Last week, San Diego’s Avalon Ventures confirmed that it is setting out to raise its ninth venture fund, which is expected to close between $150 million and $200 million. That’s a modest fund by the billion-dollar standards of Sequoia Capital or New Enterprise Associates, but it’s a formula that has worked well in the 27 years since founder Kevin Kinsella started the boutique firm, which specializes in seed and early stage investments in promising startups.
Kinsella tells me securities law precludes him from discussing Avalon’s ninth fund. But he was willing to discuss other matters, and he notes that Zynga, the San Francisco-based maker of multiplayer browser games like FarmVille and Mafia Wars, is the standout investment of Avalon’s current fund, which is something some media reports overlooked. It seemed like a good idea, especially since Zynga is the subject of intensifying media attention in Silicon Valley because of its reported rift with Facebook. Today, reports are flying that Zynga plans to establish its own gamers network at Zynga Live.com.
Kinsella says Avalon invested $5.3 million in Zynga in late 2007, a relatively small stake in a startup that has received roughly $219 million in venture capital. Nevertheless, in regulatory papers related to a new financing that Zynga filed in April, Zynga’s implied value is now close to $4.6 billion—and Kinsella says Avalon’s investment in Zynga may rank as the venture firm’s single most successful deal.
“It is among the most successful, for sure,” Kinsella says. “I would have to go and look. We had some early funds in Avalon that had what we call MOICs—Multiples Of Invested Capital—that were in the hundreds, and Zynga is approaching that and still growing…When all is said and done, it would not at all surprise me if it were the best investment that Avalon has made in the past 27 years.”
Kinsella also explains that the financing revealed in Zynga’s recent filing (Zynga issued almost 2 million in preferred shares related to a new investor that some speculate is Japan’s Softbank) as well as a reported $180 million investment several months ago by Russian venture investor Digital Sky Technologies allowed early investors to take some money off the table. “Not all went into the coffers of the company, because as you can imagine with a company with the revenue base growing the way it is [More on this below] with no cost of goods sold, they don’t really need any capital. So this is providing an alternative liquidity event scenario for some of employees and some early investors.”
When I asked Kinsella how did the deal came about, he gave a long explanation that’s worth repeating in its entirety:
“This is a company that we invested in because
