Andreessen Horowitz, Sequoia Big Winners in GitHub’s Sale to Microsoft

(Bloomberg) -- Two of the most famous Silicon Valley venture capital firms just scored a huge win with Microsoft Corp.’s $7.5 billion purchase of GitHub Inc., the online platform for developers sharing and collaborating on code. 

In 2012, Andreessen Horowitz cut a $100 million check to GitHub, which had previously been self-funded. Three years later Sequoia Capital led a $250 million round that valued the startup at $2 billion.

On Monday, Microsoft announced the acquisition, which is the largest venture-backed enterprise software sale in history, according to CB Insights. It will generate a massive return for two of Silicon Valley’s most elite venture firms, one founded less than a decade ago and the other started in 1972. The duo have long competed for high-profiles deals and needle each other behind closed doors.

Andreessen, founded in 2009, has long been criticized by competitors for paying too much for its deals. At a rumored $750 million valuation, Andreessen’s 2012 investment in GitHub put a lofty valuation on a company that had never taken venture capital funding before. But the bet proved to be savvy, as the importance of open-source development has climbed and GitHub’s popularity increased.

“Andreessen attracted a lot of attention for an outsized bet at the Series A level for an unproven company and is going to be rewarded handsomely for the risk they took,” said Phil Haslett, co-founder of EquityZen, a marketplace for shares in pre-IPO technology companies. The venture firm could make nearly $1 billion off the investment, Haslett estimated.

“We had this thesis on software becoming a very important part of this global economy and every company becoming a software company,” said Peter Levine, the partner who led the deal for Andreessen Horowitz. “We wrote a very large check early on and I think it speaks to the potential when we saw the company.”

Three years later, Sequoia worried that it was overpaying when GitHub’s estimated worth climbed to $2 billion in the company’s Series B round. “Getting comfortable with the valuation in the B was challenging,” said Jim Goetz, the Sequoia partner who led the deal, along with Andrew Reed. The GitHub sale marks another big win for Goetz, who led the only outside investment in the messaging app WhatsApp, which sold to Facebook for $22 billion in 2014.

Morgan Stanley banker Michael Grimes, who also worked on the WhatsApp acquisition, helped get the $7.5 billion GitHub deal over the finish line.

Sequoia likely earned a return of about $700 million on GitHub depending on its exact ownership stake, Haslett estimated. “Sequoia is going to be quite pleased,” Haslett said. “Not WhatsApp pleased, but pretty content with what they made.”

Goetz said both bets required faith in the company’s founders—Jan Koum at WhatsApp and Chris Wanstrath at GitHub. "Both companies had unorthodox founders with enormous conviction. I think you have that in both Jan and Chris,” Goetz said. “Both companies are deeply engaged, transformatively, in the way that software's created. When the history of software is written, there will be a chapter on Chris and GitHub, not a footnote."

In some ways, the sale was a saving grace for its investors. GitHub has had perpetual management troubles and a lengthy CEO search. Wanstrath had quietly stepped away from running the company, leaving the day-to-day management to his top executives. To make matters worse for investors, the co-founders have long said that making money wasn’t their top priority.

In the end, the Microsoft deal was sealed by Microsoft Chief Executive Officer Satya Nadella. "It was really [Wanstrath’s] relationship with Satya and the interaction and how it evolved over the last few months,” Goetz said. “All the other interest Chris had rebuffed. It's not that he's a socialist, but he wasn't interested in monetizing the developer."


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