Fundamentals of Private Equity and Venture Capital - PEI Media

after deciding to become part of a start-up, and was introduced through mutual friends. But it
soon became apparent that the company would need a heavyweight, experienced CEO with credibility
on Wall Street.
The first attempts to recruit a CEO highlighted a serious issue – eBay had no VC backing. The fact
that with monthly profits of some $200,000 by early 1997 it did not need external funds was irrelevant;
in Silicon Valley (eBay was based in San Jose, California) it was regarded as an essential
seal of approval for a company to have raised venture capital, to have been vetted and appraised
and to have passed the test. Without this, eBay couldn’t even get an executive search firm to work
for them.
The rule of thumb for a venture capital firm appraising an early stage investment was that there
had to be a clear route to making 10 times the original investment within three years. Benchmark
Partners, a venture capital manager itself only two years old, saw this potential in eBay and in July
1997 invested $6.7 million for a 25 percent equity stake on terms which valued the company at
$20 million before its investment (the pre-money valuation – see Module 4). eBay never spent
these funds – the money was left untouched in the bank – but capitalised on the contacts, credibility
and experience of Benchmark’s partners. It was Benchmark who recommended a search
firm to find a CEO, who instructed that firm to pursue a candidate who had declined their first
approach, and ultimately played a key role in persuading that candidate – Meg Whitman – that
she should leave her high profile, secure role at a major corporation, move her family to California
and join a tiny internet start-up.
In September 1998 eBay went public, achieving a listing at a market valuation of $2 billion; this
had grown to $21 billion by the spring of 1999, producing a return for Benchmark on its $6.7 million
investment of 100,000 percent in less than two years (albeit based on highly distorted valuations,
but nevertheless a spectacular return).
Whilst eBay was preparing for its stock market float in 1998, the boo.com team was trying, with
increasing desperation, to find some backers amongst the US venture capital community. A frustrating
round of visits to Wall Street, Boston and California produced a series of rejections and a
decision to increase their first round fundraising target from $2 million to $15 million, and to
appoint an investment bank. Here was a crucial difference with eBay, who had quickly built a close
relationship with Benchmark, their single investor; from the beginning boo.com was going to raise
funds from a syndicate of investors, and an investment bank would play a large role both in the
fundraising and the subsequent investor relations. This was to have enormous consequences.
The boo.com team’s approach to JP Morgan coincided with a decision by the London office of that
venerable, “old money” institution to explore the internet world, and after furious internal debate
they agreed to lead the fundraising. A strength of JP Morgan was the ability to introduce, in addition
to mainstream venture capital firms, corporate investors who may be able to add strategic
value. The first round, which closed at $8.8 million in January 1999, included an investment from
Bernard Arnault, the chairman of Louis Vuitton Moet Hennessy (LVMH), who assumed the role of
lead investor.
1999 was characterised by an endless series of fundraising – a total of $135 million was ultimately
invested – and equally endless delays and slippages in the launch date for boo.com’s websites.
The team had, in addition to setting itself the phenomenally ambitious task of a simultaneous,
multi-country launch, made serious errors in the design and development of its technology. An
effective single, dominant venture capital investor would have insisted on a simpler strategy,
imposed discipline on the high spending management team (whose excesses in salaries, expenses
and over elaborate infrastructure quickly became notorious in London, where they were based)
16 THE FUNDAMENTALS OF PRIVATE EQUITY
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