Somehow*, I came across Paul Lee’s post on high valuations, he’s a founding member and Senior Vice President at the Peacock Equity Fund, a joint venture between NBC Universal and GE Capital:
A high valuation is problematic for a number of reasons. The first, and probably most important, is the impact on the company’s ability to attract quality talent. That’s not to say that you couldn’t (I’m sure the aforementioned microblogging site is seeing a flood of resumes). However, most people in the startup world join startups for the equity upside in a liquidity event or IPO (although the garage sale furniture and stale pizza at 1 a.m. is tremendously appealing). When a highly priced round is completed, guess what–the strike price of the options also go up. In effect, the hurdle for the options to be “in the money” has gone up and the value of the options has decreased. The motivation for the employees coming in after the financing has been materially altered.
Another difficulty in raising a highly priced round is the set of expectations from the new investors. Given the high valuations, the milestones that you’d have to hit to justify the valuation are usually aggressive. The difficulty in setting such aggressive milestones is that if you only complete 50%, you’ve basically built a bridge to nowhere. When you next need to raise capital, you may be faced with a down round, or in extreme circumstances, a complete recap or non-funding. Lawsuits and tensions around the board about fiduciary responsibilities are common. Not very fun stuff.
It sort of reminds me of a quote from a low-profile entrepreneur named Bill Gates who started a software company in Seattle back in the day. He quit to run a non-profit to help end poverty:
One challenge Microsoft did face, and that Netscape now faces, is coping with a high market valuation. Netscape has little income, but investors have valued its stock at more than $2 billion. When a company’s shares have a high value, expectations from investors, including employee-owners, are correspondingly high. Failure to meet those expectations can be damaging. If you’re giving share options to employees so that they can participate financially in the expected success of a company, a high valuation hurts. If the market’s already anticipated the great work those people are going to do, then their stock options won’t appreciate much in value, if at all. This can make the options worthless. Many times in the past I have felt that Microsoft stock was higher in value than it should be. Subsequently I was proven, in a sense, to be wrong. Controlling expectations—whether about deliveries, product features or stock value—is often wise in a technology business. It’s a lot better to under-promise and over-deliver.
Read more about that here.
[* A lie. You will see why and how I was on Fast Company in a few days when I post the Fast Company article that mentions WatchMojo.]
Pretty amazing to see Michael Arrington evolve over the years. This past week he penned a post that basically took down a few questionable people and practices. Today we see this gem of a video:
Crazy to see what VCs back. No comment.
I keep telling myself not to post monthly updates of WatchMojo’s growth trajectory, and I mean it, but then every once in a while something else happens that blows me away. This is one of those months. I just announced how our offline reach has soared to over 15,000,000 consumers per month (think big screens in malls, gyms, coffee shops etc. broadcasting our content) which combined with our online reach of 5,000,000 uniques put our total reach at 20,000,000 consumers. That is very cool.
But today, I ran our October stats and I was floored, first, the graph, then some perspective, and finally some lessons:
Monthly Streams
All-time Streams
This is freaking insane. When we launched the site in 2006, I used to look at the stats and I would ask myself: do people actually watch videos? And if they do, do they watch anything other than cats falling off skateboards (well, and porn)?
Eventually, we found out that we had to take our videos to where people consumed them. We did 550,000 streams in all of 2006, then did 13,000,000 in 2007. Then 2008 saw a jump to 28,000,000 streams and in 2009 we will do 55,000,000 streams.
We decided to brand the videos heavily to WatchMojo.com, with opening and closing bumpers and lower-third watermark and all. I thought it was crazy, I pushed for it because I figured if people pirated the content (who would want to do that anyway, was my own counter-argument) then at least we would get some branding. But today this means our brand has been seen some 87,000,000 times online alone.
That’s the thing, that is only online. This month I finally decided to run the numbers and see how much presence we had offline. I fell off my chair. Our videos - branded WatchMojo again - are seen in 2,000 retail locations and reach 15,000,000 consumers each month. I will never forget when a would-be investor called me up an hour after we chatted and told me he saw us in a gas station in Los Angeles, or when a former host of ours saw us in a bagel shop in Chicago, or for that matter, when I heard that my former boss curses every time he lands on a site and sees our logo display before a video loads up.
I always laugh when Google scores heavy in InterBrand’s top brand survey because they never set out to build a brand but did so by focusing on the nuts and bolts.
I always thought WatchMojo could become a strong brand (the logo was always intended to stick out). I also thought the company could be big, very big; but the company’s popularity, reach, brand and position in the marketplace is starting to floor myself. And I am a very ambitious and driven individual. I want to make WatchMojo as successful financially as it has been operationally, and I know there’s lots of work to do on that front, but still…
We’ve had to overcome a lot:
- being a content company, which in the 2000s gets no respect from the media and investors alike,
- the 2006 lawsuit which was frivolous and we won, but almost killed us before we really took off,
- talking to VC groups and then seeing them turn around and fund our “competitors”, which wouldn’t be the end of the world, if it weren’t for…
- … seeing those very same companies scale back or shut down, only to leave a bad taste in the mouths of other would-be investors,
- there not being any ad format in online video that is popular, efficient and effective enough to move the needle, the way Google’s text ads did for search, despite the hundreds of millions that hapless VCs have made in the sector,
- being unfunded (forget being underfunded, I mean literally not funded - ever), so always having one foot in the grave and the other foot on the gas pedal,
- the 2008 recession which basically almost killed everything,
- the 2009 advertising market crumbling in H1.
Anyway, I’m not complaining. In fact, I am very grateful.
As we finish Year 3 of WatchMojo’s operations, we have never laid off a single person and technically now have 50% more staff than we did last year (don’t know why I use the word “technically” since we do, in fact, have 50% more staff than last year this time).
Not only am I not complaining, I am counting my lucky stars that we:
- have such a great team,
- have an amazing product,
- provide a valuable service to countless other media companies, both new and traditional,
- are now finally counting amongst our clients marketers such as McDonald’s, Coca Cola, Coors Molson, Malibu Rum and many, many others.
How, on earth, did this all happen?
Well, for one, determination and persistence. I’ve written on that before, here, here is the quote from former President Calvin Coolidge:
Nothing in the world can take the place of persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent.
Determination and persistence is just one part of it, you need a lot of luck and timing… and of course, vision, ambition, execution and focus.
I have no idea what the future holds… but I used to think we would get a lot of “street cred” if we jumped off the bridge like many others and raised a boatload of money. The boat never came, the money wasn’t there… and some how we are now totally dominating the industry.
I’ve referred to Sequoia’s “Good Times RIP” presentation and the famous death spiral slide:
I was very concerned about not becoming Company A - you know, the company that didn’t take immediate action and lay off people so that maybe, just maybe, when the dust settled, it could become like Company A, who had the “courage” to lay off everyone and reset its operations.
But, I also didn’t want to be Company B, who recklessly laid off people because it got scared.
Then it hit me, we were neither company A or B, we were a company that was largely off the radar, doing our own thing. We had written our own playbook and were in the process of writing our own history. We were, in fact, Company C:
I don’t quite know who is Company A and Company B in our world, and I don’t care, all I know is that we’re coming on strong. I have always said the beautiful thing about content is that it is not a zero-sum game, our wins won’t necessarily come at the expense of our competitors… but the more we compete in the marketplace, the more often we find ourselves winning.
Since being pushed out of MySpace, Chris DeWolfe has tried to raise money to roll-up social games and compete against Zynga:
DeWolfe is likely looking at very small gaming companies run by a handful of stellar developers but that lack the legal, business development, and dealmaking resources to make any kind of a dent in the current social-gaming market.
Social games are a red hot space, with Zynga allegedly generating $100-250M in annual revenues.
If this all sounds familiar, it’s because DeWolfe’s former boss Ross Levinsohn was also planning on raising money and rolling up assets when he left Fox Interactive Media. Levinsohn, of course, joined forces with former AOL boss Jon Miller and instead merged their venture capital operations with ComVentures to become Velocity. Today Miller has left for News Corp’s Digital Chief and Levinsohn has renamed Velocity Fuse. One thing he learned wasn’t obvious was the whole roll-up strategy.
Roll-ups sound great in theory and every time I mention rolling up video assets (the industry I operate in via WatchMojo) investors get hot and heavy, but the truth is, just because sometimes creative/technical types lack the “legal, business development, and dealmaking resources to make a dent in their market” doesn’t mean roll-ups make sense from a strategic, operational, financial or tactical perspective.
You have to be able to manage a lot of personalities and egos, above all, and then once that is done (if that can be done), then you have to make the numbers add up.
Then again, don’t be surprised if Levinsohn invests in DeWolfe’s venture, who knows.
DeWolfe still has a better valuation landscape today than the one facing Levinsohn when he left FIM, but either way, DeWolfe should avoid suffering from hubris and biting off something that is easier to chew if he plans to catch lightning in a bottle twice.
Fred Wilson continues his rants against… VCs. Love it:
Over the past few months, I’ve heard countless VCs utter the words ‘we need to own’ followed by some number. Often it is 20pcnt, but it is frequently 30pcnt. I heard someone tell me about a VC yesterday who said they needed to own 44pcnt. I was tempted to ask them to give me the number to four digits.
This behavior by VCs is not productive. I’ve said this before and I will say it again. We are putting our needs before the needs of our portfolio companies and the entrepreneurs who form them.
And this “need” is just greed. We don’t need to own any specific percentage. We just want to.
Any more of this and suddenly I will have to start defending VCs. Hmm, probably not. More tellingly, I think in the post he admits that USV owns 10% of Twitter:
We took 10pcnt of a company a few years ago that has become our best investment. We own less than 10pcnt of it now. And we will make a ton of money on this investment, probably more than any other investment in our fund. And we own less of it than any other investment in our portfolio.
Am I crazy? Either way, what he is saying isn’t crazy at all… VCs harm themselves when the aggressively dilute founding entrepreneurs, management and staff. This is why you will see many zombie startups.
I had a chance to speak with Barbara Corcoran. If you’re a New Yorker - or even been to NYC - she needs to introduction. Corcoran flipped a $1,000 loan from her boyfriend to create an eponymous $5B organization that became one of the most successful NY real estate brands. She sold her company and now can be seen on ABC’s Shark Tank, helping folks all over the country become familiar with her.
Here is Part 1:
WatchMojo: Why did you decide to sell Corcoran and what have you been doing since the sale?
Barbara Corcoran: I decided to sell it, because I accomplished what I said I have to be. I wanted to be the largest broker in the New York City area, and we accomplished it; that coupled with the fact that I was a very late in life mother having my first child at forty-five. And, my child at that point was probably, my son was probably seven years old, and I felt that between being a mother and being very occupied with running a big business. So, those two combined made the decision an easy one.
WatchMojo: Congrats, I can imagine how that changes everything and…
Barbara Corcoran: Oh my God, without a doubt. And, I have a three-year-old, and believe me I am panting through most of the evenings.
WatchMojo: Since you left the world of real estate directly, have you been first and foremost a mother or have you kept up your entrepreneurial ways and done other?
Barbara Corcoran: No, I went nuts as a mother within a month, as a fulltime mom and I started thinking about what I wanted to do now. And, the thing I came up with is what I liked most about the real estate business building it, which was the media side of the equation.
So, I decided to go into the media business; I didn’t know what form that would take, but I thought I am going to go into the media business. So, the first thing I did was write a book the first year, took me almost a year to write it, which made me realize I am not the best writer.
It’s a great book, good seller, but I realized it’s a lonely business and not up my alley, writing. And then, I went into the TV arena which is much more to my liking.
WatchMojo: You’ve actually done a lot of TV appearances, and obviously the show now. On the researching your background you started a Production Company. Is Shark Tank actually related or is that sort of…?
Barbara Corcoran: Well it’s, no, not at all. I started a Production Company producing real estate for different TV shows, real estate pieces. But, the truth of the matter is that it quickly turned into just being a real estate talent and addressing the marketplace. So, my first job was at Fox News as a political commentator, which was certainly a suit that didn’t fit me. It was the first time in my life I had ever read to New York Times.
I didn’t know, I would like to say, you know that was really on top of politics by any means. But, I learned it on the job, and then I went from there to Good Morning America, then I left Good Morning America went to Today Show, and now of course I’ve added the Shark Tank to it.
WatchMojo: How did Shark Tank come to be, because it’s a fascinating show and I think you add a lot to the show?
Barbara Corcoran: You know it’s a very, very successful show in many places around the world. I think it started in Tokyo, it’s in Taiwan, it’s in Canada; it’s in London and it’s been running for many years. But, I don’t know what the technicality problem was, but they were not able to bring it to the United States.
I don’t know if they couldn’t buy the rights, or what was going on there, but this is the first time they’ve been able to do it US style. And, unlike all the other shows that are called Dragon’s Den around the world, they’ve decided to call it Shark Tank here in the US.
WatchMojo: Why is that; do you think that’s a social thing for this kind of name?
Barbara Corcoran: No. I think it, I happen to agree with it. I understand the logic of it, Mark Burnett was the one who renamed it, wanted to rename it, and I heard his logic on it. And, I am misquoting him, but the jest of it was that he felt that people in America don’t really relate to dragons so well, that’s more of an Asian thing, whereas anybody can relate to being bit by a shark.
WatchMojo: Makes sense. Now, I am not an expert in securities law, but I think part of the problem is the appearance that a contestant is basically offering shares in his company to the public without a prospectus.
Barbara Corcoran: Oh, that makes great sense actually.
WatchMojo: Every successful company has an amazing story; every entrepreneur has an amazing story. Yours is up there definitely: a thousand dollar loan from your boyfriend turns into five billion dollar empire. You sort of have a sense of how, but I just want to like nitty-gritty, how does an entrepreneur actually do that; how do you take a thousand dollars and get it to a big number, forget five billion even a million. So, how did you go about?
Barbara Corcoran: Well, I don’t think I am unlike anyone else; you work your ass off #1, okay? #2, you have to be doing something you really love, and I happen to just step into something I really loved. And third, and maybe not in this order, but it’s just what’s coming to my mind. I think third, I loved the idea of creating something, and so what I created was a business version of the family I grew up in which had ten kids, lot of commotion, lot of mouths to feed.
So, being in a crowd was very comfortable for me, so I was growing the business as quickly as I could from the very first day. If I had an extra commission I would take the commission and hire another sales person, use it for the overhead immediately. And so, we just grew very, very quickly; and I might say I had a lot of help from New York City. Because, just happened to be that 1975, New York City was a terrible place to live. No one liked to come here, and there certainly wasn’t anything or not very many.
There were a handful of coops in the city that were places to live that you could actually buy. And so, I actually rode that wave up as the city converted from a rental town to a sale town. So, my timing, so that’s I guess the fourth one. I had excellent time, hot luck timing.
WatchMojo: The timing is actually up there. You raised the point that you started in 1975. Is there such a thing as an overnight success, or would you say that even the biggest so called overnight success takes a lot of time?
Barbara Corcoran: No, not that I have ever experienced one. It would be nice, no it always came harder and later than I expected.
Read Part 2, where we chat about entrepreneurship, good and bad students as well as the unique challenges and opportunities of being a women entrepreneur.
Via Paid Content, here is former News Corp. COO Peter Chernin’s advice on where to focus investment in media:
In a panel discussion with Gordon Crawford, managing director of The Capital Group Companies, at the USC Annenberg School for Communication, Cherin also offered a warning—not that most investors needed it. “You stay out of the U.S., you stay out of western Europe, and you stay out of broadcast, newspapers and traditional media.” China’s media industry, despite being less affected by the global recession than the West, is no oasis, he said. Offsetting the attractive growth opportunities are massive barriers to entry. “You can pretend to do a lot of things in China, but you can’t really make money there.” He prefers other Asian countries, such as India, Indonesia and the Philippines for doing business.
Here is the webcast:
I am not being sarcastic, but Twitter’s $100M funding round at a $900M pre-money or $1B post-money (hmm… does that detail really matter now) makes a lot of sense.
Twitter’s valuation is a perfect:
- manifestation of market supply and demand and
- reflection of the wanton destruction of old media companies and the fact that digital media has overtaken traditional media for good.
Searching for Hits
Over the past few years,
- MySpace stole Friendster’s thunder (if it could be called that) and was acquired by News Corp. for $580M
- then YouTube stole MySpace’s thunder (by piggybacking on MySpace) and it was acquired by Google for $1.65B
- then Facebook also stole MySpace’s thunder (by now a 60W lightbulb, mind you) and it turned down acquisition offers ranging from $800M to $2.3B, ultimately raising over $500M in capital and valuing itself at $15B courtesy of Bill Gates and Steve Ballmer.
While that valuation seemed crazy and Facebook might not ever sell raise money at that valuation - let alone sell for that amount - the recent crossing of 300M users, revenue figures over $500M per year for 2009 and rumored profitability (albeit brief or accounting-driven) suggests that Facebook did the right thing (yes, I admit it). After all, despite all of the naysayers, it did raise another $200M from Digital Sky Technologies at a $10B valuation.
Yes, $10B is 33% off the $15B MSFT valued it just last year, but that was last year. Last year, $5B was a rounding error, even for MSFT. This year, CBS as a whole is worth $5B (ok, so right now it’s $7.5B). While we’re at it, guess how much CBS was worth last year? Yep, that’s right: $15B. That has more to do with systematic factors in old media than CBS, mind you, but still.
But the main point I want to make is, in hindsight, Facebook has to its credit proved a lot of naysayers wrong - at least if we limit history to the period between 2008 and 2009.
Sure, in 2010, Facebook might hit a wall and it might never generate the kind of returns one expects a $10B-$15B valued company to generate… but that is not their main concern now.
And sure, Facebook might never IPO. But the point is, when someone comes to you with $50M or $100M and is willing to invest at any valuation, I am not sure you can blame anyone for saying “nyet”. Though as a fellow entrepreneur who has yet to succumb to VC money and/or crazy paper valuations, I whole heartedly agree with Bill Gates and Zoho’s Sridhar.
So back to Twitter, regardless of the lack of business model, the demand for the company’s stock far outstrips supply. This is why the company’s raised more and more money regardless of the answer to “how will they make money”.
In fact, I can attest that the main problem I have encountered when pontificating with VCs is specifically being able to paint in very clear and candid terms how our company makes money now and how it will make more of it. And therein lies the reason why Twitter is backing up the truck and looting the bank. The instant Twitter dives into “monetization”, investors will have to put down their bongs and start to value the company on an accounting basis, whereas right now, it’s all finance.
In finance, the formula for Total Return is simply
Return = Income Gain + Capital Gain
Income Gain includes like dividends. No self-respecting web company- including cash-rich Google - pays out dividends.
The Greater Fool Theory
So investors - be it private or public ones - make money on the Capital Gain, which calls for a stock to be worth more tomorrow than it is today. Judging by the sharp rise in capital invested in Twitter in such a short time span, the investors are basically betting that traditional media will continue to shrink, new media will continue to grow… and there will be more investors looking to ride the Twitter train:
A hat tip to Crunch Base for the valuation and funding info.
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