Posted: April 9th, 2012 | No Comments »
What can you do to test the waters of the deal strength?
This post is a follow-on to the discussion about a large-conglomerate offer to a smaller company. Having gone through an almost-deadly major investor deal, I wanted to write more about how to avoid our mistakes. One area of focus could have been making sure that an operating partnership gets struck…if they’re really interested, they will jump at the chance. A partnership, if done correctly, can help you survive any eventual unwinding with your dignity and company in tact…and possibly better off (see third example).
1. Conduct a ‘test’.
So, I like this one the least. I find that tests between companies can fail on multiple levels. 1) The wrong test set-up, so it was never going to work, 2) testing the wrong attributes of the partnership so drawing bad conclusions, 3) lack of time to prove the true value since Rome wasn’t built in a day. I have found that tests often mean “we’re not sure”, as opposed to “let’s blow the doors off this thing!”. There was a NYC digital content company that jumped through hoops and hoops with a large portal. They showed lift in click through from content, lift in ad effectiveness, lift in SEO. Lift, lift, lift. In the end, it was a positive test, but the conglomerate couldn’t see the test being actualized at scale. It’s hard to show you’re going to drive tens of millions of dollars when you drove a few bucks in a few months. There’s a lot between here and there, and all the doubters can poke holes in any test methodology.
2. Is there a sales channel opportunity?
This one is hard, unless you’re already on the rails. Merging anything is a challenge, but it’s especially hard to motivate teams to commit to the hard work if there’s no actual deal in place. Your sales team needs to hit their numbers, and were planning on doing it without this partner. They would need to be convinced that the ‘distraction’ from their plan will be worth the effort. If it was such a slam dunk, why wouldn’t they have been pushing *you* for it in the first place. On the conglomerate sales team’s side, they will need some vig. Assuming it’s a seamless add-on, they’re happy to sell more if they make more. Some components that should align in order to make it work are: 1) if you are finding that you are already heavily overlapping in clients, 2) that you are meeting with the same people, and 3) both your money comes from similar budgets, so your company can tuck in to the larger buy quickly to prove 1+1=3. My guess is, again per my last post, someone from their sales team would be the investment’s business ‘owner’ already…he would understand you enough to put his own job behind your numbers. If it’s being forced on anyone…it’s time to ask yourself if the sales channel opportunity is too risky to bet the deal on.
3. Can they be a customer?
This is the best structure under which to construct a ‘test’. Can they use your services themselves? Then, go get money from them. Use the contacts, momentum and support you have to construct a great vendor deal with their team, and come out the other side either being convinced it’s a great partnership, or with a nice big revenue check from them. What did you lose if the deals fall through? Nothing. What did you gain? A new customer. Either way, winner.
Trying to ensure that your big conglomerate investment or acquisition deal goes through is no enviable task. You rarely have the leverage to turn down the $6 bil Google offer, so how can you survive the process? First, be glad that you’ve changed someone’s game enough to be interesting even at your level of sales. Second, remember that’s the most valuable leverage of all.
Posted: April 8th, 2011 | 1 Comment »
My cofounder and generally extraordinary financing-whisperer, Bill Hildebolt wrote an email to 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. Bill’s analysis breaks down some key changes in the marketplace and their limitations.
Here is Bill’s email response to a ‘current multiples’ question by a colleague:
- yes, most companies are going to be looking to sell (or finance) based off a multiple of revenues, even, typically, runrate or even forward revenues (so, not last years). So if someone wanted to buy us today and we were willing to sell, we’d say it had to be off our 2011 anticipated revenues
- premium deals are trading at up to 10x. here’s a couple of examples of that:
- Salesforce just bought Radian6 at that level
- OpenTable and Logmein – the two big tech IPOs last year – both went out at 10x revenues and have traded up from there
- To get that level of multiple, though, you have to:
- Be at a certain critical mass of revenues….maybe $20mil
- Still be growing as fast as ever
- Have strong market position (and even buzz)
- Be in a sector where the revenues are perceived as recurring / sustainable, probably with one of two characteristics:
- like SAAS or cloudbased software
- network effects like Facebook, Twitter, etc.
- So, VCs will try to do financings in the 3 – 5x revenue multiple range, with the idea that a sale will occur potentially at 5 – 10x revenue. That way, the VC benefits from two things: a) growth of revenues, b) multiple expansion
- Here’s a great example of a range of acquisition outcomes in one story. Three acquisitions on one day by one company of similar companies with 3 different outcomes:
- KickApps had $12mil in revenues and got bought for around $45mil….so 4x
- Kewego had $10 mil in revenue and got bought for around $25mil…so 2.5x
- Kyte had $4mil in revenues and got bought for around $5mil….so 1x.
- If a business is more of a “services” business….for example, like all of the people building Facebook apps…the multiples are going to be lower – say 2 or 3x – with two big caveats:
- If they are CRAZY profitable.
- If the space is on fire (Facebook servicers) and they are perceived as a leader. Like Vitrue, who just raised $17mil. But even others in that space have gotten far less attention because at the end of the days, its just time and materials
- With all of that context, the bottom line is that valuation is driven by two things (as with any company) and if you keep your eyes on these two balls, you definitely won’t sound crazy to the guy on the other side of the table:
- Actual and potential growth rate. If it’s growing like a weed with a recurring, sustainable & defensible revenue stream (like EXPO!), valuation rises
- Company context. If the company is running out of money without a plan, or the CEO has quit, there’s a looming competitive threat, or even there’s only one buyer….valuation is going to get hammered. The difference between a 10x exit and a firesale is often breathtakingly slim. The ability to accurately “sniff” a situation is critical to getting to the ‘best’ answer
If that’s what you get from Bill in an email, imagine how insightful he is in person!
Posted: November 7th, 2010 | 1 Comment »
||Price and Multiple
|May 18, 2010
||$90 mil est 3-4x trailing revenue
|September 28, 2010
||$65 mil est. 6-8x runrate revenue
|October 29, 2010
|December ?? 2010
||$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.
Posted: July 7th, 2010 | No Comments »
Of all the things in this release, the thing I like the most is “enjoying strong growth”. Welcome to some awesome new board members.
New Directors Join Board as Company Enjoys Strong Growth
NEW YORK, NY–(Marketwire – July 7, 2010) – Citing rapid client growth, EXPO announced an expansion of its Board of Directors from four to six members, with several changes that dramatically strengthen its composition. New members include Pete Blackshaw of Nielsen Online Strategic Services, “Kam” Kamerschen, Presiding Director of the Board of MDC Partners and Thayer Bigelow, former President of Home Box Office and Time Warner Cable Programming.
Blackshaw, who is frequently cited by publications including the Wall Street Journal and BusinessWeek, has been a leading thinker on social media for over a decade. Pete was part of the team that first headed digital initiatives at Procter & Gamble. Blackshaw later founded PlanetFeedback, Inc., which now forms part of Nielsen Online. Blackshaw is the author of “Satisfied Customers Tell Three Friends, Angry Customers Tell 3,000.”
“Pete is a pioneer in the areas of user generated content, customer listening and all of the other concepts we now call social media,” said EXPO President Bill Hildebolt. “People think these are new concepts, but Pete has been practicing them since 1997 and to have that credibility on our Board shows the impact we’re having with global brands.”
Robert “Kam” Kamerschen is a highly sought after Board member who is currently active as the Presiding Director of MDC Partners and has served as a board member at IMS Health, Radio Shack and elsewhere as well as with numerous private company boards. Previously he was CEO and Chairman of ADVO, Inc. and also held CEO roles at RKO/Six Flags Entertainment and MaxFactor. “We are extremely grateful to have Kam involved,” noted EXPO CEO Daphne Kwon. “His experience across the corporate life cycle and his connections to companies large and small have already been invaluable as we continue to accelerate our growth.”
Thayer Bigelow, a long time investor in the company, spent more than 30 years working for Time, Inc. and Time Warner in various senior roles at HBO, Time Warner Cable Programming (and its predecessor company) and Court TV. In addition to EXPO, he currently serves as a Board Member at Lord Abbett Funds and Trinity College. ”Thayer personifies the concept of a value-added investor,” said Kwon. “His support of EXPO since inception has been key to our success today.”
“Expo is breaking new ground,” said Kamerschen. “Their marriage of consumer generated video with product reviews, how to videos and other purpose-driven content is giving companies fresh and actionable insights into their brands and creating new standards of authenticity and transparency for consumers. I think I speak for all of the Board members when I say I’m excited to be part of it.”
Posted: February 3rd, 2010 | No Comments »
With all the debate about whether NYC has become a city competitive for tech startups, one of the indicators we could look toward would be how fast digital jobs in the area get filled.
Two years ago, we would gladly pay a headhunter outrageous fees to find us a low level developer. But the competition wasn’t from other tech startups. It was from the conglomerates and banks that were paying premium rates for tech folks, pricing startups out of the market for dev talent. Nowadays, things are different.
We’ve got 4, soon to be 5-6 job specs out there, and we’re getting great response. High quality, deep experience, and entrepreneurial attitudes. My opinion is that this type of demand isn’t an indication of an already robust startup city, but rather will be the cause of one. With AOL layoffs and other media companies hitting the skids in 2009, tech talent is out there, conspiring, networking, searching. They’re realizing that the cushy job security they thought they had by taking the clock-punching jobs at big companies wasn’t actually that secure. So, the benefits of joining a small company — launching exciting new products, garnering larger responsibility, EQUITY — are becoming more attractive, more valuable in the career assessment process.
I’m predicting that some spurts of growth occur in NY from the talented seeds that the big companies are dropping all over the City. Existing high-growth companies and new ones springing up will be able to surge forward faster than anticipated with access to the exciting new talent in 2010.
Posted: October 15th, 2009 | No Comments »
Through the magic of interconnected news feeds, I’m sure a lot of my high school friends will see this, (sorry), but we are hiring at EXPO. It’s post-worthy to the extent that anyone growing as opposed to shrinking has got to be good news generally, right?
Our founding sales exec, David Rubinstein, has nurtured a pioneering team that has launched the adoption of video commerce within the nation’s top brands. We’re very proud to be expanding his group to support the growing flow of F500 companies seeking insights & experiences from our authentic, accountable consumer knowledge base. As you can guess by the location of the position (Chi/Cin/Min/NYC), we’re working with some of the largest consumer brand names out there. We are looking for someone to help those companies navigate the world of social commerce safely, effectively and valuably.
Here’s the link to the job post, please pass it on freely:
Posted: March 25th, 2009 | No Comments »
Julie Ruvolo, who pops up everywhere on the digital scene all at the same time, has joined a startup that went alpha this month. www.solvate.com
The concept revolves around creating an uber-database covering answers to common customer service issues that people individually need to solve hundreds of times each day. Solvate allows frustrated customers to not have to re-invent the wheel each time one of us has a problem someone else had before. For example, something like “How can I return my cable box back to Time Warner so I can cancel my cable subscription” probably takes us 45 minutes working through TWC’s byzantine call centers before we find out our options. And even then, we probably only find the option that one customer service rep knows, which I bet would be a different option if we were connected to another rep on another day. Meanwhile, I know hundreds of other people had to have gone through this…why don’t I know what they know?
Solvate plans to standardize the ‘answers’ to these questions, so that Solvate agents (and I assume the online public) can provide fast solutions to the second client who asks the same question.
Solvate charges by the man-hour to find the solution, and is currently offering your first hour of agent time for free. So, I tried it out by asking about the best online site to find a deal for a Disney Cruise. I know that Disney itself doesn’t offer many deals directly to cruisers, but they do offer them to agents (who then can pass on the deals to cruisers). Solvate did work, I did get a list of places from “Ryan C”, my Solvate agent, that offered consistent specials and weren’t shaky fly-by-night travel sites. I’m not sure if it saved me time, since it was just an online search. But, I would guess that if my problem involved customer service reps, and phone calls, and escalations, and specific departments, Solvate would save me time and aggravation. And if I was the lucky second person that asked a question, I am sure that the pain of the first person would benefit me. I think the trick for Solvate is to hone in on the problems people would be willing to pay Solvate to solve. ate.
Good luck, Julie and Solvate. I’ll call you back when I need to cancel my cable subscription so I can get FiOS.
Posted: March 25th, 2009 | No Comments »
While some of you might not have too much sympathy for Jake DeSantis who resigned from AIG, I think that we should all feel sorry for ourselves that talent is definitely draining away from solving the complex, intricate problems we have before us.
On the one hand, I’m incensed that ex-Countrywide executives who caused the problems are able to participate in the solution for additional personal gain. But I also turned to my husband yesterday and said, “Why in the hell is Edward Liddy still working at AIG? Why doesn’t he just say ‘Screw it. YOU people try to solve this problem’ and walk away?” He’s got these idiot Congressmen judging him who can’t even figure out their own taxes. Does anyone realize that he was ASKED to take this job by Treasury Sec’y Paulson? “Six months ago, I came out of retirement to help my country,” Liddy said at yesterday’s House Financial Services subcommittee hearing in Washington. If we’re going to make a scapegoat of someone innocent, we should at least pick someone who was there when the crime occurred.
I have limited sympathy for this guy who wrote the AIG letter above, because I am *sure* in his career he was overpaid, and the money that he says he earned for AIG was enabled by a machine *he knew* was overpriced, overcomplicated, and under-financed. But, we should be careful when John Q Public thinks he knows how best to run these companies, lest we end up driving away people who really do. I certainly don’t want Senators with “wide stances” in charge of maximizing the value during the wind down of a complex financial derivative product company. But I guess beggars can’t be choosers.
Posted: July 16th, 2008 | No Comments »
We were proud to host Pete Blackshaw’s NYC “Tell 3000″ book party at our offices last night. It was a spectacular turnout, and lasted well past the anticipated ending time. Rick Lerner and Expo’s pres Bill Hildebolt were the hosts. Thanks to Rick and his wife for publicizing, financing and catering the event.
The books sold out, some pool was played, some wine was poured, and some great conversations were begun.
We look forward from continuing to learn from our friend and advisor as he continues to simultaneously teach and learn about this space.
Posted: July 12th, 2008 | No Comments »
We have a 19 year old intern from UCLA in our company this summer. He is pretty interesting because he’s got some great film making skills already under his belt. In discussing how to get us some great consumer video, he thought up the idea (the night before) to go to the iPhone opening in NYC. He got some great footage, edited it and put it up on the same day. Because he was in a self-professed “good mood” he left out the two “criticisms” that he heard that day about the iPhone (the whole thing about not being able to connect because of the problems Apple was having with their system). He even put together his own music.
His presence in the company is a fun reminder that fearlessness will always be a big part of entrepreneurialism. I hope you enjoy his creativeness to real consumer reviewing the iPhone!