of capital for the seed round. We stopped the fund-raising mid-way once we were approached by LinkedIn and engaged in discussions with them. The transaction was actually a great exit, and *everyone* (including the Series Seed investors who came in less than 2 months before the exist) made money on the transaction. It was a brilliant exit -- from start to finish in 13 months! :)



Ok, so maybe there was more to the deal than announced, but typically the S1 would include contingent payments (outside of the normal 20% escrow) such as earnouts or stock. I began to wonder based on the "*a*" number comment that perhaps Linked-in had thrown in a sweetener to the investors, such as an opportunity to buy some secondary shares pre-IPO or an allocation in the IPO. Given the issues we had in the past around allocation of IPO shares, this would be a very sensitive issue. Mind you, this is clearly speculation on my part (what are blog posts for?) and has no basis in fact.

Time to do some more digging. I ran across a couple of blog posts by another angel investor in Card Munch, Ty Danco. One was on the acquisition and the other on his original investment. I posted a comment on Ty's blog regarding the economics of the deal and was surprised to find that he had deleted some of my speculation and added the following comment:

Ty’s note: I’ve edited the rest out, as Professor VC asked specific valuation questions, posing some questions I can’t discuss. Sorry, but as is the case often in sales where the buyer has bigtime legal counsel, I’m precluded from giving out details.
Thus, I am raising my questions here. Perhaps, there is more to the deal or maybe it is just a face saving gesture on the part of investors.

Why can’t anyone just say, “it wasn’t a great outcome for investors, but was for the entrepreneurs and glad we could help make that happen”. I guess nobody wants to pull a kazoo out of their pocket when it feels so much better to blare a trumpet.


Anonymous said...

Heard from another investor that the preferred guys did not make anything but their money back

Steve Bennet said...

Perhaps investors had already mentally written off the investment, so getting money back was considering making money...

Anonymous said...

Love the title and tie in at the end. I guess they reserved their kazoo's for bigger celebrations, like NYE. I think the logic is skewed.

K said...

Prof B.

Candid posts. Love it!
You have certainly acquired a new reader.
Keep writing!

P.S. Might be time for a new picture :)


Steve Bennet said...

Thanks for the props, K. By the picture, I assume you mean that the current one doesn't do my good looks justice :-) I had a few less gray hairs back when that was taken...

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