From: acquiredfm
The early history of eBay and its financing provides a compelling case study on challenges and adaptations in venture capital and the emergence of secondary transactions in funding rounds.
Early Ventures and Connections
Pierre Omidyar, the founder of eBay, previously worked at a pen computing company called Inc. [00:00:16] Bruce Dunleavy from Merrill Pickard Anderson and Eyre was an investor in Inc. [00:00:21] While the pen computing space, apart from Palm Pilot, did not largely pan out, Inc. pivoted into early e-commerce software enablement and was eventually sold to Microsoft, resulting in a positive outcome for investors and the management team [00:01:01]. Omidyar, an engineer at Inc., developed a relationship with Bruce Dunleavy during this period [00:01:08].
After Inc., Omidyar joined General Magic, a company credited with inventing concepts like cloud and mobile [00:01:30]. His background in pen computing made his move to General Magic logical [00:01:57].
The Genesis of eBay
While working full-time at General Magic, Omidyar began “tinkering around” on the early internet in his free time [00:02:04]. This led to the creation of a collection of internet services he called eBay, an abbreviation for “electronic Bay Area” [00:02:16]. Among these services was “AuctionWeb,” which ultimately became the core of eBay [00:02:49].
Initially, Omidyar hosted auctions for free, but server costs quickly escalated due to high traffic [00:03:47]. He reluctantly introduced a small listing fee, which users paid by sending checks to his apartment [00:04:02]. This overwhelming response demonstrated “product market fit” [00:04:06]. Jeff Skoll, a newly minted MBA from Stanford, was brought on as the “business guy” to manage the influx of checks [00:04:23]. The decision to charge fees prevented eBay from becoming a non-profit resource like Wikipedia or Craigslist [00:04:41].
The Investment Dilemma: Benchmark vs. Knight Ridder
By June 1997, eBay was growing at 10% per month and was profitable [00:07:11]. Despite having cash flow, Omidyar recognized the value of VCS and a professional board, based on his experiences at Inc. and General Magic [00:05:23].
Omidyar and Skoll pitched their business to numerous VC firms on Sand Hill Road, but nearly all turned them down [00:05:33]. Benchmark, however, showed interest, with Bruce Dunleavy, his partner Bob, and later David all contributing to the deal [00:06:06]. Benchmark offered a Series A financing of 20 million pre-money valuation [00:06:18].
A competing offer came from Knight Ridder, a large newspaper conglomerate. This was an acquisition offer of $50 million [00:06:38]. This was a significant sum, especially for a two-person company that was “barely a company” [00:07:54].
The Untraditional Secondary Transaction
There is historical debate about the exact structure and use of Benchmark’s investment [00:08:05]. What is generally agreed upon is that eBay likely did not burn any of Benchmark’s investment, as the company was consistently profitable [00:08:28]. Benchmark obtained 20% or more equity in eBay, reported as 22.1% at IPO [00:08:57].
A key and “highly untraditional” aspect of the deal was the reported provision of equity-backed loans to Omidyar and Skoll [00:10:32]. The Washington Post reported that Benchmark structured $750,000 equity-backed loans to each founder [00:09:13].
This effectively served as a secondary transaction, paying 3 million of the $6.7 million investment was used as a secondary [00:09:53].
This structure was non-consensus at the time, allowing entrepreneurs to “take some money off the table” early, preventing them from selling the company for a lower sum and instead aiming for a much larger outcome [00:10:54]. This approach was later observed in deals like the Clubhouse funding round, where secondary transactions became more common [00:11:17].
Monumental Returns and Impact
The deal closed in the summer of 1997 [00:11:29]. By September 1998, just over a year later, eBay went public [00:11:41]. Benchmark, having helped recruit Meg Whitman as CEO, saw its 400 million at the IPO [00:12:17].
Due to a six-month lockup period, Benchmark could not distribute its shares immediately [00:12:24]. By the time the lockup expired in spring 1999, their stake was worth over 4 billion on an 6.7 million investment turning into $4 billion in under two years [00:12:43]. This alone generated a 47x return on their fund [00:12:51].
If the reported secondary/equity-backed loans were indeed incremental to the equity investment, this could have added another 4 billion to its limited partners [00:13:39].
Despite the dot-com bust in 2000, which negatively impacted many investments, eBay remained strong, ensuring a confirmed 50x return on the fund [00:14:12]. This success meant that the usual “first one X” return to limited partners before general partners participate in carry was a “rounding error” [00:14:31]. Even by conservative estimates, the eBay investment generated $1.5 billion in carry dollars to be distributed among the equal partnership [00:14:54]. Famously, Benchmark also gave pieces of carry to its assistants, leading to stories of them becoming multi-millionaires [00:15:13].