after deciding to become part <strong>of</strong> a start-up, <strong>and</strong> 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 pr<strong>of</strong>its <strong>of</strong> 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 <strong>of</strong> approval for a company to have raised venture capital, to have been vetted <strong>and</strong> appraised <strong>and</strong> to have passed the test. Without this, eBay couldn’t even get an executive search firm to work for them. The rule <strong>of</strong> 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 <strong>and</strong> 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 <strong>and</strong> experience <strong>of</strong> Benchmark’s partners. It was Benchmark who recommended a search firm to find a CEO, who instructed that firm to pursue a c<strong>and</strong>idate who had declined their first approach, <strong>and</strong> ultimately played a key role in persuading that c<strong>and</strong>idate – Meg Whitman – that she should leave her high pr<strong>of</strong>ile, secure role at a major corporation, move her family to California <strong>and</strong> join a tiny internet start-up. In September 1998 eBay went public, achieving a listing at a market valuation <strong>of</strong> $2 billion; this had grown to $21 billion by the spring <strong>of</strong> 1999, producing a return for Benchmark on its $6.7 million investment <strong>of</strong> 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 <strong>of</strong> visits to Wall Street, Boston <strong>and</strong> California produced a series <strong>of</strong> rejections <strong>and</strong> a decision to increase their first round fundraising target from $2 million to $15 million, <strong>and</strong> 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 <strong>of</strong> investors, <strong>and</strong> an investment bank would play a large role both in the fundraising <strong>and</strong> 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 <strong>of</strong>fice <strong>of</strong> that venerable, “old money” institution to explore the internet world, <strong>and</strong> after furious internal debate they agreed to lead the fundraising. A strength <strong>of</strong> 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 <strong>of</strong> Louis Vuitton Moet Hennessy (LVMH), who assumed the role <strong>of</strong> lead investor. 1999 was characterised by an endless series <strong>of</strong> fundraising – a total <strong>of</strong> $135 million was ultimately invested – <strong>and</strong> equally endless delays <strong>and</strong> slippages in the launch date for boo.com’s websites. The team had, in addition to setting itself the phenomenally ambitious task <strong>of</strong> a simultaneous, multi-country launch, made serious errors in the design <strong>and</strong> development <strong>of</strong> 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 <strong>and</strong> over elaborate infrastructure quickly became notorious in London, where they were based) 16 THE FUNDAMENTALS OF PRIVATE EQUITY COPYING WITHOUT PERMISSION IS UNLAWFUL
Module 2: <strong>Private</strong> equity as an asset class COPYING WITHOUT PERMISSION IS UNLAWFUL THE FUNDAMENTALS OF PRIVATE EQUITY