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YouTube morphs into 'GooTube' in a $1.65bn deal, leaving venture capital firm Sequoia with another home-run11/10/2006. Source: AltAssets. 
 Search engine Google has made its biggest deal to date, buying online video-sharing community YouTube for $1.65bn in stock, boosting Sequoia Capital's performance with a rather nice exit for the VC house.
The staff at Sequoia - who have previously backed such luminaries as Apple Computer, Cisco, eBay and Yahoo - have proved again that their reputation as the 'Entrepreneurs Behind the Entrepreneurs' (their slogan: not ours) is more than just another piece of corporate verbiage.
Why? Because Sequoia's ex-portfolio company Google (a ten per cent stake bought by the VCs for around $12.5m) has now agreed to acquire Sequoia's current portfolio company YouTube for $1.65bn in a stock-for-stock transaction. Following the acquisition, YouTube says it will operate independently and will continue to be based in California's San Bruno, adding that all YouTube employees will remain with the company.
The exact number of Google shares issued in the transaction will be determined based on the 30-day average closing price two trading days prior to the completion of the acquisition. Both companies have approved the transaction, said deal subject to customary closing conditions and expected to close in the fourth quarter of 2006.
Founded in February 2005 - inside a Californian garage, where else - YouTube has become one of the most visited sites online, gathering 100 million video views every day for its user-created content. Sequoia led the only two early venture rounds in YouTube worth $11.5m, and could now be looking at collecting anywhere between $500m-$700m, depending on the size of their undisclosed stake (around 30 per cent of the company, say a number of media sources).
Privacy-seeking Sequoia told AltAssets they did not have a press release on this exit, but back in November last year, Roelof Botha, a Sequoia partner and former CFO of PayPal, prophetically said of their investment, 'We have already seen user-generated content blossom in text through blogging, in photographs through services like Flickr and Shutterfly, and in audio through podcasting. YouTube is pioneering the next wave to become internet's premier video service.'
Sequoia was the only venture house to back YouTube, although the canny hedge fund Artis Capital Management also holds an undisclosed amount invested in the firm. Launched in January 2002, Artis Capital Management currently manages $1bn of assets, investing primarily in public companies in the emerging technologies field.
Sequoia is also now handing onto Google one of the main problems with the user-created content model, the slew of legal issues that usually result when an unknown-and-much-disputed proportion of users take copyrighted content (either direct steals such as unauthorised TV clips or slightly modified content - lipsyncing to studio-owned music tracks) and load it into such systems. With Google's robust defence of IP issues such as their spider's crawls of copyright content, news scrapes via Google News, or their controversial full-text search of books, YouTube should be in as safe a pair of hands as exist on this issue.
The search engine has also suggested they could extend their revenue sharing model, well-pioneered by AdSense, to the user-creators feeding YouTube with content, giving the hordes of users visiting YouTube an extra motivation to further inflate the 65,000 new pieces of 'product' being uploaded into YouTube's content management system each day.
'The YouTube team has built an exciting and powerful media platform that complements Google's mission to organise the world's information and make it universally accessible and useful,' was how Eric Schmidt, Google's CEO, explained the deal. 'Our companies share similar values; we both always put our users first and are committed to innovating to improve their experience. Together, we are natural partners to offer a compelling media entertainment service to users, content owners and advertisers.'
YouTube co-founder Chad Hurley, went on to add, 'Our community has played a vital role in changing the way that people consume media, creating a new clip culture. By joining forces with Google, we can benefit from its global reach and technology leadership to deliver a more comprehensive entertainment experience for our users and to create new opportunities for our partners. I'm confident that with this partnership we will have the flexibility and resources needed to pursue our goal of building the next-generation platform for serving media worldwide.'
While the pessimistic money may see a deal where another yet-to-turn-a-profit internet firm is trading out for over a $1bn, and think 'Dot-com Bubble 2.0' rather than Web 2.0, the historical ingenuity of Google in monetising their content through PPC programmes such as Google AdWords may yet make this Sequoia exit a value-for-money deal for Google.
Copyright © 2006 AltAssets
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