Chris Dixon is a veteran investor and entrepreneur, with enormous visibility in the tech world. Contacts with potential acquirers are a non-issue for him.
A poor CS fellow could have created a version of Hunch that was 100x better and they still would have 1,000x less of an exit opportunity as compared to any startup Dixon founded.
Get real.
Perhaps your hypothetical fellow should focus on building a "lifestyle business" instead of trying to get big and then get acquired...
Grandparent makes it sound like Dixon pulled this off in his spare time. He assembled a team of A-level engineers, then secured millions in funding so they could develop an awesome recommendation engine with almost no clear revenue stream. I challenge anyone to find a CS grad who can match that in his or her spare time.
EDIT: restructured on second read.
While Dixon's reputation is a great asset, I wouldn't say it's a multiple-orders-of-magnitude difference.
This type of thinking is why the valley is so full of zombie companies pumped up with capital, but with no real traction or any way of ever being profitable
PG and many speakers at startup school repeatedly said that its easy to spot the ones who are just doing it because they want to be "that guy" like Zuckerberg - the ones who want to play the game. Instead of starting a company to figure out what customers want.
What motivates you to start a company is really important. Especially during the downswings that kills most startups (google "trough of sorrows").
I would agree, and it's a damn good talent acquisition. Hunch's team is made almost exclusively of engineers who (a) went to some of the best CS programs in the world (CMU, MIT, Stanford), and (b) really really really know their shit (just have a 5-minute convo with one of them).
Here in NY, Hunch had a reputation for opportunistic hiring. They had lots of funding and an incredible core team, so they'd only hire engineers that astounded them. That's a great way to set yourself up for a talent acquisition.
1. No dev is worth $1m. Their skills may generate as much and more, but only in a specific context. Being great at catching a football is worth $50m in context of the NFL, $0 without it.
2. You can't really buy talent. At best, you can keep it, working at 1/2 of its ability, until fully vested and moves on. Alternately, eBay could create an environment as challenging and attractive as Hunch - but (a) by definition, it's almost impossible and (b) if you could pull it off, you could hire the similar talent for much less than $80m.
I'd think walking through the halls of those CS programs offering $250k a year in salary would get a a bunch of A-Level talent at a much lower price then they paid for Hunch.
40% of them will start their own companies once their non-competes expire.
Ebay's been on a spending spree this past year and I'd say this is one of the better deals they've made, depending on how long they've locked in Hunch's team.
Impressive back-end tech (the recommendation engine) that can now process millions and millions of items on eBay to help increase sales (something like a quarter of Amazon's sales come from recommendations).
MS bought Powerset (and their NLP-type search engine) for $100m in 2008. They also bought Farecast (travel pricing forecasting) for $75-115m in 2008.
Hunch for $80m is a steal, as far as talent acquisitions go.
EDIT: I'm not sure if they were product or talent acquisitions, but does it really matter? All companies listed above obtained state-of-the-art algorithms and the teams that developed them.
There's a different kind of bubble in the valley, it's a contained ecosystem that people get caught up in. Similar to the social bubble surrounding a college or church. People inside the bubble often cannot see the forest from the trees.
In the bubble it's easy to get to know all the trees, but from the outside it's just a forest and few trees are easily recognized or stand out from the others at all.
Here's the facts as I see them: Crunchbase says Hunch started in September of 2007 and had 23 employees on LinkedIn when they exited. (TechCrunch calls it a 20-person team, so I'm presuming that's all the employees.) They've gotten $19.2m in funding, let's just say $20m. TechCrunch claims the sale was "around" $80m.
So what does the breakdown look like? Who gets what? What are the likely investor terms?
My totally naive guess would be that the investors got at least a 1x liquidation preference, maybe more. I mean, did Hunch have any revenue? So there was at most $40m to go around to the people at the company. Of course, most of that probably went to the founders. Would maybe 20% of that have gone to the 20-ish employees? So naively pretending that each of the 20-ish employees got 1% for four years, did they each end up with an extra $100k/year? What's the likely distribution of shares among employees?
What are the transaction costs (lawyers, taxes, etc.) for this sort of acquisition? How long will the employees have to be at eBay to get their earn-out, and will that earn-out be in addition to their common stock in Hunch? Will they end up being paid less to work for eBay during their earn-out than if they were on the open market?
Of course, their are many other reasons to do a deal like this (passion for improving eBay's recommendations, for example), but let's ignore that for now.
- Let's keep it simple and say that since this is an experienced team, the investors invested $20m at a $60m post, so they have 1/3 of the company. Since it is an experienced team, I'm going to guess no participation or anything else hokey. 1x liquidation preference is likely but won't matter in this scenario b/c preferred will convert to common.
- With a 20 person team, you've probably given away 5-10% of the company to employees. The later employees probably did not get much, but then again, they weren't around for that long. Let's be very generous and call it 10%.
- That leaves the founders with 57% of the company.
- Let's just not count transaction costs, they're probably in the $75-$200k range, and it's not super material to this discussion.
In that scenario, the founders make $11.4 million each pre-tax, or about $8.55m post-tax (assuming all founders are equal, which is probably also unlikely here). The employees make $8m pre-tax total, or ~$350k each pretax, or ~$190k each post-tax, but the distribution is going to be skewed towards earlier employees. Investors make $26.4m, which is a pretty poor return for a 3-year investment -- investors are mostly looking at IRR, which means the longer an exit takes, the higher the outcome needs to be to make it worth it.
This is just a wild ass guess on what a transaction like this might look like, but lots and lots of things are likely way different than I guessed here, and I can guarantee that I've over-estimated the amount of money everybody made, because as a general rule of thumb that always happens.
EDIT: > How long will the employees have to be at eBay to get their earn-out, and will that earn-out be in addition to their common stock in Hunch? Will they end up being paid less to work for eBay during their earn-out than if they were on the open market?
Probably 2-4 years for the earn-out. The employees might get more retention bonuses to stick around, above what they would normally get from the transaction. They will not earn below-market due to the retention package.
This is worthwhile for eBay, since only a 1 or 2% improvement in recommendations could be worth millions of dollars a year.
They were founded in 2008 and sold for $80m 3 years later. That is considered a "long journey" these days? Statements like this give me that "we're in a bubble" feeling.
Hunch is not for sale. The founders have already sold companies before and have no desire to sell Hunch. We want to build it into a large company.
hunch responded one year ago
With some very notable exceptions (YouTube, Zynga, Groupon), built-to-flip and talent acquisitions dominate the 1-2 year exit companies.
Founders have an excellent chance of making nothing on an average startup.
Although who am I to argue with $80 million.
Really? If you don't have a 'building to sell' roadmap in the first place, why be depressed? If you're building a long-term, stable company with real value and profits, you're not for sale in the first place.
On the downside, they really asked a lot of questions, which made me uncomfortable with using it.
Knowing how long it can take for a small company with a good idea and product to launch, I wouldn't really call that a long journey.
Still, congratulations to them. I hope eBay is able to make something good out of what they have created so far.
Seems Hunch has gone the 'Mega Machine' route (1 T RAM, 48 Core [1]), from 700k users (80m Total TTHY / 113THAYs [1]), make 250k API users
How do you scale that out to eBay numbers?
[1]http://blog.hunch.com/wp-content/uploads/2011/05/110509-HUNC...
eBay is an interesting challenge because so many of the listings don't have metadata like product IDs.
The work Hunch has been doing on the open web is a good fit for this kind of unstructured data.
