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April 28, 2005
Peribit an Eight-bagger for Foundation
Yesterday, I caught up with Adam Grosser, a partner at Menlo Park, Calif. VC firm Foundation Capital, which was an early investor in networking equipment maker Peribit Networks. As you may have heard, Juniper Networks on Tuesday said it will acquire Peribit for $337 million in cash and stock. For Foundation Capital III, the fund that invested in Peribit, the acquisition represents an eightfold return on invested capital (affectionately known as an eight-bagger). That's the best return so far for the fund, which was raised in 1999.
As a group, funds of that vintage year haven't generated much in the way of returns. On average, 1999 U.S. VC funds have a -14.6% internal rate of return, according to researcher Private Equity Intelligence. Private company valuations were downright bubblicious at the time VCs started investing from those funds, and the bubble popped soon afterward, dragging down overall fund performance. Thus the Peribit deal put smiles on the faces of some battle-weary VCs. "We're all psyched," says Sam Jadallah, a VC at Mohr Davidow Ventures, which was not a Peribit investor.
Grosser thinks the deal bodes well for VC exit strategies. "Given the reality of fairly modest exits compared to seven years ago, we're very pleased," he says. Grosser estimates that Peribit was valued at about 8.25 to 8.5 times annual revenues of roughly $40 million. That multiple actually looks stingy compared to publicly traded competitor HyperSpace Communications, which is currently valued at 36 times 2004 revenues. But compared to other recent acquisitions of private VC-backed companies, 8.25 is high.
"Companies are valuing acquisitions pretty highly if the customer base is valuable and the growth rate of the company is high," Grosser says. Peribit brings customers such as Toys R Us to Juniper, which has been eager to gain customers outside the telecom industry. Peribit's revenues have grown 80% to 100% each year for the past four years.
Interestingly, Peribit was acquired while it was on the path to an IPO, a trend we wrote about last year. The company had chosen Goldman Sachs to lead its public offering but hadn't yet filed a prospectus with the Securities and Exchange Commission when it reached a deal with Juniper (Merrill Lynch advised Peribit on the acquisition).
Preparations for going public often draw interest from potential acquirers, and that was the case with Peribit. The company and the investors believed the acquisition price was "on par" with the likely IPO price, Grosser explains. But an acquisition comes without the volatility and dilution to existing shareholders that an IPO brings.
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