
EBay acquires Hunch for $80m - speedracr
http://uncrunched.com/2011/11/21/ebays-got-a-hunch-for-around-80-million/
======
socratic
Could someone experienced breakdown what a transaction like this looks like
for everyone involved? I'm super curious. I've never been acquired, so I
really have no insight into the process other than what I've read.

Here's the facts as I see them: Crunchbase says Hunch started in September of
2007 and had 23 employees on LinkedIn when they exited. (TechCrunch calls it a
20-person team, so I'm presuming that's all the employees.) They've gotten
$19.2m in funding, let's just say $20m. TechCrunch claims the sale was
"around" $80m.

So what does the breakdown look like? Who gets what? What are the likely
investor terms?

My totally naive guess would be that the investors got at least a 1x
liquidation preference, maybe more. I mean, did Hunch have any revenue? So
there was at most $40m to go around to the people at the company. Of course,
most of that probably went to the founders. Would maybe 20% of that have gone
to the 20-ish employees? So naively pretending that each of the 20-ish
employees got 1% for four years, did they each end up with an extra
$100k/year? What's the likely distribution of shares among employees?

What are the transaction costs (lawyers, taxes, etc.) for this sort of
acquisition? How long will the employees have to be at eBay to get their earn-
out, and will that earn-out be in addition to their common stock in Hunch?
Will they end up being paid less to work for eBay during their earn-out than
if they were on the open market?

Of course, their are many other reasons to do a deal like this (passion for
improving eBay's recommendations, for example), but let's ignore that for now.

~~~
drusenko
Here's a wild, random-ass guess:

\- Let's keep it simple and say that since this is an experienced team, the
investors invested $20m at a $60m post, so they have 1/3 of the company. Since
it is an experienced team, I'm going to guess no participation or anything
else hokey. 1x liquidation preference is likely but won't matter in this
scenario b/c preferred will convert to common.

\- With a 20 person team, you've probably given away 5-10% of the company to
employees. The later employees probably did not get much, but then again, they
weren't around for that long. Let's be very generous and call it 10%.

\- That leaves the founders with 57% of the company.

\- Let's just not count transaction costs, they're probably in the $75-$200k
range, and it's not super material to this discussion.

In that scenario, the founders make $11.4 million each pre-tax, or about
$8.55m post-tax (assuming all founders are equal, which is probably also
unlikely here). The employees make $8m pre-tax total, or ~$350k each pretax,
or ~$190k each post-tax, but the distribution is going to be skewed towards
earlier employees. Investors make $26.4m, which is a pretty poor return for a
3-year investment -- investors are mostly looking at IRR, which means the
longer an exit takes, the higher the outcome needs to be to make it worth it.

This is just a wild ass guess on what a transaction like this _might_ look
like, but lots and lots of things are likely way different than I guessed
here, and I can guarantee that I've over-estimated the amount of money
everybody made, because as a general rule of thumb that always happens.

EDIT: > How long will the employees have to be at eBay to get their earn-out,
and will that earn-out be in addition to their common stock in Hunch? Will
they end up being paid less to work for eBay during their earn-out than if
they were on the open market?

Probably 2-4 years for the earn-out. The employees might get more retention
bonuses to stick around, above what they would normally get from the
transaction. They will not earn below-market due to the retention package.

~~~
flavio87
you are calculating the tax here at around 25%. Wouldn't this count as long
term capital gains tax (if you hold the stock for more than 1 year, which it
seems likely since the company was incorporated in 2007) that is currently
being taxed at 15%?

~~~
jamiequint
State/City long term capital gains in NY are around 11-12%. In California they
are the same as the income tax rate of 9.3%. 25% is the blended
Federal/State/City rate.

~~~
flavio87
ah forgot about that - thanks for clarifying.

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jnorthrop
"It’s been a long journey for Hunch."

They were founded in 2008 and sold for $80m 3 years later. That is considered
a "long journey" these days? Statements like this give me that "we're in a
bubble" feeling.

~~~
hassy
I am somewhat disappointed since Chris Dixon has said Hunch would be in it for
the long-term. (I've followed Hunch since it's early days* and always wanted
to see it go big.) $80m is a nice pay-out though, the systems they've built
have the potential to bring an immense amount of value to eBay's offerings,
and a lot of that money will trickle down to other startups via angel
investments.

* <http://hassy.posterous.com/my-favorite-startups-hunch>

~~~
kmfrk

        Hunch is not for sale. The founders have already sold companies before and have no desire to sell Hunch. We want to build it into a large company.
        
        hunch responded one year ago
    

<http://www.formspring.me/hunch/q/1392572735>

~~~
jjm
I've learned that in one year, one's goals can change dramatically.

~~~
AznHisoka
It's also one thing to say something. But the situation changes when a ton of
money is actually thrown right in front of you.

~~~
kennystone
If the number is right, $80m is not a ton of money for people who have already
had big exits and took $20m in VC to start this company.

~~~
mdda
It could also be that the company is doing far worse than the business plan
they originally showed out to the VCs : If there's lower growth rates, it's
far better for everyone to notch up a quick 3x, rather than see the business
dwindle into obscurity (the alternative case, in the minds of the VCs, if
they're not going to 'go big').

------
AznHisoka
Wow, this is like a knight in a white horse for Hunch.. I seriously doubt they
were making any profit... This sounds like a talent acquisition. I mean this
is ridiculous... but it goes to show you.. you gotta show up for the game (the
startup game, I mean) to win it... $80 m for a site that doesn't even get 1
million uniques (per Compete) a month is a STEAL. I mean.. seriously, everyone
who has a CS background should just start something on the side if a deal like
this is possible.

~~~
arturadib
> everyone who has a CS background should just start something on the side if
> a deal like this is possible

Chris Dixon is a veteran investor and entrepreneur, with _enormous_ visibility
in the tech world. Contacts with potential acquirers are a non-issue for him.

A poor CS fellow could have created a version of Hunch that was 100x better
and they still would have 1,000x _less_ of an exit opportunity as compared to
any startup Dixon founded.

Get real.

~~~
arctangent
If this really is true then it's a sad indictment of the state of the startup
scene.

Perhaps your hypothetical fellow should focus on building a "lifestyle
business" instead of trying to get big and then get acquired...

~~~
dmix
Technically he should be a software developer with a $120-200k salary working
at Google, saving money with compound interest and getting company stock.
Thats the easiest way as a CS grad to become wealthy - if thats your goal.

~~~
alphamale3000
That's when you don't factor in 'skills'. If you're 'any' CS grad, you're
right. Be if your skills are above average (CS and business sense), this skews
the return of investment of the startup.

~~~
dmix
Well, not any developer can get $200k at Google. So skill is important in both
respects.

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dr_
I never used Hunch much, and I'm not sure if an 80 million exit with 20
million in VC funding is so great for the founders, but I suppose it gives
eBay a footing in NYC - that's the part of the article I found most
interesting.

~~~
danssig
15 million a piece. I don't know how long they were working on it but the very
top billed actors tend to make, what, 20 million for movies that take ~3 years
to make.

~~~
ebaysucks
So you assume the VC's only scored a 1x on this deal and had no special
treatment for their preferred shares such as accrued dividends, liquidity
preference, participating preferred, etc?

~~~
danssig
I went by what the GP said.

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kennystone
Chris Dixon talked a lot about "going big", growing big companies, etc. He
talked a lot about a new "data tier" for the web and how Hunch would be an
intelligent filter for all the data. I wonder what changed?

~~~
frou_dh
A chance to leverage synergies?

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dgurney
Something about Hunch's trajectory is utterly predictable and ever-so-slightly
depressing. I suppose building to sell is a perfectly valid business model --
if you succeed -- but it makes me feel a little dirty. And if nobody buys you,
you're well and truly f#%@$ed.

Although who am I to argue with $80 million.

~~~
wyclif
_And if nobody buys you, you're well and truly f#%@$ed._

Really? If you don't have a 'building to sell' roadmap in the first place, why
be depressed? If you're building a long-term, stable company with real value
and profits, you're not for sale in the first place.

------
rokhayakebe
"I have a hunch nobody ever meaningfully used Hunch."

<http://twitter.com/#!/rafat/status/138633186300264448>

------
beagledude
Hunch is like my divorced neighbor who couldn't work it out, so now they're
giving up and short selling the house and bringing down the values for
everyone.

------
Zirro
"It’s been a long journey for Hunch. The company was founded in 2008."

Knowing how long it can take for a small company with a good idea and product
to launch, I wouldn't really call that a long journey.

Still, congratulations to them. I hope eBay is able to make something good out
of what they have created so far.

------
Brajeshwar
I never felt the need to use Hunch on its own. Now that it can be more of a
tool to supplement other objectives, it sure might be the right tool after-
all.

~~~
jkaljundi
Hunch was always more of an API company than a destination site.

~~~
movingahead
Can you name some companies which were using its API? Their developer site
doesn't take any names.

~~~
jkaljundi
What I meant was the goal of the company was to build technology and license
that via an API, not become a destination site.

------
vaksel
did anyone actually use Hunch seriously?

~~~
suking
No freaking kidding - only thing I saw the founder do was interview people on
TC. Never heard anyone mention hunch outside of those interviews. What is ebay
thinking?

~~~
hassy
> What is ebay thinking?

Impressive back-end tech (the recommendation engine) that can now process
millions and millions of items on eBay to help increase sales (something like
a quarter of Amazon's sales come from recommendations).

~~~
smokinn
80 million dollars is a lot to pay for a recommendation engine.

Netflix had their own and paid a million dollars as prize payout for an
absolutely state of the art system.

If it really was just a tech acquisition they massively overpaid.

~~~
hassy
Don't forget that Hunch's system is real-time (this is very hard), and is more
than just scalable collaborative filtering for items of the same kind. They
can ingest a Twitter or Facebook profile, infer your "taste profile", and
start recommending things instantly; "things" meaning books, films, music,
events, places etc etc.

~~~
suking
I don't believe real time is very hard. Something that ebay can' already do.
And if they can't already do it, how will hunch come in and solve it. It would
probably require major changes to db's etc if that is why ebay can't already
do it.

~~~
hassy
_> I don't believe real time is very hard._

At scale it is. More here:

[http://www.quora.com/Hunch/Is-Hunch-actually-doing-
anything-...](http://www.quora.com/Hunch/Is-Hunch-actually-doing-anything-
technically-interesting/answer/Hasan-Veldstra) (this one got a vote from one
of the founders)

<http://hassy.posterous.com/my-favorite-startups-hunch>

------
benhalllondon
Anyone have any suggestions about how Hunch would scale to eBay levels?

Seems Hunch has gone the 'Mega Machine' route (1 T RAM, 48 Core [1]), from
700k users (80m Total TTHY / 113THAYs [1]), make 250k API users

How do you scale that out to eBay numbers?

[1][http://blog.hunch.com/wp-
content/uploads/2011/05/110509-HUNC...](http://blog.hunch.com/wp-
content/uploads/2011/05/110509-HUNCH-TASTEGRAPH_800px_v2_small.png)

------
bproper
Here's an interview with Chris Dixon on the Ebay purchase.

eBay is an interesting challenge because so many of the listings don't have
metadata like product IDs.

The work Hunch has been doing on the open web is a good fit for this kind of
unstructured data.

<http://www.betabeat.com/2011/11/21/chris-dixon-ebay-hunch/>

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speedracr
Is Arrington rebuilding a proper tech blog as a counterpart to the growing
news machine of Techeablecrunchbeat?

~~~
hswolff
I think it's just in his blood at this point to blog about tech news. Good for
him I say. If you love what you do then do it.

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subpixel
Whatever Hunch is really good at, we haven't seen it yet. I assume Ebay has,
and that it has everything to do with crunching customer browsing & purchase
behavior to offer them products they're most likely to purchase.

~~~
Tichy
I think their predictions were actually really good. A while ago I tested
several movie recommendation engines and hunch was the only one that
delivered.

On the downside, they really asked a lot of questions, which made me
uncomfortable with using it.

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pepdek
There is a great play around the collection of data outside of just social
space. Hunch has done a great job aggregating this data via a social means and
displaying the data to the masses in an appealing way to drive more people
towards their "recommendation" engine. I work for a site called Ranker and
we're focused on a similar data play with much greater focus on SEO.

* <http://www.ranker.com/>

------
iampims
I like their movie predictor: <http://hunch.com/movies/>

