Jeff Weiner left Yahoo! for a VC firm (two in fact). So did former Paypal and Facebook executive Matt Cohler.
This would seem like a good thing, but the fact is, the VC world is in decline and shrinking:
According to VentureSource, a research unit of VentureWire publisher Dow Jones:
- There were 844 venture firms investing in U.S. companies last year, 40 fewer than in 2006
- That is down 30% from the bubble year of 2000, when there were nearly 1,200 active investors.
- The total includes a substantial number of firms–224, or 27% of the total–who didn’t back any new companies last year, an indication that the ranks of active investors will continue to thin.
- Less than half–45%–completed four or more investments.- 29% made just one investment:
- About 550 firms have made at least one investment in a U.S. company this year.
- In all, the NVCA has about 470 member firms representing 90% of the venture capital under management in the U.S.
No comment…
TheStreet.com’s Jim Cramer says CBS should go private (via SAI). Funny, I said that might be a good strategy for CBS, too, back in mid-April. Here is the summary of the argument:
One way that no one will care about a) Performance or b) Les Moonves salary is if it were not publicly traded. Moreover, Wall Street is being unreasonable: yes the company is shrinking, but it will take time for digital revenues to grow, anyway. However, if someone came along and took CBS out at $20B, I think a lot of shareholders would buy that (or I guess, sell for that).
It then allows CBS to d) clean house if they so choose to (and will have to). Kate Couric becomes moot in the grand scheme of things… but most importantly, it will allow CBS to roll up a number of smaller web properties, content producers and tech applications to bolster its overall portfolio. In 4 years - when video advertising will be $7.1B in the US (up from $1B) and all online advertising will be nearly $100B in annual expenditure - it can then be go public again…
This might very well be the best course of action. The question remains: does private equity have the stomach for a $20B debt purchase? With $16B in annual revenues… I think so.
See the video here with Cramer… everytime I see a pre-roll I just shut off the video… unless I need to find my headphones which thankfully take me oh-about-30-seconds:
In any self-respecting capitalist society, the capital markets will be at the heart of any financial storm. As such, it’s no surprise to see the fallout from the sub-prime mortgage crisis spill over to other segments. However, for all of the doom and gloom scenarios, in the context of how this affects the Web, a few things are very different from 2000.
The main reason for that argument being that the 2000 meltdown was a result of the Web and high technology excess, this time around, it’s a victim, and dare I say it: an innocent stander-by. Let’s consider how times are different:
In 2000, as this table above illustrates: the main culprit was the technology and new media sector (ie. the Web). Today the Web - while not a shelter per se - does offer some cover for traditional media companies. It’s not the culprit, it’s the refuge.
Last Friday, GE for example suffered the twin attacks of seeing a massive fall in earnings on its financial unit (GE Finance) as well as see its media arm NBC Universal experience some weakness. But that weakness in media came due to NBC’s reliance on traditional media: TV mainly.
While digital revenues are not yet material enough to provide much hope for such behemoths, the fact remains, online is actually one shining light. In fact, provided there is a dynamic of scarcity, you will see many more deals. It’s not a coincidence that Q1 saw more deals for more money. This trend will continue, today AOL announced that they are buying Sphere.
In 2000, for example, AOL had just come from a disastrous merger with Time Warner and was not exactly in the market looking for more digital acquisitions. Today, it wisely sees digital as its salvation.
TW is not an exception to this trend: these days tech companies are cash rich: Apple for example has $18B in cash on its balance sheet; it just hired a lawyer from HP whose background lies in M&A. Back in 2000, all tech companies were seeing their stock prices tumble. All of a sudden, the currency they had used for acquisitions was in the toilets.
Today, these companies generate billions and have cash and stock as available currencies. But it’s not only the buyers who are in a very different state of mind, sellers too have changed: Sphere for example had only raised $3.5M in financing.
It’s also not a coincidence that you will see more and more buyouts: when we compiled a list of the top 10 best digital acquisitions of all time, most of them came during the 2001-03 nuclear winter. As they Japanese say: where some see threats, others see opportunity.
Big media and technology firms have learned the lessons: CBS just opened an office in Menlo Park to make more digital acquisitions, presumably. See our thoughts on CBS’ options here, in CBS Should Buy CNET, merge with Yahoo! or go private.
Of course there are fundinistas that have raised $25M to $100M in capital (making them harder/impossible to sell) but the fact remains: this time around, it is different… the technology and new media crowd are not the culprits, they are the victims of the mess in the housing, credit and banking sector.
This does not mean that we in the new media or technology are immune, it simply means that it’s a bit different in 2000 when we all got decimated.
Paid Content refers to a NYT article on CBS which calls for the company that Bill Paley built to make digital acquisitions, which begs the question: should they go for a big purchase or make small moves?
Of course, answering that question alone without addressing the backdrop to that question yields an incomplete picture.
CBS has hit some rough patches, according to Paid Content:
The parent company is under a mini-siege of sorts about
a) its performance,
b) Leslie Mooves’ salary,
c) Katie Couric’s disastrous tenure at the company,
d) layoffs (even on the digital side, as others are ramping up) and other issues (…)
e) CBS’s need for an acquisition is becoming apparent. Some CBS executives privately agree.
All right. I want to dive in and comment on e) but let’s run through this list quickly.
a) Its Performance
We’re not sure if they are referring to its financial performance or its stock’s, either way:
As per the NYT:
“Without the cushion of Viacom’s other properties, CBS has been more exposed to the struggles of the advertising market. In 2007, it earned $1.25 billion, down from $1.66 billion the year before. CBS stock closed at $21.40 on Friday, compared with $30.99 a year earlier.”
While no company or manager can control what happens to the stock price, I think big media will see a lot of revenue loss over the next few years. Print-centric media companies shrank, why would TV or radio-centric media companies be any different in the next wave of the Web’s growth?
After all, 1994-2003 saw text-based media explode online, 2003 is about audio/video-heavy media.
CBS is seeing this sooner and faster due to its exposure to TV and radio. However, they are strong in outdoors, the challenge there is the upside there won’t account for the downside in more traditional media.
So all hope signals point to online… which explains why:
“On Monday, the company’s interactive unit will officially open a fully staffed office in Menlo Park, Calif., in Silicon Valley, to stir innovation and content development.”
Ironically, the CBS Interactive brass gets the Web quite a bit, but it’s true that they have been overly cautious, too. Being cautious is a bad thing in booming times and a great thing in corrections. The problem for CBS is that the correction is coming offline and online continues to charge ahead… so indeed, CBS does need to make some bold moves. But what are those moves?
Last year, we suggested an outright merger with Yahoo! With MSFT’s $45B gamble, those bets are off (hmm… are they?).
b) Leslie Moonves’ Salary
Last week Henry Blodget wrote: “CBS CEO Moonves Gets 29% Raise, Just Reward For Job Well Done“.
Clicking through, I realized he was being sarcastic by pointing to the seemingly inverse relationship between Mr. Moonves salary and CBS’ performance. While I appreciate Henry’s position, the truth is that CEO pay is determined on a number of things, frankly.
It’s also about the demand and supply for talent. As the CEO of CBS, Mr. Moonves could probably command a much larger salary elsewhere, if CBS’s Board wants to pay him $100M because that is what it takes to retain him, I am not sure CBS or Moonves should be blamed. For the record, he did not make $100M but rather $37M. Is that a lot of money? Yes. But the company made well over a billion dollars in profit and $14B in revenues. Of course, I’m an executive so my perspective is going to be different than that of an analyst or journalist.
But my point is: running a shrinking business in a mature market is not something most executives would embrace, to lure the best (or retain them), guess what? It takes a generous compensation program.
c) Katie Couric
Don’t care personally, but indeed, this is becoming an albatross and if indeed she is that horrific (I don’t watch TV), it’s time to try something else. I recognize she might not be best suited for news, but surely there is plenty of things she can be doing for CBS in other capacties (infotainment, mainly).
d) Layoffs
Layoffs are always demoralizing, especially when a company is making over $14B in revenue and remains profitable. But what about a case - like this one - when the company is shrinking? This is a tough question.
My gut says Jack Welch’s “the lowest 10% should leave” is not a bad thing… so while I don’t want to dehumanize the layoff dynamics and their effect, I think it’s unfair to question the layoffs.
Of course, I do wonder why layoffs are taking place in online areas… which is what both Paid Content and NYT refer to. But just bear one thing in mind: many traditional media companies are not necessarily well structured in new media; divisions and structures are sometimes borne out of legacy organizational systems and sooner or later a correction or adjustment is called for. If this is the case, then I don’t think it’s fair to bash CBS on this point.
e) Acquisitions
The question remains: should CBS make one big hairy and ambition acquisition or should it buy a number of smallish companies and roll them up and/or foster their growth?
For the record, CBS has done both. In fact, it’s done everything including investments in Spotrunner, Joost and many others. In terms of acquisitions: Last.fm was a mid-sized / big one; Wallstrip was a small one.
What would you do if you were Quincy Smith and company? Buy? Merge? Sell?
ACQUISITIONS:
You know what, I admit a small acquisition won’t move the needle, but a major acquisition won’t either. Who would they have bought?
- Bebo? Is a company that marketers love really well-served by serving advertisers social networking inventory? Nope.
- Facebook? Too expensive to buy. Nothing to see, here (perhaps a merger? See below).
- Gawker Media? That might be an interesting addition. But I think Gawker Media founder Nick Denton wants to become CBS, and not sell to CBS. Anywa, Gawker Media lags in video, CBS needs to look ahead and not look back.
- Speaking of video, one company that might position it for future growth is Blip.tv, but Blip.tv does not own any content… so that is a risky move because CBS might buy a great video platform with amazing bells and whistles but then lose all of the content therein. [Disclaimer: Blip.tv is a partner of WatchMojo.com]. In the same broad category as Blip.tv are Brightcove and Video Egg. Bright Cove also does not own any content and is way too expensive, having raised $80M in funding. Video Egg ain’t cheap either, with $40M of funding in the tilt.
- Then there’s all of the YouTube/MySpaceTV competitors: Revver, Veoh, Metacafe, DailyMotion, Break, etc. Mind you, CBS invested in Joost… so what message would that send? As well, Revver was on the auction block and I presume CBS looked at it and then balked. Again, none of those companies own any content, CBS needs to be stronger in web content. That would be the hedge for CBS going forward, of course, it also needs better distribution. I see CBS works closely with Veoh… but is Veoh big enough as a distribution source? [Disclaimer: WatchMojo.com syndicates video to all of the sites listed here]
- Craigslist.org? Not sure Craig Newmark would sell, no matter how progressive Quincy’s team might be. This is Big Media after all… but Craigslist.org would not unleash CBS’ digital revenues.
- Glam Media? That would be a shot in the arm with regards to bolstering its female audience online… but here’s the problem: female audiences still watch TV… what CBS might be better suited for is getting access to a men’s audience. [Disclaimer: Glam Media is one of WatchMojo.com’s syndication partners, too]
- Digg? Not a fan of this one, frankly. Maybe a combo Revision3 / Digg? Even less of a fan of that. Revision 3 is way too niche: it’s too tech-oriented and relies on two hosts, largely. Given how Kevin Rose’s interest waned from Digg to Revision3, then to Pownce, I am not sure he’s buyable because he’s the main asset of Revision 3. [Disclaimer: if you look very broadly at all video content, then WatchMojo.com is more or less competitive to Revision 3, though I view them as rather complementary to our programming].
- Federated Media? Too tech-focused and they don’t own any of the content on the blogs they rep. Big media needs to own content to make it worth their while. Sorry, but that’s just the way media works.
- Gorilla Nation Media’s audience might be a better fit, but as an advertising representation firm, it faces the same challenges: You are buying a stack of contracts that at any point could be severed. Unless you own the underlying content, those contracts are not worth the paper they are printed on.
- Heavy.com? They have a men’s audience, for sure. But if CBS is to buy a destination, it needs to be an enormous destination, I am not sure Heavy.com would move the proverbial needle. In fact, in 2005, News Corp. bought IGN Entertainment, but IGN was doing over $70M in revenues on the strength of its Media Properties (IGN.com, RottenTomatoes.com, etc.), had a lot of technology (in-game advertising + digital distribution of movies, music and games). Moreover, IGN Entertainment was far and away the leader in terms of men’s 18-34 audiences.
However, if Fox Interactive Media has become a new media behemoth, it has more to do with MySpace’s burgenoning audience than with IGN’s properties. That being said: IGN Entertainment does give a lot of content and audiences that marketers look for. The challenge for IGN is that a major chunk of their inventory comes from their message boards, which are notoriously hard to sell and monetize.
This being said, when one looks at how instrumental MySpace and IGN’s acquisitions were, it’s fair to say that the ROI has hitherto been higher on the MySpace deal. I am surprised at this, I won’t lie. But this lesson would encourage CBS to look for a MySpace and not an IGN.
I am not that familiar with Heavy.com’s business, frankly, but I am not even sure if Heavy is an IGN.
- IAC is way too e-commerce oriented. Its search engine Ask.com does not really fit with CBS, either. So pass.
- There’s Meebo, but at $250M or more in value… I am not sure if CBS would even know what to do with it. And, who are we kidding: do marketers really even want to advertise in instant messaging communications? That one makes sense in theory but in practice? Not sure.
- There’s the barrage of search video tools: Blinkx, Pixcy, etc., but CBS remains a media company; it should be technology-centric, I think. What I mean by that is that its content should be compatible with all tech platforms to make it was widely available as possible.
- There are a number of ad networks: Tribal Fusion, Specific Media, Casale Media, Adconion etc. I think the obsession over ad networks will pass. Moreover, a lot of media companies will build and launch their own, which is a mistake as well. I am not sure if CBS should plunk down $100-$500M on an ad network. Advertising.com rescued AOL’s butt because AOL was transitioning from a walled garden to a normal website but the fact remains, that says more about how poorly AOL was doing than how great Advertising.com has done (for the record: it has done great).
Valueclick is publicly traded, but expensive.
If it was interested in ad networks, it might as well skip over display ad-based ones and dive into video networks such as Tremor Media or Broadband Enterprises. Again, I am not sure being in the ad network business is the best capital allocation move.
- It could - much like how NYT invested $29.5M in Wordpress - make a bid for Six Apart (makers of Movable Type) or even Wordpress. But, again, I am not convinced it makes sense for a media company to own a platform without the underlying content. News Corp. buying MySpace made sense because the content on those sites become News Corp. property, or at the very least, MySpace gets a license to profit from it…
- Slide? At the company’s last $500M pre-money valuation, I think CBS would gain street cred in one block on SF by buying Slide but see Wall Street punish it. Hey, just being honest here folks: that is one expensive widget company with moutain-fulls of unsellable inventory!
- There’s TheStreet.com, though I am not sure if it’s big enough or whether CBS really wants to get that deep into finance and investments. Bear in mind Wallstrip was all about investing… so this would be a doubling down on one category. Moreover, at a market cap of $250M, it would eat a lot of money the company could spend elsewhere.
- CNET remains very tech-oriented but it has embraced a lot of lifestyle properties, too. In fact, CNET would be a good fit with 100M uniques, $400M in revenues etc. In fact, trading at $1.2B, it’s not that expensive. CNET would give CBS some web DNA and CBS would open up swarms of traditional advertisers to CNET. This could be the best move yet: unlike most other options, CNET owns a lot of content. It also owns a lot of URLs such as TV.com that with CBS’ help could come to life.
Updated: Oh, wow, they listened to me: it’s official.
MERGERS
- CBS could in fact merge with Yahoo! I wrote about this and frankly, this remains an option.
- It could merge with Facebook; won’t happen. At a market cap of $14B technically Facebook is worth roughly the same as CBS. This would be a bizzarro world deal where Facebook trades in growth for CBS’ $14B in revenue… but this one is so loopy.
- As crazy as it sounds, it could undo the merger with Viacom; won’t happen.
SALE
What about a sale to News Corp.? News Corp. owns FOX, it would love to own CBS. But for this to happen, it would mean Sumner Redstone and my old boss Rupert Murdoch would have to come to terms; won’t happen.
Incidentally, last Friday, GE lost 12% of its value, or $40B. It could have bought two CBS’s. By buying CBS, GE’s NBC Universal would own two of the three main networks, making this an impossibility.
That same obstacle is present in a sale to Disney, who owns ABC.
CONCLUSION
As you run down the list… you realize that all CBS is actually a great media company that just needs some tweaking. Yes, indeed: “Nobody likes negative growth, from the guy who shines shoes to the C.E.O. Everybody feels the pain” the truth is no one wants to blow something up either.
My two recommendations for CBS:
- Buy CNET for $1.5B - $2B (that would be a 25% to 66% premium), which would take its digital revenues from “$200M” to $600M. Combining CNET with Last.fm would also yield a lot of upside in digital music and video tie-in’s. But even then: for a company with $14B in annual revenues, does $600M mean much? Many analysts only give credit to a media company’s stock if digital revenues account for 10% of total sales. Even News Corp. or Disney do not claim that.
CNET remains one of biggest acquisition targets that represent meaningful revenue opportunities, and even that won’t move the needle. So what other options are there?
OR
- Merge with Yahoo!
Actually, there’s also one more option:
GO PRIVATE?
One way that no one will care about a) Performance or b) Les Moonves salary is if it were not publicly traded. Moreover, Wall Street is being unreasonable: yes the company is shrinking, but it will take time for digital revenues to grow, anyway. However, if someone came along and took CBS out at $20B, I think a lot of shareholders would buy that (or I guess, sell for that).
It then allows CBS to d) clean house if they so choose to (and will have to). Kate Couric becomes moot in the grand scheme of things… but most importantly, it will allow CBS to roll up a number of smaller web properties, content producers and tech applications to bolster its overall portfolio. In 4 years - when video advertising will be $7.1B in the US (up from $1B) and all online advertising will be nearly $100B in annual expenditure - it can then be go public again…
This might very well be the best course of action. The question remains: does private equity have the stomach for a $20B debt purchase? With $16B in annual revenues… I think so.
All righty, that was a great use of 40 minutes of my time. Back to work.
Silicon Alley Insider is reporting that a Private Equity firm (or two) were drafting the papers to issue a buyout offer for Yahoo! when Microsoft unveiled its bombshell unsolicited offer this morning.
I have long argued that a PE deal is the most logical route for Yahoo! Not what the company wants but next to other options, probably what the doctor ordered.
The problem, frankly, is that this MSFT offer means a PE would have to come in at $45B or more, which is not impossible, but it makes all other options moot. What shareholders will want is instant relief, and technically a PE firm or MSFT can offer that, but a PE firm means all upside would go to the acquirers whereas a MSFT cash/stock deal would allow existing shareholders to benefit from the synergies (yikes, there’s that word) and upside of a combined entity.
Interesting to see the storyline that will emanate next week.
Other options I’ve analyzed include:
- status quo (a $100B market cap by 2010?)
- merger with eBay
- merger with Viacom
- merger with CBS
- acquisition by/merger with Microsoft
- taken private
- sale to AT&T
- can Google buy Yahoo!?
- Spin off ad network unit
For the longest time, I’ve been hinting at private equity firms to give me a call so we can rescue Yahoo! That might happen, it might not. But to pull that off, you need a good $40B or so. With Yahoo! at $25B - and reporting earnings as we speak - it might happen.
But today, an easier target. No, I’m not talking about CNET - though I’d love to manage CNET and whip it into shape, too. CNET is in fact facing a hostile takeover from Jana Partners, who has built up a 20% stake in the company.
I’m talking about About.com, the company founded by Scott Kurnit, first sold to Primedia for $690M, then unloaded to the New York Times for $410M in 2005.
Just this past Sunday, I mentioned that I was surprised at how little NYT had invested in developing the videos on About.com. I mentioned that with much lesser resources, we had built a video library twice the size of About.com.
Anyway, Alley Insider is now reporting that NYT wants to sell About.com :
It’s on track to do about $100 million in revenue for 2007, and perhaps $30 million in operating profit, up from $44 million and $11.7 million in 2005 (those numbers include results from recent acquisitions like ConsumerSearch–$33 million purchase price–and UCompareHealthCare.com, $2.3 million). At a 15x Ebitda multiple, About could fetch $450 million. Bump that up to 20x, and it looks a little better: $600 million.
I think About.com will have a hard time finding a buyer because big buyers won’t know what to do with it. With so much focus on social media and networking, an old school Web 1.0 company such as About.com won’t be able to command $500M from many obvious buyers because such companies would rather spend $500M on more high growth opportunities - basic risk and return.
So devoid of such upside, here’s my two not-so-subtle suggestion:
- Lend me $500M.
- We’ll buy About.com for $500M
- We’ll leverage our expertise and library at WatchMojo.com and invest some of that $30M in profits in developing About.com in a video content powerhouse to match its text content strength.
- We’ll integrate our MetaMojo.com vertical search technology to better develop and profit from niche vertical opportunities.
- We’ll let About.com’s columnists use the BloggerMojo.com blog network to publish timely pieces that drive traffic back to the millions of pages deep within About.com.
- We’ll use the StreetMojo.com application and create mini comminities matching users with marketers (b2c) and users with users (c2c).
Overnight - or in 1 quarter - About.com goes from a really useful but stagnant old, new media company, to a rapidly growing company with considerable exposure to both social media and video.
Adding our existing video content alone on About.com’s thousand of SEO-optimized pages alone would reap considerable strategic value. But with video advertising set to cross $1B in 2008 - and cross $7B in 2012 in the US alone - I am pretty sure that I can make About.com be a $10B market cap company in 5 years (7x growth in video market alone in 4 years).
Let’s face it, About.com can attempt to build up video alone etc., but within About.com, that will be hard. With About.com being a part of NYT, it’s impossible.
Something tells me that making a run at CNET is counter-productive. They don’t seem to be a willing, motivated seller. But NYT Company? I think they’d sell that puppy to me in a heartbeat.
Now all I need is a banker. A private banker with $500,000,000.00. Hmm. Where can I find that?
Any takers?
Related:
TheFunded.com, a site entrepreneurs love but VCs absolutely hate, has pushed the envelope considerably by adding a feature that allows entrepreneurs to upload term sheets for others to view. A term sheet is essentially a letter of intent, a non-binding, revocable, starting point that is not final and culminates with a business transaction.
Short Term Repercussions
On the surface, yes, this does seem to violate some confidentiality clauses found in such agreements, but TheFunded.com has taken some measures to address those concerns, such as removing the names of the companies and investors and only publishing the actual terms, and not the sheets themselves.
But VCs have long funded companies that bundle private and confidential data to anonymously profit from it, this is basically the same practice, so I do not see what the big deal is.
I see a bigger practical shortcoming, which is most entrepreneurs won’t update recently obtained term sheets they intend on accepting (the ones that are fair and reasonable) out of fear of upsetting the party that made them the offer (the investor). If entrepreneurs end up submitting accepted-but-old term sheets or term sheets they passed on, then there is a risk that the sample of term sheets will not be accurate. But by the same token, the same was said about TheFunded.com initially… yet entrepreneurs gladly submitted reviews about meetings that took place recently, describing good and bad experiences.
Mind you, would I upload a term sheet’s details? Not if there was a confidentiality clause. I like to be very ethical, more importantly: if an investor of mine would ask me if I uploaded a term sheet, I would not be able to lie, so I would personally avoid getting in that situation (hey, just being honest). I would ask the investor if they minded, arguing, well, arguing what I am about to argue. Read on.
VCs Reaction: Thunder, Lightning and Hail
VCs - who have long been critical of TheFunded.com - will probably not like this one bit. Entrepreneurs on the other hand are probably smiling some more and asking themselves how they ever survived before Ted, aka Adeo Ressi, launched the site in 2007.
In fact, VCs have asked Ted to:
- allow VCs to comment; he has refused, allowing them instead to certify their profiles.
- refuse to allow anonymous comments on the site; which Ted claims is necessary to make entrepreneurs confident and comfortable on the site.
He is right on both points.
On the first: VCs have their own inner circles to comment on entrepreneurs, they should not be allowed to create shouting matches on a public forum such as TheFunded.com. The best way to avoid bad reviews from being written is not to have lawyers or hired PR people write comments defending VCs, it’s by VCs to become more ethical and fair.
On the second: keep dreaming. I’ve never posted anything on the site but trust me, as an entrepreneur, I’d not be 100% honest if I had to sign my name.
What TheFunded.com Has Done: Address the Subjective Nature of Funding Process
Does this create room for personal beefs to be aired on TheFunded.com? Yes. But what you see on TheFunded.com should not be taken as “the truth”. It’s one side of the story, the entrepreneurs’ side. Then, there’s the VC side. Somewhere in between is the truth.
What TheFunded.com Will Do Over Time: Create Efficiency
But since leverage and power are stacked clearly on the VC’s side, a service like TheFunded.com is indispensable. It also helps VCs weed out bad apples by cutting off their funding and encourages institutional investors to fund good VCs: Business Week reported that Ted claims the site is profitable, with revenues well into 7-digits, going on to add that his main clients are institutional investors who end up investing in VC funds. This is a very important mechanism: bad VCs won’t get money from big investors. Good VCs with bad reviews (it happens) will be able to let their track record, ethics and their side of the story prevail. Horrible VCs will be forced out of the industry.
What TheFunded.com Will Do Now By Adding Term Sheets: Address the Objective Nature of Funding
But allow me to take this argument one step further: VCs should not complain about term sheets being disclosed on the site, they should welcome it.
That’s not a typo. Let me explain.
TheFunded.com does not prevent me from working with a VC, it simply gives me a sense of what to expect.
TheFunded.com adds information to the marketplace in the sense that it levels the amount of information that entrepreneurs have relative to VCs.
In other words, because VCs have more information, they can earn “abnormal profits”. This is efficient market hypothesis, in fact. Any VC that says they welcome TheFunded.com is lying unless they are fine with making less money. The truth is, as VC Paul Kedrosky says, it’s a surprise such a service didn’t launch sooner. As such, VCs who say “it’s great” say so reluctantly.
But hitherto, TheFunded.com has been a limited tool for entrepreneurs (it’s only been a year, mind you). TheFunded.com gives entrepreneurs a sense of what to expect after an initial contact is made. But everything that happens from that contact onwards is pretty subjective.
If you let VCs comment on TheFunded, you’d see that surely there was a reason the VC:
- was slow to get back,
- showed interest only to suddenly lose it,
- asked for confidential information then shared it with competitors,
- was on their Blackberry during meetings, etc.
We don’t care about these details. It is a VC’s prerogative to be lack tact (not all do) and do those things. TheFunded.com exposes bad manners insofar as it allows entrepreneurs to voice their criticism.
But where TheFunded.com fell short, frankly, was in the objective side of things. While the initial back-and-forth is important, it is secondary to the term sheet. The term sheet is what VCs have to answer to. The term sheet is the black and white document that cannot be distorted: if a VC asks for a 3x liquidation preference in a booming market on your average, healthy company (or if you ask me, anything over 1), that’s unfair. End of story. TheFunded.com needs to expose such brazen robber barons. In fact, good VCs should also want to weed out such criminal activity because in the end they will only be hurt by the practice.
In other words, if they are vulture capitalists, then the term sheet will reflect it.
If the VCs are fair, just, ethical etc., then the term sheet will reflect that, too. There’s no need to have them commenting on the site.
As such, adding the ability to view term sheets will actually do exactly what VCs want: their voices will be heard, but not through words alone (comments on TheFunded.com) but actual actions, measurable actions. Isn’t that what VCs ask for from entrepreneurs?
The Main Reason Why Entrepreneurs Will Benefit From Seeing Term Sheets: Managing Expectations
Last year I spoke to a VC regarding a potential Series A investment. The VC asked me what I thought our company was worth. I proposed a pre-money valuation using about 10 recent comparables in the marketplace, in both funding rounds and M&A deals. He came back and said “nope, that’s too rich”, arguing that he had seen “funding deals in Series B rounds that came in at that value.”
I asked him “which deals?” to which he answered: “sorry, it’s confidential”. I asked him for comparables that he was not involved with to back whatever figure he had in his mind. Sorry, no answer there, either.
So we played a song and dance that went nowhere, fast.
First off, his argument about the Series B valuation was poor because as founder/investor, I’d served as the initial investor when we launched two years ago, investing an amount that is awfully representative of an initial VC round these days (but that’s not the point I’m making here so I shall digress).
More importantly, talks broke down because this VC was making me jump through more and more hoops to show validation of what we were doing and forced me to spend 6 months living in a spreadsheet - which I refuse to do. I instead focused on signing more deals and generating sales. But he was making me do all of that to justify my valuation (which is somewhat meaningless in some ways, relative to other items in a term sheet anyway).
Had I been able to see existing term sheets in the market, I would have been able to quickly see if he was being honest about my valuation being too high or he was trying to low-ball me. Since then, seeing a lot of deals take place, I can tell you I was not being unreasonable. He was in fact trying to low-ball… not because he’s a douchebag (I actually liked the guy quite a bit, and no, he does not read this blog) but because that is what all VCs do!
In other words, up to now, TheFunded.com helps set expectations of what to expect from initial contact to the term sheet (assuming you will get one). But once you got a term sheet, TheFunded.com helped entrepreneurs in a very vague and ambiguous way (”the term sheet was a bad one” is very vague compared to “we got $2M in funding on a $8M pre-money with a 1x liquidation preference”).
It is often said that entrepreneurs are unreasonable with their requests and expectations. That is a fair criticism to be leveled against us, and in turn, by allowing the information in term sheets to be added into the ecosystem, then VCs should be happy because entrepreneurs will have an objective barometer to sense where the market is at.
Reducing Cycle Time of Financing Deals
Valuation is not about what an entrepreneur thinks his or her company is worth, it’s about the market. In fact, it’s not even about a term sheet we get, because term sheets are not final. This is why I don’t understand VCs beef on the confidentiality matter. VCs are not even bound by term sheets, oftentimes they change the terms. By allowing term sheets to become part of the information ecosystem, even if they remain anonymous, then it helps shorten the funding process too: a VC has to be in line with the market, as does an entrepreneur. More companies will get funding, more opportunities will be capitalized on, and there will be less frustration in the process.
Ultimately, VCs won’t welcome this
Despite all of these advantages, VCs won’t be happy and the reason is simple: VCs are in the business of maximizing their earnings, which means their objective is not really in line with an entrepreneur’s goal, it is in fact almost inverted!
For VCs to achieve their goal, it usually start at the term sheet by getting unfair advantages. TheFunded.com addresses this, it’s a welcome and indispensable tool in the equation. If VCs don’t like it, it says a lot more about them than it does about you.
End Game for TheFunded.com
Interestingly, Ressi mentions that if he wanted to raise money, it would be a challenge, but I disagree. He could raise money for this or any other venture easily. I can see TheFunded.com remaining private and independent, especially on its current run-rate. But I also see TheFunded.com selling to a company like Thomson Financial, News Corp. or Bloomberg. Maybe non in the exact incarnation it is in today, but I can see it evolving to a place where such financial information companies could help it become a clearinghouse of data (and maybe money if they can overcome some major conflict of interests) in the private financing space.
Related:
- My 15 minutes with TheFunded.com’s Ted
- Why do Entrepreneurs Accept Draconian VC Terms?
- Biggest Mistakes VCs Make
More on VentureBeat, TechCrunch, Business Week.
Yahoo! - a stock I’ve owned all the way up to $34 (many times) and come back down to $22 (many times) and never sold (unlike others like aQuantive and Electronic Arts where I made money time and time again trading within a range) is being circled by private equity investors, as well as strategic media players such as AOL, News Corp. Viacom, MSFT, AT&T, CBS, according to Peter Lauria of the NY Post (owned by News Corp.).
Bear in mind, the NY Post has frequently pumped the MSFT/YHOO merger rumor, helping push up the stock 18% in one day back in March, after which point both companies denied the rumor. But with the stock in the gutter, and 2008 being all about display/banners and videos (where Yahoo! is strong), then it’s a matter of time before someone launches a bid. From Lauria’s article:
“Yahoo has an execution problem, not a structural problem, and whenever you have an execution problem there are a lot of smart people with a lot of money that think they can do better,” said UBS analyst Ben Schachter. “Each day Yahoo’s stock gets cheaper, it raises the interest among these people. Yang and Filo don’t want to sell until they’ve had a real chance to turn the business around. Where the stock is now, however, they might not have that option.”
I mentioned the Yahoo! going private option all the way back in summer of 2007 fall of 2006, and a lot of people said “no way” so at the risk of saying “I told you” I think that private equity remains a very viable option, both with regards of feasibility and in terms of result.
Henry Blodget adds: “So the most likely buyer here is probably private equity. And it’s not hard to guess what a big PE buyer would likely do: Go private, lever up, pay a huge one-time cash dividend, fire a couple thousand people, sell off everything but the core business, and go public again.”
I’m not saying “told you so” mainly because it has not happened, but I will say this: if any private bankers want to discuss this, and how to maximize value, you know where to find me. In fact, while we’re talking crazy, here are some more not-so-crazy options for Yahoo!:
- status quo (a $100B market cap by 2010?)
- merger with eBay
- merger with Viacom
- merger with CBS
- acquisition by/merger with Microsoft
- taken private
- sale to AT&T
- can Google buy Yahoo!?
- Spin off ad network unit
What would you do with Yahoo!?
Yahoo!, the perennial $22-34 stock, might actually clock in for the day in the green zone. Mind you, there’s some 15 minutes left to go in the trading day, which closes at 4pm EST.
Yahoo! is more than ever a private equity target in my opinion. Sure, as a Yahoo! shareholder I’d love to see MSFT make a public offer at $50/share, but the best fit would be a PE buy. I know what you’re thinking, the credit crunch. Right? Wrong. For low income saps like you and I, credit might have tightened, but with oil registering daily highs, and the USD at record lows, the Federal Reserve dropped rates, which makes the cost of capital that much cheaper when using leverage, lots of it.
The main reason a go-private Yahoo! bid makes sense was recently reiterated on Valleywag, though the numbers are clear to a novice investment banking analyst, too:
Yahoo Japan, of which Yahoo owns a third, is worth $25 billion, putting Yahoo’s stake in it at nearly $9 billion. Alibaba.com, a Chinese e-commerce company in which Yahoo directly owns a 10 percent stake, is worth $17 billion. Tack another $1.7 billion on. That figure doesn’t include Alibaba.com’s parent company, Alibaba Group, which runs Yahoo China and in which Yahoo owns a currently illliquid 40 percent stake. Estimates of its value are running between $8 billion and $16 billion. Yahoo has other investments like G-Market. Add it up, and you realize that Yahoo’s wholly owned operations in America and Europe are valued by the market at next to nothing, especially compared to the multiples other Web companies are getting.
Frankly, the same cloud of negativity that surrounds YHOO - the stock - is the same aura and vibe that gets people to think that MSFT is about to go out of business due to Google Apps. It’s a big pile of nonsense, but Wall Street is as short sighted as Publish button trigger happy bloggers who rain doom on Yahoo! or MSFT with little reason or understanding of the three companies fundamentals.
Yahoo! needs a house cleaning at the top, and that has begun. But to this day, call me crazy, I’d pick Yahoo! at $30B over Google at $200B any day… but I’ve been saying that for so long that I really am no authority on the matter anymore.
Read our options for YHOO here:
- status quo
- merger with eBay
- acquisition by/merger with Microsoft
- taken private
- can Google buy Yahoo!
Prices have been going up and number of deals have gone up. Will that change?
Alan Meckler, Chairman & CEO of JupiterMedia: Media Bistro hurt us in some ways, others expected same figure even if they did not have same business, revenue and cost structure… done over 500 deals and the main challenge after signing is entrepreneurs who say they get that things will change, but actually don’t.
David Levin, United Business Media: Prefers small deals to large ones… there are very fragmented markets and opportunities abound in those, he’s done 43 deals in past year alone. Companies and opportunities usually fall in: want it, fix it or sell it?
John S. Suhler, President, Veronic Suhler Stevenson: Veronis focused on middle and lower middle market ($150-250M range), more of a strategic buyer, not a financial player only: Do additional acquisitions to complement companies they invest or buy. Debt affects deal flow, for sure, so while the money is there, it’s slightly more expensive.
Lauren Rich Fine, Media Analyst: Tribune deal might be undone, but Reuters/Thomson probably won’t.
Steven Rattner, Managing Principal, Quadrangle Group LLC: There are deals of passion and deals of spreadsheets, buying newspapers right now fall in the latter… when Rafat suggested that companies buy newspapers for obvious reasons, Rattner is quick to add “what are obvious reasons people buy newspaper assets?” The reasons are not obvious, he states, referring to operating pressure. The Tribune deal showed that there are not really that many buyers (where only Sam Zell showed up). Of course, as a buyer, he’d say this to knock prices and expectations… Sellers don’t want to accept low enough figures to create safety net or margin of error as margins continue to shrink and revenues fall.
But really, here’s what I want to know: if and when Paid Content sells, which M&A bank will Rafat Ali hire: DaSilva & Phillips or The Jordan, Edmiston Group, Inc., who are Diamond and Platinum sponsors respectively?
Care to comment on that, Raf?
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