BUSINESS BLOGS
BUSINESS BLOGS
category: business
26 Sep 2007

Paid Content reported today that GameTrust sold for less than $50M, after raising $20M over 3 rounds, over the past 5 years. That does not seem like a healthy exit for the numerous VCs, which include: TWJ Capital, NJTC Venture Fund, Patriot Capital, CSK Ventures, Topspin Partners, Silicon Alley Venture Partners, Draper Associates and investor Elon Musk.

So why did this deal happen? VCs supposedly want 5x or 10x on their investments… this was probably not anything close to that, I’d guesstimate. Here’s my take:

Lesson #1 - Just Build It

This supports my belief that if you build something of value, even if VCs don’t see an incentive to invest more money at a higher round (which I presume was the case here), you always have the option to sell… instead of doing a down round, which no one wants to do.

Lesson # 2 - Demand and Supply

A second thing to note, is the demand and supply dynamics in Gametrust’s space, I can name 10 companies off the top of my head who do exactly the same thing. I can’t for my life imagine any leverage in discussions. I can envision Real Networks acknowledging that the investors did not want to lose money and they made them a low-ball offer: $50M on $20M invested ultimately boils down to 2.5x return.

How Much did VCs get?

I know it’s not only a 2.5x return, especially for the first round investors, because investors in the Series A round could have done an investment at a lower valuation, such as $5M, and that would be 10x return.

But the company’s Series B in 2005 was for $9M.  Series B, $9M, “oversubscribed”?  Add those variables up and Series B was at a steep value… meaning those who came in the second round did not get more than 3x, I’d bet.

The round was led by TWJ Capital and NJTC Venture Fund, and was joined by Patriot Capital. First round investors, including CSK Ventures, Topspin Partners, Silicon Alley Venture Partners, Draper Associates and investor Elon Musk, also participated in the round.

All of those investors seem to be middle market or late stage investors who demand to see sizable revenues. If that is the case, they came in late, at higher valuations indeed.

When you add everything up, I suppose the first rounders CSK Ventures, Topspin Partners, Silicon Alley Venture Partners, Draper Associates and investor Elon Musk got in at a valuation close to $10M - meaning they got 5x - while Series B did 2-3x and Series C probably got just enough not to lose money.

Any way you dice it, the company took in $20M and exited at $50M, that’s not very impressive. In my old company, we exited at $13.5M off $500K in capital. Different market, but still.

Give me $20M and I’ll turn water to wine, then build you a $1B business.