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The big NYC clean

Posted: November 7th, 2010 | 1 Comment »
Date Acquired Acquiror Price and Multiple
May 18, 2010 Assoc. Content Yahoo $90 mil est 3-4x trailing revenue
September 28, 2010 5min AOL $65 mil est. 6-8x runrate revenue
October 29, 2010 drop.io Facebook asset purchase
December ?? 2010 cafemom Yahoo? $100 mil rumor, est 4x trailing revenue


Not as relevant on retail multiples:  November 7?, 2010 diapers.com by Amazon for $540 mil, est 1.5x runrate revenue

*Caveat: I have not been an investment banker in decades, and most of these multiples are ‘informed guesses’ on my part. I invite anyone to write me with better estimates and I’ll update the post.

UPDATE:  Please see my updated post here

Within the past 6 months, some well-run, well-funded NY new tech companies have been wholly acquired by major conglomerates. Cafemom also seems up for grabs, rumored to be sought by Yahoo.  By the time this post is up, I understand Quidsi/diapers will also be gone.

So, why would these companies, with relatively good growth metrics, sell at the bottom of the ‘great recession’? Why not hang on 1-2 years for the inevitable multiple expansion on top of higher revenues? Even 5min, with the healthiest acquisition multiple of the bunch, had people guessing why they would have sold now as opposed to waiting for better multiple post-recession on obviously expanding revenue.

There are multiple considerations that may have made selling today the right decisions for these companies despite strong growth prospects. Many of these we lived ourselves at EXPO at some point. Overall, while it’s generally a buyers market, other factors can make it the right time for founders & investors to look past doubts about selling in a downturn. My co-founder, Bill Hildebolt, and I came up with a list why we think we’re seeing so much sales activity that we personally know all too well.

Unplanned need for cash driven by slower sales
In an economy marked by corporate spending decreases, many newcos are experiencing lower than expected sales. Usually a remedy for this would be lowering costs. However, many new tech companies have high fixed costs – people – which means that cutbacks are not easy to make to maintain support of existing clients (not to mention severance, etc.). For many of these companies, you can’t lower costs by just buying less plastic and then making fewer widgets. With lower than planned revenues, and an inability to lower costs correspondingly, companies find themselves needing to raise money either a) faster than anticipated, or b) more than anticipated. Either way, VCs, insiders, even angels, aren’t attracted to that type of story.

Poor terms when capital is available
Raising capital in most markets isn’t something executives dream about (well, maybe in their nightmares). But in this market, terms could have been so unattractive that an early, but fair exit became a better alternative. While we’ve heard there’s money out there for seed, and for strong B rounds, there doesn’t seem to be a lot for ‘follow-on’ A rounds. Plus, you’d be trying to raise capital on revenues that you feel don’t reflect your true value, on multiples that are currently depressed. Who wants to do that for a year?

Cash wasn’t just king, it was also queen.
Conglomerates started hoarding cash into the downturn. They cut costs quickly and found other ways to raise cash. They’ve continued to hold that cash even as their P&Ls have stabilized. At the same time, interest rates are at historic lows and so there’s no return on that cash. An attractive use for cash in that environment could be to ‘buy growth’.  With their own shares depressed in the market, conglomerates are using 100% cash as the payment consideration — with Quidsi being the latest example with $500 mil rumored to be in cash. All of the ongoing business deals listed above were for reportedly all or almost all cash. Knowing that immediate liquidity was possible, many VCs or angels may have just decided that an all-cash acquisition proposal was too good of an opportunity to help them balance their own portfolios. Cash isn’t appearing every day for them, and many are tapping out of old funds but haven’t raised new ones. They may have put pressure on executives to liquidate because of a premium they may have had for the cash.

What’s the opportunity cost of holding on?
Despite growth, promise, and great product, executives might have just run the numbers and not liked what they saw. With IPO markets far from frothy (albeit also very far from dead), and a potential hard road for revenue growth for a few years, some founders might have just run the numbers and decided cashing out now was in their best interest. It’s been a tough two years for most of us, and it’s easy to decide you’ve ‘topped out’ on your personal risk-reward returns for the next couple years. Most of us entrepreneurs don’t display the reserve of Mark Zuckerberg, who said “I don’t think I’m going to have another idea this good for a long time.” Most of us think we have an idea every minute.

My co-founder and I have gone through almost all of these stages since founding the company. Sometimes in the down market, we’ve run the numbers, not liked what we’ve seen, but either had the foresight or plain luck to not have been forced to make any decisions at that point. Most of that credit goes to my partner, Bill, who planned our financials knowing that “Most companies don’t go out of business because they’re bad businesses. They go out of business because they run out of cash.” As our headlights become longer now as our business model has taken shape, it helps us project that the wait will be well worth it.

Congrats to the execs who have found their right exit now, and here’s to the rest of us who are intending to find it later.

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One Comment on “The big NYC clean”

  1. 1 Peta Dunia said at 3:24 pm on April 8th, 2011:

    […] a colleague who was asking about current multiples of tech/new growth companies.  As an update to my blogpost about multiples earlier in the year, the market is definitely more frothy and more yielding in certain spaces.  […]

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