As an individual investor, have you ever wanted to get just one chance to participate in the early rounds of private funding for the next big technology IPO or M&A target? This world of early venture capital funding which can yield gains of 5X-10X the original investment is usually out of the reach of most average investors. But on occasion a special opportunity presents itself which puts the small guy in a position to not only invest early with the venture capitalists, but to buy a stake in a company at a lower price than them.
To clearly identify such an investment opportunity, one must understand what to look for as you are pursuing due diligence. In venture capital funding, the term "exit" and "exit value" are the most important words in the industry. When venture capital makes an investment in an early stage public or private company, their ultimate goal is to "exit" that investment at a time to be determined with as high of a return on that investment as possible. This "exit" opportunity is usually executed with an IPO or when the growing company is acquired. The "exit value" is the selling price of an asset (company) at an IPO or acquisition. The keys to success in VC funding is to exit at the right time when you discern the exit value to be the greatest.
Unlike many individual investors, venture capital firms are not "buy and hold" investors. They want to get in early at a low price and exit at the top of the market when the valuations are the richest. The exit is the key! And typically, when a VC firm has exited an investment, they move on to the next early stage growth opportunity to generate the next high exit value for lucrative, 5X-10X original investment returns.
On the rare occasion when you notice that a VC firm has successfully exited (sold) an investment at a price 5X+ their original purchase and then comes back to fully reinvest those gains back in the same company, you may well be receiving a profitable clue and huge buy signal. We have recently uncovered this exact situation in the case of Glu Mobile (GLUU), a leading global developer and publisher of freemium games for smartphone and tablet devices for a wide range of platforms including iOS, Android, Windows Phone, Google (GOOG) Chrome and Mac OS. Glu is headquartered in San Francisco and has an international reach with major offices overseas in Brazil, Canada, China and Russia.
Huge Insider Buying
In the past 110 days, Glu's CEO, three directors, and one of the Top Ten venture capital firms in the country, GGV Capital, have purchased 3,297,717 shares of GLUU in the price range of $2.25 - $3.24. While it is always notable and a bullish signal when insiders buy company stock on the open market, the recent reinvestment in Glu of $9,883,221 (3,243,218 shares) by GGV Capital and Hany Nada is extraordinary and actionable for investors looking to invest alongside and at a 25% lower entry than one of the most successful venture capital firms around.
The most recent insider buys include:
Niccolo De Masi
Benjamin Smith IV
Hany Nada/ GGV
Hany Nada/ GGV
Hany Nada/ GGV
Glu Mobile's Venture Capital Reinvestment By GGV Capital and Hany Nada
To understand the bullishness of this major VC reinvestment in Glu, let me introduce you to GGV Capital and Hany Nada. Mr. Nada has served on the Glu Mobile board since April 2005. Nada is a co-founder of GGV Capital, an expansion stage venture capital firm. As a specialist in M&A/IPO guidance in the U.S. and Asian markets, he has led his venture capital firm's successful investments in athenahealth (ATHN), Endeca [acquired by Oracle (ORCL)] Glu Mobile, Kintana (acquired by Mercury Interactive), Turbine [acquired by Time Warner (TWC)] and Xfire [acquired by Viacom (VIA)].
Currently, he serves on the Board of Directors for Tudou (TUDO), China's leading video content provider, Vocera Communications (VCRA), RootMusic, Glu Mobile, and Wild Tangent. In addition to actively making investments in the mobile and digital media sectors in the U.S. and China, Nada is responsible for one of the industry's most successful China/U.S. investment teams as well as general oversight of the firm's funds.
It is no surprise to those in the VC industry that Nada's GGV Capital was named one of the Top 10 Venture Capital firms of 2012. GGV was selected based on total number and dollar amounts of successful M&A and IPO deals during the last two years (October 1, 2010 through September 30, 2012) from their portfolio companies. GGV produced $4.387 billion in total exit value which included one of the few $1 billion+ deals [Oracle's acquisition of GGV funded Endeca].
Some of the most notable Nada-led, GGV Capital investments which resulted in successful exits due to M&A deals negotiated at high revenue multiples include the following:
With that background of Nada and GGV Capital, let me now uncover this history of GGV's early investment in Glu which yielded a gain of $10,429,445 and then speculate on why they have recently reinvested nearly $10 million of those gains back into Glu at an average price of $3.05/share.
GGV Capital's Initial $10 Million Exit From GLUU
In 2005, Glu Mobile first caught the attention of GGV Capital and Hany Nada as a potentially huge growth opportunity in the early stages of the mobile gaming revolution. As an early funder, GGV and Hany Nada were given a seat on the Glu Mobile Board of Directors. They continued their Glu support with multiple rounds of funding including early buys in 2009 and 2010 of 3,000,000 shares at an average price of $1.02/share for an investment of $3,060,000.
As any smart venture capitalist would do when their exit value is reached, Nada and GGV decided to lock in their gains and exit most of this 3,000,000 share position when their investment was registering a 5X return at over $5.00/share. Over the course of three months, GGV/Nada sold 2,609,177 shares at $5.17 average to achieve an exit value of $13,489,445. A portion (1,164,000 shares) sold were pursuant to a 10b5-1 trading plan established on June 3, 2011. This exit amounted to a realized gain of $10,429,445, or a 340% increase of their $3,060,000 venture capital investment.
This amazing 340% return in less than two years is the kind of performance that only venture capital funders usually have access to based on their access to capital and ability to forecast growth stories. But, individual investors now have an incredible opportunity to join GGV Capital in their latest reinvestment of nearly that entire 340% gain back into Glu Mobile. History tells us that GGV's exit value on this new Glu investment is significantly higher than their $3.05/share average purchase price.
GGV Capital's Reinvestment of $9.8 million in GLUU
As noted earlier, instead of moving along to the next early stage venture funding opportunity, Nada and company have recently reinvested $9,883,221 back into Glu with their recent purchase of 3,243,218 shares at an average price of $3.05 (3X their purchase price in 2009 & 2010). This is not typical investing activity for venture capital to revisit gains back into the same company. What this should tell individual investors is that Nada and GGV believe that at $3.05, Glu is very undervalued and not reflective of the exit value they are now putting on Glu shares. Evidently Nada's longtime position on Glu's board and unique experience in venture capital funding in the gaming sector have given him great confidence in reinvesting in Glu at $3.00 based on a 105b-1 trading plan established on February 28, 2012.
Following is a summary of how GGV/Nada achieved a 340% return and then reinvested it back into Glu:
GGV Capital Early Buy #1 (2009-2010)
Summary of Buy #1
GGV Capital Exit #1 from $1.02/share buys
Summary of Exit #1
Buy #1 & Exit #1 Totals
GGV Capital Reinvest Buy #2 (2012)
Summary of Buy #2
GGV Capital Reinvest Exit #2 (TBD)
In just two weeks, Glu Mobile will report 2012 full year financial results on February 5. Guidance is for revenues of $87.4 million (an 80% year over year increase in smartphone revenue) with a year ending balance sheet of $21.5 million in cash and no debt. Going forward, the company is also planning to guide for quarter over quarter adjusted EBITDA improvement in Q1 2013 from Q4 2012. More importantly, we expect to hear forward guidance about Glu's 2013 retooled game road map which includes the integration of recent acquisition Gamespy into more games and the integration and vision of recent hire, Matt Ricchetti as the President of Studios. Risks going forward would include Glu's ability to release profitable games in 2013 with high monetization rates unlike the weak Q3 2012 releases where 9 of 11 games were deemed failures. Gamespy and Ricchetti's experience in monetization should improve new game release prospects in 2013.
Without the ability to predict the future, we have been given many recent clues as to what Glu's funders and leadership expect for Glu in 2013. The CEO, three directors and venture capitalists are investing heavily in the $2.25 - $3.24 range with large insider buys before the February 5 earnings conference call. Clearly, these individuals and institutions who know the company the best consider the stock extremely undervalued. With a current share price of $2.30, investors can follow the lead of insider venture capital and buy at a 25% discount to Hany Nada's 3,243,218 share purchases ($3.05/average) just over 100 days ago.
One can also speculate that GGV and Hany Nada have reinvested back in Glu because they expect the company could be a potential takeover target just as other Nada-led investments have been as referenced earlier. For years, Nada has anticipated M&A and consolidation in the gaming sector as evidenced by his remarks to the Silicon Valley Business Journal and 2013 may be that moment for Glu:
"You don't need 65 mobile game companies," he says. "You maybe need 10. The problem is there are so many ways to deliver the games ... You'll see a lot of game companies because of that. But over time they shrink and that is happening right now. There are a lot of consolidations right now. And as M&A goes on, you'll continue to see a consolidation in the marketplace."
With the revenue multiple range of 4X-20X for GGV/Nada funded companies acquired in M&A, prudent observers notice this great track record of identifying, funding, and exiting at top values. If Glu followed this path and received only a conservative 4X multiple (on 2012 revenues of $87 million), Glu could be acquired at $348 million or $5.04/share based on 69 million shares outstanding. Under that scenario, investors buying now (in the $2.25-$2.30 range that the CEO and directors just paid) would realize a 118% gain.
My plan is to hold my large GLUU position (added to most recently at $2.29) and watch for Nada's exit value to be reached via acquisition or share price appreciation. With his great track record, history tells me Glu Mobile will not remain at this low $150 million market cap for very long or even the $200 million market cap ($3.00/share) where Nada was comfortable reinvesting again in Glu. Thanks to required public filings by Hany Nada as a GLUU insider, I'll be watching every move he makes and so should you.
Glu Mobile offers a great risk/reward profile going into 2013. The downside should be at the 2-year support lows of $2.00 (-13%) while the upside is $5.00 (+118%).
Disclosure: I am long GLUU.