Cisco flipped for Pure Digital, but did VCs flip out?

March 23, 2009

Cisco’s $590 million all-stock purchase of Flip video camera maker Pure Digital last week may sound like a nice price for the venture capital-backed company, especially given the non-existent exit market right now.

But Venture Capital Journal editor Larry Aragon writes in a PEHub blog post that the $590 million number doesn’t sound that meaty when you calculate the return on investment for Pure Digital’s venture capital backers. And that’s especially true because some top-notch VC firms like Benchmark Capital and Sequoia Capital have invested in Pure Digital. (Venture Capital Journal and PEHub are part of Thomson Reuters.)

Aragon calculates that if Pure Digital’s VC investors put in about $95 million, and assuming that they own about half the company (since it’s a stock deal), “that’s a return of just over 3x their money.”

Now, Silicon Valley’s brand-name venture capital firms have long been used to returns on investment that are several multiples higher than that, usually around 10 times the investment. We know the dotcom boom days are never coming back, but a selling price that brings back only three times the money invested — that too, over a five-year period, according to Aragon — is cause for concern about how profitable the VC model really is.

Surely, the VCs might have been tempted to hold out for a better return on their investment if the public markets showed any signs of life. But with IPOs of venture capital-backed companies remaining a dream in the current environment, guess the venture capitalists decided that Cisco’s offer was one they couldn’t refuse.

Photo: Pure Digital Website

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It may be 3x now, but it’s Cisco stock in a down market… Give Cisco a one or a couple more years, and you’re sure to see that at least double.

I’d trade my 401K in for cisco stock, if I could, right now!

Posted by Mark Chernisky | Report as abusive