The Ancestry of It’s Not a VC-Backed IPO

Online genealogy company yesterday filed for a $75 million IPO, and some people instinctively began buzzing about the prospects for yet another VC-backed IPO (following hits like OpenTable and LogMeIn). Only problem is that isn’t really VC-backed. At least not anymore.

The Provo-Utah-based company was founded in 1998, and that October raised $10 million in Series A funding from CMGI @Ventures, Epic Ventures and Intel Capital. Less than one year later, it would raise $38 million in Series B funding at a $163 million post-money valuation. The existing shareholders were joined by newbies like Amerindo Investment Advisors, Compaq Computer Corp., L Capital Management, Pivotal Asset Management and Tango Partners. It was all perfectly bubblicious.

Beginning in 2003 and 2004, however, some of those investors began quietly selling shares in to Spectrum Equity Investors, one of the very few private equity shops to dabble in direct secondaries of VC-backed companies (General Atlantic and TCV come to mind as others).

By 2007, Spectrum apparently had enough exposure to, that it knew it wanted control. The Boston-based firm agreed to sponsor a $300 million majority recap of the dotcom, alongside minority co-investors W Capital Partners, Crosslink Capital and Sorenson Media. It’s unclear how much leverage was on the deal, although is currently saddled with around $117 million in debt (which is a pretty heady figure).

What all of this means is that is really more of a buyout-backed IPO than a VC-backed IPO. It might sound like semantics, but it’s an important distinction. I’ve publicly wondered for years about why more buyout shops haven’t scooped up more VC-backed companies formed during the bubble.

The answer was usually that the good ones either: (a) Had already exited via IPO or M&A; (b) Were being held too tight by the VCs; or (c) Don’t have a strong enough private equity “profile.” If does well — which will largely depend on if investors believe its revenue growth and IPO proceeds can sufficiently pay down the debt — then a bunch of PE shops might be kicking themselves for not following Spectrum’s lead.