You knew this was coming…
When Mahalo launched, the naysayers came out in droves: we penned a post called Mahalo: English for 1996.
Then as the company morphed from one project to another, the cynicism grew. Last month founder Jason Calacanis penned a post calling for 80% of Web 2.0 to shutter. Knowing that Jason is a master of PR, you knew he was laying the foundation for Mahalo’s own cuts and potential shutdown. Right now, the latter is by no means a fait accompli, but for Jason to suggest that the company will be able to survive without any ad revenues until 2012 is a bit of a red herring; the real question is,will Sequoia, who itself rang alarm bells just last week on the need to get one’s house in order, sit by and watch Calacanis burn through $20M in VC?
Yeah, I don’t think so.
Mahalo, like many other startups that were funded in the past few years, were over-confident VCs flipping a coin in the air hoping it would land on jackpot. But as the economy tanks and credit becomes scarce, financiers realize this isn’t time to play Grown Up Monopoly with real money…in fact, many companies don’t pass Go and don’t collect $200.
This is why we’re seeing all of these layoffs. Make no mistake about it:
- quality companies with a glimmer of hope are being funded and reinforced as we speak,
- so-so players are being asked to reduce costs until a final judgment is rendered,
- defo losers are being shut down. Some might have to repay the money they raised.
Today’s news from Mahalo means that its backers put it in the second or third pile. Where will it end up?
Mahalo’s traffic strategy right now is simply to jump on the latest, breaking news, publish a page on it, and hope that Google’s super quick spiders index their page… It’s a gimmick, not a worthless one, but not exactly priceless either.
Mahalo’s dilemma remains the same: the more Mahalo becomes an actual content hub though, the more it strays away from its core. The more it sticks to its core, the less relevant it is over time.
From Jason Calacanis’ website:
We’ve laid off a just under 10% of our full-time staff, cut our overhead by doing smart things like renting desks (we have six offices in Santa Monica fyi), and reorganized our editorial department to focus on freelance positions over in-house editors. The net result of the effort is we are giving Mahalo another year of “dry power” (or runway) to complete our mission.
Yeah… that might not be a good idea. Who the F needs six offices?
Online music-focused social network Imeem is on the block, according to our sources, and has hired investment banker Montgomery and Co. to lead the sale. Coincidentally, we have also learned that the company is announcing some layoffs internally today—as much as 25 percent of its around 80-strong workforce.
Imeem has raised above $50 million in funding over the last two years, including a $15 million round from Warner Music Group earlier this year. Other previously disclosed investors include Sequoia Capital and Morgenthaler Ventures…we have also learned that DAG Ventures was the last one to invest in the company this summer, with the valuation north of $200 million. They would probably like more than that, but with the current market, anything in nine figures would be, well, reality-rational.
It is worth noting that DAG did the last funding at $200M. Depending on what, if any, liquidation preference they put in the deal, it is very possible that the founders, management and employees will be wiped out in any deal.
This is why I would never agree to a liquiditation preference, frankly.
Disclosure: Imeem is one of WatchMojo.com’s distribution partners. We have absolutely no insight on the company’s layoffs etc.
Ron Conway - the gold medal standard of angel investing - and Sequoia - the gold medal standard of VC investing - are announcing impending doom, in essence.
To summarize, their advice can be summed up as:
“Times will be rough, you need to cut costs and hunker down for the storm. If you can survive the tough times, you will be fine, maybe. But if you cannot, tough.”
Here is my two cents: while the economic reality affects everything around you, I am not sure there is a need to panic or do anything differently if you had an actual business with clients, revenues, etc. In fact, I’ve even outlined that you can build a lead now when competitors get trigger shy.
The problem is: for years we’ve seen a reckless record of investing in companies that were anything but.
If as an investor you have been putting up signs for nearly 5 years looking for Facebook apps and Web 2.0 garbage, it’s sort of hard to stop that momentum and look for companies that are making money, let alone profitable.
When you raise money, you do so not just for the dough, but to tap into leadership and guidance. So while these respected inevstors’ warning bells are prescient and accurate, it would have been nice for them to show wisdom in their investments (I realize this sounds crazy considering the barrage of home runs they have between them…) during boom times, too.
Related:
- Single most important variable to look for when you join a startup.
Sure, Cuill (or is it Cuil?) tripped out of the gates after a much hyped launch, that much we know. But with all due respect to the otherwise on-the-ball Matt Marshall and Venture Beat, he’s missing the point on Cuil’s admittedly absurd $200M valuation in the last venture round. We’re not doubting the fact that the valuation was absurd and in hindsight, way over-valued. What we’re saying is that this is typical behavior of VCs who - let’s face it - could not identify a valuable business from a puffed press release if their lives depended on it.
Cuil isn’t worth 200 rupees, let alone 200 million rupees or dollars, but that is not the point. The point is:
Venture capitalists don’t invest for safe plays (the proverbial single, double or even triple), they invest for grand slams, let alone home runs.
In search - a market where Google commands 70% market share and which translates into a $20B revenue stream in 2008 and more importantly, a $137B market cap - it could be argued that a mere 1% market share is worth a cool billion dollars.
At this rate, considering that Cuil’s search is pretty lame and a member of their team just left (a father of Web search, no less), I’d guesstimate that Cuill won’t be in the Hall of Fame of VC investments any time soon… but that says more about the willingness to back potentially huge payoffs over probably positive payoffs.
A bit of disclosure: I should mention that it’s ironic that back in 2005, my developers and I built a search engine which was about as much of a polar opposite to Cuill as possible. While they pushed the fact that they had a massive index, we emphasized our small, restricted index.
As we idealistically outlined in our Ten Tenets: the size of the index is quite irrelevant. Quoting an analyst on the topic:
“It really doesn’t matter how big the database is,” said Jupiter Research analyst Gary Stein. “It only matters if you can find what you’re looking for.” In surveys asking consumers what they view as most important about search engines, “size never gets clicked,” said Stein.
Judge for yourself which one returns better results:
- Barcelona on MetaMojo vs. Cuill
- Prostate cancer on MetaMojo vs. Cuill.
Both seem fine… but considering that Cuil has over $30M in funding, you have to ask: is this the best way to invest and deploy capital? Judging from the flop of a launch, I’d say no.
We built MetaMojo on less than $100,000… the focus was not to be the size of index (something that Cuill kept harping on, along with the fact that they could index the Web at a cost of 1/10th of what it cost Google… to which I kept thinking: who cares? - but I digress).
What we were going to focus on in Phase 2 of development included customization, personalization and socialization, but the simple truth of the matter was that no VC thought that we had anything to parlay to even make it to 1% market share in search, where Google, MSFT, Yahoo, IAC’s Ask and AOL command 99% market share, so unable to raise VC for it, I shifted Mojo Supreme’s focus from vertical and social search to video content… which in hindsight was a very good decision, seeing how we command considerable leverage in this space now and have become a leader with relative minimal investment (relative to companies in our space that have raised $10-30M of VC dollars and who are searching for a successful revenue model, but I digress once again).
The point I am making, frankly, is that VCs need to get on the cluetrain not for investing in wrong markets and wronger companies… but investing in a bunch of alumns from AltaVista and Google and hoping that they can re-invent the wheel is not counter-intuitive, it’s plain dumb. These people are highly accomplished and probably have a better understanding of search technology in their pinky toe than I do in my entire being. However, “people like that” already have enough laurels to rest on and usually large enough bank accounts to rely on, so they won’t outhustle startups that tend to - if not reinvent the wheel - then at least shift the battlefront to a corner where they can compete and win.
Back in 1999, Ross Levinsohn (the former CEO of FOX Interactive who wisely told Rupert Murdoch to outbid Sumner Redstone for MySpace) was in AltaVista, and when Google came up, the guys in the room said: “does the world need another search engine”. That was before Overture, Applied Semantics, Sprinks came along to weld the future business of search, which Google parlayed to create a perfect storm which left all would-be contestants in the dust.
In other words, it will take a lot more than “cuilness” to even make a dent in search, let alone earn 1% market share.
A side note, Venture Beat’s Marshall points out that:
Turns out, Madrone manages investments for the heirs of Wal-Mart founder Sam Walton. Madrone’s Greg Penner (pictured left), who is on the board of Cuil, is married to Carrie Walton, Walton’s granddaughter. He’s also on Wal-Mart’s board. Penner notably is also a board member of Baidu, a Chinese search engine which is doing quite well in China.
Nice… maybe that explains why old man Walton didn’t give all of his fortune to one heir and wisely chose to diversify across his lineage…
Step 1: After f*cking over Sean Parker at Plaxo, Sequoia is shunned from participating in Facebook funding, who raises money from former Paypal President Peter Thiel.
Step 2: Sequoia is snubbed once again from Facebook craze when Slide - founded by former Paypal encryption wunderkind Max Levchin - launches slide show maker for social networks. Social networking craze ensues… then starts to fizzle.
Step 3: Having had enough of being shut out of the FB ecosystem, Sequoia leads Series A (in January 2007 at $1.5M) and Series B (in March 2007 at $15M) rounds for Rock You, Slide’s arch enemy in FB app ecosystem. Note timing of Series B: right before FB launches apps.
Step 4: Realizing FB apps is as valuable as a warm bucket if spit, Sequoia (along with initial investors First Round, and Lightspeed Ventures) pass on investing in Series C round to display greater fool theory in mimicking Slide’s mammoth $50M round, get DCM to ride on Sequoia and First Round’s coattails by investing a $35M - the day after Slide says FB apps are pretty much useless. It’s worth noting, by the way, that according to one contributor on TheFunded, “would not take money from DCM if offered”.
Step 5: Sequoia can brag that they are participating and helped finance the FB craze… blah-blah-blah until next fad; DCM can claim that they invested alongside the great and venerable Sequoia.
Rock You now has raised over $51.6M in funding. Slide is up to $58M. That is early $110M in funding alone… would you pay $110M for both companies in a buyout?
I wouldn’t… see our first piece here.
UPDATE: Venture Beat notes: “Doll Capital Management led the round, providing $30 million. The remainder $5 million was provided by existing investors, Sequoia, Partech and Lightspeed.”
Yeah… that changes everything I said. Right…
M&A can happen quickly, but financing is a mind-numbing process that takes 6, sometimes 12 months.
As such, learning that Rock You just raised $35M for Facebook apps, you have to wonder, how do the investors feel upon learning that just yesterday, the #1 in this “space”, Slide, signaled a shift in strategy by stopping to develop new apps.
The money did not come from dumb money:
The round was led by venture firm DCM, with contributions from several private investors. Previous RockYou investors include Lightspeed Venture Partners, Partech International, and Sequoia Capital.
But all factors being equal, VC-backed ad-supported companies are prone to fail: no freaking clue how advertising works and too arrogant to admit it, too.
Three months ago I asked “why is there no YouTube fund” to match Facebook or iPhone funds, even though online video will be far bigger than social networking ads, and wireless ads is really hype driven for the time being (for the record, I am far more bullish on the iFund than the FB funds). Today’s announcement by YouTube that content owners can sell ads against their own content and monetize their content is validation and support of my argument that there is a need for a YouTube fund. After all, online video ads in the US is supposed to grow from $1.25B in 2008 to $7.1B by 2012… while social networking revenue projections are being reduced. To drive the point home: YouTube’s market share in video is more strangling in video than Google’s is in search, yet right now, YouTube only does $75-200M in annual revenues… so the upside - while both clear and unclear - is there.
As I said, some investors must be waking up today feeling rocked. To see how something so stupid can even happen, click here.
It’s definitely very sexy and easy to argue that traditional media just doesn’t get web video. Some blast NBC for having the audacity to want to be in control of their content’s destiny online; others question the logic of Viacom not wanting 3 programmers and a venture capital fund walk away with $1.65B in capital gains largely - in their eyes - thanks to their content.
The balls these old media types have, is the prevalent vibe… and “they just don’t get it” is the usual conclusion we draw.
Of course, juxtaposed with this nonsense is the assumption that new media companies so get it.
Really?
This week, Mania TV pulled a 180 degree turn: first being a content producer, then pulling a Bolt.com and embracing user-generated content, only to issue a mea culpa and reverse strategies, admitting that UGC is in fact loser generated content in favor of professional content, once again.
Today, much-hyped Funny or Die - who’s apparently gone nowhere after that one clip of Will Ferrell sent everyone including Sequoia Capital into a tizzy - announced that it’s going to launch Shred or Die to basically avoid the Funny or Die from joining the deadpool.
All to say, there’s nothing wrong with experimentation, it’s how the Web has gotten to where it’s at… but people, let’s cut the BS, at least old media has a business to protect and defend whereas most of these new media web video companies seemingly ain’t got a clue.
Disclaimer: technically, I’m “new media” by way of WatchMojo.com producing web video for the web… but I’ll be the very first to admit, I never have a clue.
Michael Arrington has a fantastic story on Parakey and how its investors - including powerhouse VC Sequoia - got fleeced in the sale to Facebook.
To summarize:
When Facebook acquired Parakey in July, everyone assumed the stockholders of that fledgling startup would be popping the champagne bottles. No matter what the acquisition price (it wasn’t disclosed), if the sellers got Facebook stock in return for their Parakey shares, it would likely be worth a fortune down the road.
It turns out that wasn’t the case. The acquisition price, say two sources close to the deal, was paid in cash and was “less than $4 million,” providing investors with just a 2x return on their investment. Meanwhile, Parakey founders Blake Ross and Joe Hewitt were rewarded handsome stock options to join Facebook as employees in lieu of any cash compensation.
This story reads like a Harlequin novel. Let’s count the ways:
#1 - Facebook: The Startup That Keeps Slipping Out of Sequoia’s Hands?
The main (only?) reason Sequoia was out of any of Facebook’s funding rounds in the first place is because Sequoia squeezed out Sean Parker from Plaxo (a Sequoia funded company). Parker has the distinction of having his DNA on Napster, Plaxo and Facebook. After being jipped at Plaxo and joining Zuckerberg at Facebook early on, he apparently put the kybosh on any Sequoia involvement. That’s what I’ve read, could be less than true, since perhaps Facebook’s wild valuations had something to do with it.
#2 - Paypal Connection?
What’s more interesting about this, is the Paypal connection. Peter Thiel, Facebook’s first angel investor, was Paypal’s CEO. Roelof Botha, the wunderkind Sequoia VC who invested in YouTube and made the firm north of $500M on a $11.5M investment, was Paypal’s CFO. Is there a story there? Who knows… But you’d think that these two gents would probably connect and get Facebook some Sequoia love, no? Again, who knows.
#3 - Sequoia Screwed by Side Deal?
Sequoia is known to eat their young. It’s a great VC that adds a lot of cachet to any startup, but that means that they get to set the terms. In this case, I am surprised they did not have more rigid liquidation preferences. But if you connect the dots, maybe in Parakey’s negotiations, the founders were explicitly told that they wanted to avoid any Facebook stock to fall in Sequoia’s hands. That’s a brazen suggestion, but a possible one.
#4 - Lesson: Don’t Only Back Known Entrepreneurs
VCs readily admit that they like to back repeat entrepreneurs and folks they know: Blake Ross has a track record unlike any other, so he was probably able to get the terms he wanted.
The lesson - in an ideal world - would be for Sequoia to realize that only backing people who can get money from anyone is not optimal in the end, it does not reduce the risk profile of an endeavor and in fact runs counter to the interests of their LPs… that’s right, invest beyond Silicon Valley’s chummy circle, and maybe you won’t find yourself on the outside.
Alexander Muse has an interesting take on the deal.
What’s Driving M&A These Days? Today Google announced that its Google Video is now a search engine, clearly putting YouTube front and center in the video library space and cementing its rationale for acquiring YouTube.
When one company buys another, it helps to decompose the deal by looking at:
I) One of the three financial statements:
- income statement: revenue and profits, essentially.
- balance sheet: assets, usually audience, brand, technology, etc.
- cash flow: goes hand in hand with income statement.
II) Another way to look at what drives M&A is the following Four Pillers:
- people: expertise and experience
- content
- technology, patents, etc.
- revenue/profits/cash on books.
III) Strategy and Competition
Of course, oftentimes it’s strategic, either to get into a market or to defend oneself against a new player. Sometimes, a large company will buy a smaller company because they fear the smaller one can become too large to contain.
YouTube/Google Case Study
It could be argued that Google’s acquisition of YouTube, which we did not include in our Top 10 Web Acquisitions of All Time fell under a myriad of reasons other than revenues or profits. The company did $7M in revenue in 2006, even though it had the inventory to do $7M per month, according to our “back of the envelope” calculations here.
When YouTube was acquired by YouTube, it valued YouTube’s technology and patents at a paltry $24M: Google’s acquisition of YouTube was largely based on accounting goodwill and only $24 million was for patents and developed technology, according to this article.
And since YouTube’s revenues and profits were immaterial to Google, who in 2006 generated $10B in revenue and by year’s end sat on $12B in cash, Google paid neither for technology nor income, but rather the audience and content.
Essentially Google paid:
- $33 per user for the audience (source), as it had an audience of 50M users. According to that, Facebook for example is worth $800M, incidentally what Viacom offered for Facebook.
- At the time, it streamed 100M per day, so while this metric is awkward, that converts to $16.5 per daily stream.
- But Google also ended up acquiring the largest database and collection of videos out there, according to a recent story:
Some observers said $1.6 billion could end up being a cheap price to pay for a collection of the world’s most valuable video. For instance, Google plans to spend hundreds of millions of dollars to create the world’s largest library of digital books.
What is YouTube’s content worth? For one, it’s not YouTube’s content, and Viacom’s Sumner Redstone would remind you of that 1 billion times. The fact that it’s really good content but not proprietary sort of offsets one another.
And yes, Google is not currently really monetizing video inventory on YouTube, but it is expected to generate $300M in video advertising by 2008, according to Marianne Wolk of Susquehanna Financial Group, as I wrote here.
I found this suspect, but then I checked back with some of my earlier posts, some market figures and I said: “maybe, it’s possible.”
But before we get hammered on the kool-aid, note one thing: in this comprehensive post I made some time ago, video advertising is growing quickly but assuming one player will get $300M is interesting:
Online advertising is moving very quickly, from 2004 to 2006, the projected estimate for the online video advertising market grew from a slated $657 million in 2009 to $3 billion in 2010:
- An estimate of the online video ad market for 2009 - set in 2004: $657 million
- An estimate of the online video ad market for 2009 - set in 2005: $1.5 billion
- An estimate of the online video ad market for 2010 - set in 2006: $2.3 billion
- An estimate of the online video ad market for 2010 - set in late 2006: $3 billion
The reason is simple: the Web and video are natural fits. The success is not on YouTube alone, which streams 100 million daily videos per day. It’s not just YouTube, the entire Web has caught the video bug: 24% of surfers watch online video at least once a week, 46% watch at least once a month (Online Publishers Association).
Clearly online advertising is snowballing, and Google could indeed make $300M in video ads by 2008.
What Will Google’s Revenues Look Like in 2008?
Google did $10B in 2006 revenues, and as I outlined in “Will Google Surpass MSFT in Market Cap by 2010,” Google’s revenues have grown:
- 2002 revenues grew 409%
- 2003 revenues grew 234%
- 2004 revenues grew 118%
- 2005 revenues grew 92%
- 2006 revenues grew by 70%.
Assume it’s 50% in 2007 and 35% in 2008, then that 2006 figure of $10B is $20B in 2008 (yikes), so $300M is a paltry 1.5% of its total revenue. Separated but interesting post: 2020: $100B US Online Ad Market and Google’s $375B Market Cap? here.
Cost of Leadership in Video Market?
But when you want to better understand why Google plunked down $1.65B for YouTube, a site making no revenue, consider this:
Google Sites Ranked by comScore as Top U.S. Video Property in March 2007 (link).
To summarize:
March saw Americans consume more than 7 billion video streams online, led by Google Sites with 1.2 billion (16.7 percent share of streams). Yahoo! Sites ranked second with 434 million streams (6.2 percent), followed by Fox Interactive with 421 million (6.0 percent) and Viacom Digital with 260 million (3.7 percent).
In total, more than 126 million Americans viewed online streaming video in March. Google Sites also captured the largest streaming video audience with more than 57 million unique streamers, followed by Fox Interactive Media with 47.4 million and Yahoo! Sites with 34.5 million.
Gee. How did that happen? Google Video was a Top 10 player: with 10% market share, while FIM’s Myspace had 23% and YouTube had 46%.
Oh, right, YouTube. Google used 1% of its market cap to acquire YouTube. In hindsight, that deal is looking better and better. When we penned Top 10 Web Deals of All Time, I said “we’re omitting YouTube/Google because it’s too early,” and in all fairness, between the $1B lawsuit from Viacom and everything else that can go wrong, it’s premature to suggest otherwise, but, the fact remains: video is a rapidly growing market.
YouTube is the undisputed king of user-generated and user-appropriated content… when people ask me “what is WatchMojo.com vis-a-vis YouTube,” I always tell them it’s a distribution partner, we’re complemetary, basically. I also am quick to assert that YouTube/Google is not a really good comparable other than it being a shot in the arm.
But when you consider the acceleration of marketing dollars online and the place video will have within the online advertising mix, I do wonder what the strategic value of the leader in made-for-web video content would be.
I don’t know, but it’s a question I’m increasingly forced to ask.
Of note:
Other notable findings from March 2007 include:
· Five out of every seven U.S. Internet users (71.4 percent) streamed video online.
· Three out of every ten (30.1 percent) of U.S. Internet users streamed video on YouTube.com.
· The average online video viewer consumed 55 video streams, or nearly two per day, during the month.
· Online viewers watched an average of 145 minutes of online video in March 2007.
Related:
- Understanding TV Execs Angst and Envy.
- Newspapers See Value in Web Video.
- Video is Killer App, but not in Good Way, for All Magazines.
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