Pe deals of the year

Introduction: Mission accomplished (mostly)   Terra Firma-EMI   3G-Burger King   BankUnited   Kinder Morgan   THL-Warner Music Group   Carlyle-China Pacific   Arcos Dorados   Sequoia-LinkedIn   Sun Capital-Bruegger's   Cerberus-Talecris   Court Square-FiberTech   Second best of the best

Back in 2003, Sequoia Capital's Mark Kvamme and Michael Moritz sat in the parking lot outside the Silicon Valley building that housed two new social networking startups -- Friendster Inc. and LinkedIn Corp. -- discussing which of the companies to back.

Their decision turned out to be the difference between a flameout and a billion-dollar home run. Eight years after their investment, professional networking service LinkedIn launched a resoundingly successful initial public offering on May 19 that showered its investors with galactic profits, at least on paper.

Sequoia, the earliest institutional investor in LinkedIn, led a $4.7 million Series A round in 2003. The Sand Hill Road firm owned 18.7% before its holdings were watered down to 17.8% post-IPO. Its 16.84 million shares were worth about $750 million at LinkedIn's IPO price of $45 apiece. Based on a recent closing price of $72.01, however, that stake is worth about $1.2 billion, an outsized 171 times return on a mere $7 million investment.

"The investors in LinkedIn did their jobs," independent IPO analyst Tom Taulli says. "They took some risk in investments that weren't popular at the time, and now they are getting compensated for that."

While Kvamme's advice to LinkedIn during his long tenure on the board helped shape the success of the company, Sequoia's achievement stemmed from its ability to identify, and support, a visionary entrepreneur in the person of LinkedIn co-founder Reid Hoffman. Hoffman struggled with his own startup, SocialNet.com, in the late 1990s before joining online payments processor PayPal, where Moritz was a director. After eBay Inc. acquired PayPal in 2002, Hoffman revisited his social networking interest, with a focus on the professional market. His living room became the birthplace of LinkedIn.

"What we really liked was Reid Hoffman's vision," Kvamme said in a recent Bloomberg story. "He was spot-on; 90% of what he said he was going to do, he did. We understood how this was something that in the future would be a great tool for corporations."

LinkedIn represents an interesting demographic for advertisers: professionals in their mid-30s, with money. Last year about 42% of revenue came from paid services and subscriptions provided to job recruiters. Among other services, LinkedIn enables recruitment firms and other enterprises to search its membership for potential hires for a fee.

Growth has been impressive. It took 494 days for it to garner its first million members; it now adds an average of one new member every second. It boasts 90 million members in 200 countries.

Last year's revenue doubled as momentum picked up, with about 33% from advertising. The Mountain View, Calif., company turned profitable for the first time, booking $15.4 million net income on $243 million net revenue, from a net loss of $3.97 million on net revenue of $120.13 million in 2009.

LinkedIn didn't score the lofty first-day pop that marked landmark floats in the late '90s: nearly 700% for computer maker VA Linux shares, 525% for Foundry Networks Inc. Still, LinkedIn's IPO valued it at about $6 billion, a rich 115 times Ebitda for the 12 months ended March 31.

Even after shares settled down from their $94.25 first-day close, or 109% above the $45 offering price, the paper gains for LinkedIn's investors are of the sort that burnish their reputation as some of the VC industry's standouts.

Greylock Partners and Bessemer Venture Partners also did not sell shares in the offering, but their stakes are worth about $1.07 billion and $331 million, respectively. Bain Capital Ventures, which led a $53 million round in 2008, sold about 654,000 shares and garnered $29.4 million. Its remaining 3.9% is valued at about $267 million. The venture capital firms declined to comment, citing a quiet period.

The largest windfall went to Hoffman, now the company's executive chairman, and his wife, Michelle Yee. They sold 155,335 shares in the offering and reaped $5.2 million. They still own 18.95 million shares, or 20.1%, worth about $1.4 billion.

Other investors are likely to benefit indirectly from LinkedIn's offering, as it could serve as a spark for the slowly recovering IPO market. When LinkedIn filed its prospectus on Jan. 28, it became the first of a crop of U.S. social media companies, which have amassed hundreds of millions of dollars in investor equity, to approach the public market. Its IPO was viewed as a litmus test for Wall Street's appetite for future offerings, including online group deal company Groupon Inc., which filed its S-1 June 2, and Facebook Inc., expected to attempt a listing next year.

Taulli agrees: "The performance of LinkedIn's IPO is very good news for investors in Zynga or Twitter or Facebook."