The reasons behind Google’s acquisition seem quite intuitive. YouTube falls in line with Google’s strategy of converting user visits to its properties into contextual advertising revenue. YouTube’s huge user-base combined with its own user base gives Google formidable market power and the ability to influence consumer behavior. Also, while the prospect of YouTube being acquired by one of the media giants was slim, the acquisition did serve to deter competitors like Yahoo from making further inroads into the online video-sharing market.
For Sequoia Capital, YouTube’s main investor, the investment turned out to be a huge success. Sequoia had initially invested $3.5 million at a pre-money valuation of $15 million and another $8 million in a second round of funding. Sequoia is estimated to have owned approximately 30% of YouTube, for a stake valued at $495M. This represents a 43X return on invested capital in less than 2 years time. Sequoia was chosen by the YouTube founders due to pre-existing relationships and the fact that Sequoia apparently ‘got’ the concept of YouTube early on. According to YouTube co-founder Jawed Karim, during YouTube’s Series A fundraising process Sequoia impressed the YouTube team by having Sequoia’s entire staff experiment with the YouTube product.
Was the $1.65B acquisition price justified? Revenue projections for YouTube have not been disclosed, however Fred Wilson has estimated YouTube’s revenue figures potential at $400 million annual revenue, $150 million net annual revenue. Another revenue analysis pegs current monthly revenues at $7.5M. The newly announced revenue-sharing model that rewards users who upload content, only serves to muddy the valuation picture even further.
Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.