By Scott Austin
Of DOW JONES VENTUREWIRE
As EMC Corp. (EMC) and NetApp Inc. (NTAP) wage a bidding war for
the rights to acquire storage-device maker Data Domain Inc. (DDUP),
two venture capital firms stand to benefit mightily from the rising
sale price.
On Monday, Data Domain's eight-member board - which consists of
three venture capitalists - struck down EMC's offer to buy the
company at $30 a share, or $1.8 billion, instead backing NetApp's
$1.9 billion proposal.
Such an acquisition of Santa Clara, Calif.-based Data Domain
would cap a strong run for Greylock Partners and New Enterprise
Associates, highlighting how beneficial the IPO market can be for
the venture capital industry.
Founded in 2001, Data Domain raised more than $40 million from
investors including Greylock, NEA and Sutter Hill Ventures. In June
2007, the company's IPO wowed the market, with the share price
rocketing 66% to $24.95 from $15. At the end of the day, Greylock's
26% stake was worth $338 million, NEA's 25% ownership was valued at
$323 million, and Sutter Hill's stake was valued at $188
million.
That's a collective $849 million, more than 20 times the
original investment.
That November, Data Domain held a secondary offering allowing
investors to dump 3.2 million shares at $27 apiece. Greylock
unloaded $27 million worth of stock, NEA sold $26 million in
shares, and Sutter Hill sold $10 million total.
Over time, the firms dwindled down their stakes, distributing
stock to partners of the respective funds or selling shares in the
open market. While NEA and Greylock still own a piece, Sutter Hill
distributed its remaining stake to limited partners last summer.
Ronald Bernal, who was a partner from 2002 to 2006 at Sutter Hill
and is now a partner at Sequel Venture Partners, is on Data
Domain's board.
According to a filing, NEA now owns 13.8% of Data Domain,
meaning a sale of the company to NetApp for $30 a share would reap
the firm $260 million, up from $217 million in NetApp's original
$25-a-share offer. Longtime NEA partner Scott Sandell serves as a
Data Domain director.
Greylock, which is represented on the board by partner Aneel
Bhusri, now owns just 3.9%, worth $74 million at the current offer
price.
Overall, these firms will make out in a big way - quite a feat
at a time when liquidity is hard to come by. IPOs remain the best
way for venture firms to generate lofty investment returns, but
since 2001 these offerings have made up only 13% of exits, compared
with 56% in the 1990s, according to the National Venture Capital
Association.
(Dow Jones VentureWire covers news about venture-capital
investing and start-up companies)
-By Scott Austin, Dow Jones VentureWire; 212-416-2024;
scott.austin@dowjones.com