Gluecode's sale to IBM shows VCs a new way to chart exit.

IT isn't every day that a venture capitalist can turn a $5 million investment into a $90 million profit in just over a year.

But last week, two venture capital firms--Palomar Ventures and Rustic Canyon Partners--did just that with the sale of Gluecode Software, a 2-year-old startup in El Segundo, to IBM Corp.

Though published reports put the value of the deal at $100 million, investors called that figure "aggressive." Gluecode executives could not be reached for comment.

The local venture capital community sees the sale as a watershed event--proof that young start-ups are attracting more strategic buyers like IBM.

"The good news is this means there are healthy exits out there and that's encouraging," said Renee LeBran, a partner at Rustic Canyon. "How many software companies have gone public in the past year? Not too many."

Rich Smith, general partner at Palomar Ventures, acknowledged that the offer for Gluecode "was too good to pass up."

Many venture firms like Palomar make small investments of between $2 million to $5 million in early-stage companies. Their goal is to nurture the management team and offer business advice while prepping the company for a public offering in five to seven years.

"We're in the business of building businesses in the long term," said Smith. "As VCs, we have the desire to maximize our return on investment. So the question becomes, do you take a fantastic return on a deal that you invested in just a year ago, in which case, you give up the greater reward?"

For venture capitalists, the reward often comes from stock options that are doled out to top investors when the company goes public.

Gluecode operates in a hot area of software known as "open-source," in which the software code is free and continually developed and debugged by volunteers. Gluecode's open-source software is managed by the Apache Software Foundation and available for free via downloads from the Internet.

Gluecode's server is called Geronimo, which companies use for a variety of business applications like advanced computer tasks for e-commerce Web sites, stock trading and banking. IBM is expected to make money by offering services and technical support to companies that want to use Gluecode's applications.

Randy Churchill, director of business development at PricewaterhouseCoopers, said the deal epitomizes several trends in the venture industry, including the return of early and seed-stage investments after a long drought and higher prices paid for certain companies.