Apple's purchase of Lala sparks price confusion

Apple was bidding against other potential buyers during negotiations.

Maybe it reached 80 million for them to be able to outbid the competition.

You can't just look at what they are worth as the only reason for the price they paid. You have to factor in the fact that they were also competing with other companies for the rights to Lala.

Josh, you said:

"but then you have to take into account that the company only raised $35 million in venture capital. Would Apple really pay more than double the company's total even if the valuation is much higher?"

That sentence says to me that you question paying more for a company than was raised in venture capital. You are implying that the venture capital money raised is its value, which isn't true.

I have no problems with publishing rumors, but the associated commentary should be sound.

You know guys, I've been reading TUAW for a while. Sometimes the coverage has been ok, other times quite poor. This is a strong example of poor coverage. Comparing apple's purchase price with the amount of VC investment to see if apple got a good deal is the WRONG way to approach the analysis. That is not how venture capital works. Let me explain to you how it works.

First let's start with an example of how you can get a valuation of $180 million dollars with a venture capital investment of $35 million. When a venture capital fund invests in a company, it buys a fraction of the shares of the company. This implies a valuation for the entire company. So if the fund agrees to buy 19.4% of Lala for $35 million, this implies that the company is worth $180 million. The remainder (80.6%) of the company is owned by others associated with Lala, like the founders. The funding structure is definitely more complicated than this, but you can get the idea.

If apple bought Lala for $80 million, this is a bargain compared to its earlier valuation of $180 million. Venture capital gets the percentage of $80 million that they own. The employees/founders of Lala get the rest. This is how venture capital makes money - they hope for an exit where their share of the company is worth more than their investment (through IPO or acquisition).

There is a complication in the way that funds are financed. During each round (which implies that the company needs more cash to stay solvent), the later investors are given securities that are senior to those of earlier investors. This is common, and means that later investors are likely to make good money on their fraction of the $35 million investment, and early investors will make less. Lala's founders would own a diminished stake in the company with each round of investment. Later investors ensure that the founders maintain a reasonable stake to ensure that their incentives are aligned with those of the investors.

Hopefully all of you at TUAW now have a better understanding of the way the venture capital investments work.

Apple recently has been pretty good about using acquired technology for its intended purpose...unlike their old PowerSchool purchase.

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