Total / R&DRevenueRun Rate
Lycos 4/2/96 $219 Jun 95 Mar 96 9 months 28 / 15 $3.3Excite 4/4/96 $183 Jun 94 Feb 96 20 months 38 / 14 $0.6Yahoo! 4/12/96 $334 Mar 95 Mar 96 12 months 43 / 7 $4.3InfoSeek 6/11/96 $299 Aug 93 May 96 27 months 71 / 26 $6.9
Average $259 17 months 45 / 16 $3.7 Note: All information is derived from the IPO prospectuses of the respective companies. IPO Market Capitalization is equal to initial public offering price times total shares outstanding and excludes over-allotment shares and options. “Incubation Period” is calculated as the timefrom the company’s incorporation to the IPO filing date. Revenue Run Rate is equal to 4x revenue for the most recent quarter reported in the preliminary IPO prospectus.
On average, these companies were less than two years old, employed fewer than fifty employ-ees, and booked sales of less than $1.0 million in the quarters leading up to their IPOs. Withholdthe company names, and most venture capitalists would recognize the profile as a typical sec-ond- or third-round venture investment. Instead, these four companies went public at an aggre-gate market capitalization in excess of a billion dollars, giving the public investor the opportunityto play venture capitalist. So how has the public fared?We considered the performance of a portfolio consisting of $10,000 divided equally among theIPOs of these four companies. As of this writing (August 28), an investor’s original $10,000 wouldbe worth $20,222 for an annual return of 67.5%. For comparison, $10,000 similarly invested inthe Standard & Poors 500 index (“S&P”) would have grown to $13,962, or an annual return of 27.7%, excluding dividends.
In this instance, the public venture capitalist would have made outquite well. (Given the recent volatility in the markets, by the time of publication, the comparativereturns could be substantially different.)
For students of the Capital Asset Pricing Model, we also considered risk-adjusted returns. Over this relatively shortobservation period, our portfolio of Internet Navigation stocks had a negative
. This raises the intriguing possibilitythat our portfolio represents the Holy Grail for efficient market theorists, namely, positive expected returns and a negativecorrelation with the market. We suspect the negative correlation will abate over longer observation periods, although itseems logical that the valuations of early-stage companies will fluctuate mostly due to company specific events and lesssignificantly due to overall macro-economic or market factors. Consequently, returns to investors in these companies mayappear to be un-correlated with market returns for extended periods.