Can a category leader's $60M exit be seen as anything but underwhelming?

By Michael Carney , written on May 6, 2013

From The News Desk

In my recent coverage of the social video category whipping boy Viddy, I called the July 2012 sale of then-category leader Socialcam for $60 million to Autodesk “underwhelming.” Over the weekend, two of the company's investors, Alsop Louie Partners (ALP) co-founder Stewart Alsop and JustinTV and Exec founder Justin Kan, took to Twitter to air their disagreement.

The discussion that ensued (Storify below) calls into question how we measure success in the world of venture backed startups.

For some, return on investment (ROI) or internal rate of return (IRR) – the latter being a metric that considers the time it takes to earn that return – are the primary measures. But this ignores the fact that the venture model is predicated on achieving home runs, in terms of gross return, not base hits.

Nonetheless, by either of these measures, Socialcam was a resounding success, having raised only $1 million to $1.5 million via a party Seed round, according to most reports (the company never disclosed the extent of its capitalization). Assuming that investors owned between 15 to 30 percent of the company, they would have made between 6X and 18X over a maximum of 18 months. For their time, the founders would have received between $42 million to $51 million. Again, not bad.

Given that ALP raised $98.6 million for its current fund, this deal was likely more impactful than it would have been for a mega-fund, but it’s certainly nowhere near the “return the fund” variety (meaning this one deal would have retured the full value of the fund). To the extent the company could have potentially commanded nine figures, I maintain that the deal was underwhelming. 

Here's why: At the time of its acquisition, Socialcam was the clear category leader. The platform had swelled to 75 million registered users, 8 million of which were daily active users, on the back of Facebook Open Graph virality.

By comparison, its nearest competitor Viddy had roughly 1 million daily active users at the same time and approximately 30 to 35 million registered users. Keeping the search for comparables going, Instagram had just 35 million registered users at the time of its $1 billion acquisition by Facebook, although it had just launched on Android and would quickly explode to more than 60 million and eventually surpass 100 million active users.

To the extent that many were calling Socialcam and Viddy the “Instagram(s) of Video,” a mid-eight figure exit is the definition of underwhelming and damning for the rest of the category.

Particularly Viddy, which had raised $30 million at an enormous $370 million valuation just three months earlier. While that round would eventually prove to be ill-advised, it certainly gives the impression that the Socialcam deal left tens of millions of dollars on the table – if not more.

It wasn’t until the Fall that we saw the social video category atrophy. Given their willingness to accept Autodesk’s $60 million price, perhaps Socialcam’s founders and investors saw the writing on the wall. On the day of the acquisition, the company’s co-founder and CEO Michael Seibel said, “There will be no Instagram of video.” Given the state of the category today – neither Viddy nor Socialcam has more than 5 million monthly active users – he seems prescient. Going back to early expectations, this seems as underwhelming as the Socialcam deal itself.

As I said to Alsop and Kan on Twitter, Socialcam did well to turn its few million dollars raised into tens of millions of dollars of exit value in just 18 months. But that's not how the big boys play the VC game. Given the massive expectations and the opportunity that remained – Vine anyone? – the exit left plenty to be desired.

Read on as SocialCam's Alsop and Kan take issue with my assessment: