Avalon Ventures: the Low-Flying Firm About to Make a Billion Bucks on Zynga’s IPO
Posted on July 7th, 2011 on peHUB
By Connie Loizos
You may have been as surprised as me when reading through the list of investors on Zynga’s recently released S-1. Let’s see: there’s Union Square Ventures, Foundry Group, Digital Sky Technologies…and Avalon Ventures?
In many ways, 28-year-old Avalon is the antithesis of big-name venture investors like Digital Sky Technologies that burst onto the scene two years ago and have been sucking the oxygen from the rest of the industry since.
You’ll probably never see the partners of Avalon Ventures on the covers of Fortune or BusinessWeek, for example. It has offices in La Jolla and Boston, not Silicon Valley. And its partners don’t blog or tweet. “We’re old guys,” says managing director Rich Levandov, who has thick white hair and a penchant for blue jeans.
It’s also highly unlikely that you’ll ever see Avalon raise a massive amount of money, or make a first-time investment in an established winner no matter what its valuation. Simply put, it’s not a group of gunslingers.
Yet the firm has already seen two of its portfolio companies sell for roughly $40 million apiece in the last 12 months, according to sources close to both acquisitions. AOL acquired the content marketing platform Pictela last December after it raised just $3.5 million, mostly from Avalon. On the very same day, Rackspace acquired the server management platform Cloudkick, which had raised $2.75 million, also mostly from Avalon. (Avalon owned 50 percent of both startups, says Levandov.)
Then, of course, there’s Zynga, a company whose big-name backers include Union Square Ventures, Foundry Group, Andreessen Horowitz, and Digital Sky.
With a 5.8% stake, Digital Sky owns nearly as much as Avalon (6.1%) and Foundry (6.1%) and slightly more than Union Square (5.5%) . But not all stakes are created equal, of course. DST and Andreessen Horowitz (not included in Zynga’s S-1) bought their stakes after Zynga’s valuation had already soared to several billion dollars. Avalon, Foundry Group, and Union Square funded the company at a mere $15 million pre-money valuation.
Avalon’s prescience could prove very profitable. The firm invested $5.3 million in aggregate over two rounds in Zynga out of its eighth fund, a $150 million vehicle closed in 2008. (The firm closed on a ninth, $200 million fund, in January.) If Zynga is valued at $20 billion right out of the IPO gate, as is widely expected, Avalon stands to clear at least a billion dollars, providing its Limited Partners with over a 5x return — assuming Avalon has a 20 percent carry. It’s going to be a lot harder for some of the industry’s higher-profile — and far bigger – funds to produce a multiple that comes close.
Levandov suggests Avalon may hold onto its Zynga shares for an even bigger outcome, too. Avalon earlier sold some of its stake to secondary buyers, meaning the pressure is off to liquidate as quickly as possible. In the meantime, Levandov is quick to cite a new Gartner Group study that predicts worldwide gaming revenue will hit $74 billion by year end — $12 billion of it from online gaming. The study further estimates that online gaming will remain the fastest-growing gaming segment as it spreads to mobile phones, iPads, PCs, and Macs. “Zynga just owns [the online gaming] space now,” Levandov notes.
So did Avalon just get lucky this time around? Yes, and no. Hiring Levandov into the firm in 2007 has proven to be an enormous boon. It turns out he’s been friends with Zynga founder Mark Pincus since the mid ’90s, when Levandov was an entrepreneur-turned-AOL executive. (He says Pincus invited him to cofound one of his earlier companies — the Web-based push service FreeLoader — but he decided to stay at AOL instead.) When Pincus was fleshing out his plans for Zynga, he called Levandov, who agreed within one hour to back him.
But one senses that Avalon, which invests in both tech and biotech and has just four investing partners who split the firm’s carry evenly, has also done well by sticking with what it does best: investing from $250,000 to $3 million in early-stage companies, capping out its investments around $8 million, and supporting entrepreneurs who aren’t afraid to shoot for the moon.
“We don’t have a PR firm trying to get our name out there, and that’s great, because the amount of direct [queries] that would come through the door is not what we want to see,” says Kevin Kinsella, the firm’s founder. “We’re not waiting for FedEx letters to arrive. In most cases, we’re finding the deals ourselves.” |
