In a rare move, venture firm NEA made the hugely profitable call to hold its MuleSoft shares after IPO lockup

Key Points
  • NEA first invested in MuleSoft in 2013 and held onto its whole stake even after the IPO lockup period expired.
  • A stake that was worth $340 million is now valued at more than twice that amount.
  • Salesforce agreed to by MuleSoft on Tuesday for $6.5 billion.
Source: MuleSoft

Six months ago, venture capital firm New Enterprise Associates had the opportunity to start selling shares in software vendor MuleSoft, with the post-IPO lockup period coming to an end. The firm opted to hold.

With Salesforce's agreement on Tuesday to acquire MuleSoft for $6.5 billion, NEA's decision turned what was a $340 million stake in September into a $723 million position at the time of the announcement.

MuleSoft, a San Francisco-based developer of software that helps businesses stitch together applications, went public a year ago at $17 a share. The Salesforce purchase price of $44.89 a share represents a 36 percent premium to where the stock closed on Monday, before the deal news leaked , and a 160 percent return for MuleSoft investors since the IPO.

That upside for investors could help convince other high-valued private companies to test the IPO waters, adding to an already strong year for tech IPOs.

Not the typical venture play

While venture firms often maintain shares in their companies for several years after public offerings, they tend to sell significant chunks along the way. After all, their job is to make early bets on founding teams and promising technology, not to manage portfolios of publicly traded stocks.

Scott Sandell, managing general partner of NEA, which first invested in MuleSoft in 2013, told CNBC that the firm holds its entire stake only in unusual situations.

"For us it is a very high bar to hold a public stock because we are paid to achieve high returns for our limited partners," Sandell wrote in an email. "In this case, we saw very strong company fundamentals and a great management team, combined with an IPO valuation, which we thought underappreciated what we saw, creating a very high likelihood of significant appreciation for the patient investor."

Salesforce to acquire Mulesoft for $6.5 billion

MuleSoft's other top venture backers are also notching big wins, even though they trimmed their stakes after the lockup expired.

Lightspeed Venture Partners was MuleSoft's biggest investor at the time of the IPO, with 19.3 million shares. According to its latest SEC filing, the firm has cut its holdings by 36 percent and now owns 12.35 million shares worth $554 million. Hummer Winblad was the second-largest holder with 17.9 million shares, though it has since cut that number by 39 percent to 10.9 million, worth $489 million at the purchase price.

For those three venture firms and several other with sizable stakes, the acquisition will bring in significant chunks of cash at a time when Silicon Valley investors are hungry for actual returns, not just paper mark-ups.

The deal could get some high-valued private companies to consider coming off the sidelines and going public, said Yogesh Amle, head of software investment banking at Union Square Advisors.

"An IPO is an intermediate step to the eventual exit," said Amle. "This should definitely encourage other private companies to at least aspire to be public companies."

The tech IPO market is already showing some signs of life this year. Cloud security company Zscaler debuted last week and doubled in value in its first day of trading. Dropbox is scheduled to go public this week, with Spotify expected to hit the market in early April. Zuora filed its IPO prospectus last week and DocuSign has filed confidentially, according to TechCrunch.

It wasn't just big venture investors who made a killing on MuleSoft. Hong Kong-based investment firm Sylebra HK, which spun out of Coatue Management, bought 3.48 million shares in the fourth quarter, making it one of the company's top shareholders.

Based on the mid-price of MuleSoft's trading range in the fourth quarter, Sylebra parlayed an investment of about $75 million into $156 million in just a few months. The firm's total stake in MuleSoft, including over 1 million shares it purchased earlier, is worth $206 million.