• Why That Google Capital Deal Could Mean More PIPEs

    Conceptual 3d abstract illustration.
    Conceptual 3d abstract illustration.

    Last Wednesday, Google Capital ventured into the world of investing in publicly traded companies, announcing it has backed Care.com, a platform that connects people with caregivers which went public in early 2014.

    With Google Capital investing $46.35 million, it became Care.com’s single largest shareholder, according to The New York Times. The deal also sent nine-year-old Care.com’s shares soaring. On the day of the announcement, Care.com was valued at $278 million; by the end of trading on Friday, the company’s market cap had reached $508 million.

    It might have seemed interesting, if unremarkable, to some industry watchers. Others, however, think the deal may well usher in a new era of private investment in publicly equities, or PIPE deals, despite their checkered history.

    Those who’ve been around for a boom and bust (or two) are already familiar with them. PIPE deals became increasingly attractive in the aftermath of the late 1990s tech bubble, when the public market shut for tech companies, stranding not only ambitious startups hoping to IPO but publicly traded outfits, too.

    Faced with few options, some of those cash-strapped companies turned to outside investors like venture investors and hedge funds. In return for capital, the companies typically provided their public shares at a discount — along with the promise that if their shares were to fall in value, these new investors would be provided more shares to make up for their losses.

    In some cases, things worked out well. Phil Sanderson, today a managing director at IDG Ventures, was working as a partner at Walden Venture Capital at the time and says he led two investments in publicly traded companies that provided quick, meaningful returns to the firm. One of those bets was on VitalStream, a content delivery network that was later acquired; the other was the IT management company Niku, also acquired.

    Sanderson says the two companies produced a “3x to 5 x return in a two- to three-year period,” and he credits those returns with approaching both firms with a VC-like mentality. “I’d join the board, bring in sales, help recruit employees. I would also communicate to analysts I knew about the company, and I’d be out there talking with hedge funds, getting them to buy and build positions in the stock. It was a lot of work but it paid off.”

    Other companies weren’t so lucky.

    More here.

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