This is a guest post on trading from Tusk Trader (check out the newly launched site: www.TuskFund.com), an experienced Bay Street trader who will be writing here until Tusk’s own blog is set up. Tusk had a front row seat to the twists, turns, and almost collapse of our capital market systems a few years ago and provides a unique perspective you won’t find anywhere else. For most people, financial literacy is the elephant in the room. Let Tusk Trader help change that. If you are on twitter, make sure to follow Tusk at @TuskTrader
We might have seen the trade of the month this week or even the trade of the year.
The markets have been a buzz these last few days about the 1 billion dollar takeover of Instagram by Facebook. Facebook has paid $1 billion to acquire the high growth photo sharing app. Other than the shear magnitude paid for a company with no revenue, what has really captivated traders is the small group that actually doubled their money in that transaction in a very short time frame. Less than a week before the takeover, Instagram had just closed on their series B financing and that valuation was at $500 million. The investors involved were Sequoia, Thrive Capital, Greylock and Benchmark (as reported by AllThingsD’s Liz Gannes). Within a matter of days, these venture groups turned an investment into a trade most traders would be drooling over and bragging about for years. This group doubled a very large investment in a very short period of time with little risk. Most venture capital firms are about the investment, longer-term strategies, guidance and loads of risk management. The Instagram deal ended up bringing these venture firms loads of cash and some Facebook stock.
Like many traders, these investors could say they knew the offer was coming and that was why they got in when they did. There could even be some truth to that. A popular company with a large bank account does attract much more aggressive takeover bids and can prompt quick moves by potential acquirers. Something tells me however, that they had little idea that the valuation would end up that high or that it would happen so quickly. Either way, good for them, well done and they deserve a pat on the back. It’s a bumpy month in the markets and it’s nice to see someone making money and knowing that the gains will be likely pumped back into more start-ups to foster more growth in the industry