24/7 Wall Street has an interesting run down of the 25 most valuable blogs. Like all lists, it’s entertaining. I disagree big most of the rankings but agree that Gawker Media is clearly the #1 blog-based publishing company, at least in the Western world (I am sure there must be very valuable Asian, European and South American blog empires).
More interestingly, the list is a mish-mash of technology, celebrity, finance, etc., blogs… which I think makes the list a bit noisy. While I understand diversification makes sense, lumping different publications together in a list, just because they happen to be powered by blogging software, is a bit odd. That’s basically like having a list of sites powered by a given CMS… who cares?
It would be better to see top 5 finance blogs, top 5 tech blogs, top 5 celeb blogs… you know, to compare apples with apples.
Then again, I am biased: here’s a rundown of the Eight Elite Technology Blogs.
Scripps is one of my favorite media companies.
Admittedly, Scripps is one of the many sources of inspiration when I came up with WatchMojo.com’s programming and editorial strategy (re: HGTV, Food Network, DIY Network, Fine Living). Other influences are Discovery Networks (Travel and History Channel), Viacom (VH1, MTV), etc., so admittedly, it’s varied.
However, trying to wrap my head around their strategic plan for the entire company is not an easy thing to do.
What is Scripps?
The E. W. Scripps Company, through its subsidiaries, operates as a media company that provides content and advertising services via the Internet. It operates through four segments: Scripps Networks, Newspapers, Broadcast Television, and Interactive Media. The Scripps Networks segment operates national television networks, including HGTV, Food Network, DIY Network, Fine Living, and Great American Country. The segment also provides video-on-demand and broadband services. The Newspapers segment operates daily and community newspapers in the United States. It also owns and operates Scripps Media Center, as well as operates Internet sites, offering users information, comprehensive news, advertising, e-commerce, and other services. The Broadcast Television segment operates ABC-affiliated stations. The Interactive Media segment offers online comparison shopping services. It operates a comparison shopping service that helps consumers find products offered for sale on the Web by online retailers, as well as operates an online comparison service that helps consumers compare prices and purchase various essential home services. The company also offers BizRate, which is a consumer feedback network that collects consumer reviews of stores and products. The E. W. Scripps Company also offers other services, including syndication and licensing of news features and comics. The company was founded in 1878 and is based in Cincinnati, Ohio.
Like most media companies, Scripps is facing a threat of cannibalization.
Consumers and advertisers are flocking to the Web, but the core business of Scripps - along with all traditional media firms - remains offline.
It’s a harrowing experience. One that keeps executives awake at night and creates anxiety and envy. Occasionally, they’ll make $500M decisions that puts them in a corner.
Anyway, interestingly, Scripps is in the process of spinning off its slower growing and mature businesses from its higher growth web business. But when you dive into their 10-K, you see a lot of interesting tidbits that shed light on how confused some traditional media companies can become in these digital days.
Tale of the Tape
Scripps is worth $6.8B in market capitalization.
For 2007, the company’s total revenues were $2.5B with net income of almost $400M. This translates to a P/E of 18 and a P/S of 2.75.
It makes sense, in some ways, to spin off the new media assets, granted… but you have to wonder about the broader repercussions and realities for old media.
From the 10-K, via Paid Content:
“Our Internet sites had advertising revenues of $40 million in 2007 compared with $34.0 million in 2006 and $22.0 million in 2005.”
It should be noted that these are advertising sales only. Indeed, Scripps Interactive also consists of Shopzilla and uSwitch. In fact, in 2005, Scripps paid a whopping $525M for Shopzilla, then named Bizrate. At the time of purchase, in 2005, when Scripps bought Shopzilla:
Founded in 1996, Shopzilla, formerly BizRate, is a privately held company that is expected to generate $30 million to $33 million in EBITDA profit, also excluding investment results and unusual items, on revenue of $130 million to $140 million for the full year 2005.
As such, with a price tag of $525M (in cash, no less), at a $135M in revenues, this converted to a 3.9x P/S ratio.
As of Q3, 2007:
Shopzilla and uSwitch, which together make up Scripps’ Interactive Media division, generate upwards of $54M per quarter, driven largely by CPC and CPA-style referral fee revenues.
For what CPC, CPA and CPM mean, along with other standard online ad terminology, click here.
If you project the $200M or so that the referral business generates, at the same 3.9x P/S ratio, the unit should command a whopping $800M in a sale. Scripps is adamant that Shopzilla is not for sale, but that’s not what the rumor mill suggests.
I should disclose now that Shopzilla was an advertiser of our sites in 2007. We do not have any inside information on this matter, however.
Advertising Has Inherited the World
But advertising is everything these days. Free, ad-supported content is what drives value these days… and much of what Scripps is doing is all about unleashing shareholder value. So let’s focus on that.
Doing the math and focusing only on “Our Internet sites had advertising revenues of $40 million in 2007 compared with $34.0 million in 2006 and $22.0 million in 2005,” then that’s growth of 100% in 2 years but effective annual growth of 54% from 2005 to 2006 but only 17% from 2006 to 2007 .
What about 2008, you ask?The 10-K continues:
“Interactive media segment profit is expected to be $13 million in the first quarter”
Multiplying that by 4, you get $52M. From 2007 to 2008, this would be growth of 30%… not bad. What happened in 2007 to kickstart growth from a paltry 17% to 30%?
Acquisitions, that’s what.
“In July 2007, we reached agreements to acquire the Web sites Recipezaar.com and Pickle.com for total cash consideration of approximately $30 million.”
Scripps can file this under “Advice You Didn’t Ask For”, particularly since I’m biased, but I am not sure Scripps is wise to be buying UGC sites, frankly. Don’t take it from me: CNET regretted acquiring Webshots; from my vantage point, Scripps will regret buying UGC sites, too. What these sites need is not more low-quality inventory… they need to pull a AOL/Webshots and find a way to create low cost, high quality video content.
What this means for the spin-off?
Regardless of what I, a mere mortal, thinks of such acquisitions, the fact remains: the company spent $30M from Scripps’ cash hoard to load up on interactive. That of in itself is wise.
Scripps balance sheet shows $58.95M of cash but nearly $600M in debt. At even 5% interest charge (presume Scripps $2B in sales guarantee it a low interest rate or cost of debt), that is an annual $30M interest expense. In other words, in 2007, it paid $30M in annual carrying fees to spend $30M in acquisitions to kickstart its interactive growth. That makes sense, I guess: invest today for tomorrow’s growth.
That’s also why, I presume, they want to spin off the new media company: more capital for more acquisitions, and to pay off debt (I am guessing about the latter, I have no idea what management’s actual use of funds and strategy is).
Benchmarks
The Web’s online ad markets are growing at 25% per annum, but with quality content you expect Scripps to outgrow the market.
Moreover, while the growth rates are nothing to sneeze at… in absolute markets, they’re puny when the offline unit does $2.45B in annual sales.
You cannot, after all, simply shift your offline content online and expect the same revenues. TV ads in the US were a $75B market in 2007 while web video was a $750M market. Web video and online media in general cannibalizes traditional media and TV in particular cannibalize offline revenues… Scripps is a textbook example of a victim of this phenomenon.
What about the Stock?
Of course, it’s all about the share price and market cap… so maybe the financial engineering makes sense. Does it?
Double the P/S and P/E for the online segments (since they are higher growth segments, this basically means that investors would bid twice as much for the growth), a $40M revenue in 2007 x 5.5 P/S ratio project a $220M company. Of course, that is just the online advertising contribution, the referral fees generate over $216M per year (if we simply take that Q3 2007 amount of $54M and multiply it by four).
But multiples on referral fees are in the gutters relative to multiples on ad revenue…
With the obsession over advertising these days, you have to presume that P/S for referral-based businesses is down. But since the Web does indeed command a premium to offline media, we’ll eliminate any discount or premium and simply say that today Scripps would be able to get the same multiple, 3.9x.
But the problem with this rationale is that with $200+M in revenues, that would project nearly $800M in value. I don’t think anyone would pay nearly $1B for Shopzilla.
In fact, given the herd mentality of investors and buyers in general, I doubt they’ll get $525M for Shopzilla because buyers would prefer to spend such an amount on sexier things: video, social networking, video games, etc. As such, if you work backwards and agree that a price is what the market will pay for something, it’s hard to imagine Shopzilla getting $500M on the market, so this means a P/S of about 2.5x.
So what would all of Scripps Interactive be worth?
Regardless, if you combine the businesses comprising interactive:
+ online advertising = $40M in 2007 revenues at 5.5x P/S = $220M
+ referral fees = $216M in 2007 revenues at 3x P/S = $648M
You see that the interactive business should be an almost $1B company.
If Scripps is indeed worth $6.8B… then the rationale is that you can carve out a faster growing segment, sell a portion to investors, raise money, pay down some of the debt, and then make acquisitions at a lower cost of capital.
Of course, this entails that they buy the right assets and the right people. Will they? Time will tell. But considering Scripps bought - then sought to sell - Shopzilla for $525M… you have to understand why the company is going to tread carefully.
You do not need a CFA to realize that Yahoo! is an undervalued company. Yes, the company once synonymous with the World Wide Web is now facing numerous challenges, but between investments in Alibaba, Yahoo! Japan, a myriad of recently acquired US-based properties (Flickr, Delicious, etc.), the company is worth more than $32B.
But, tell that to Wall Street investors and analysts who keep pegging Yahoo!’s growth (or lack thereof) to Google’s and end up favoring the search leader.
Reading up on John Battelle’s predictions for 2008 - in which he forecasts AOL’s Platform A being spun off - I wondered, should Yahoo! bundle its Yahoo! Network and spin that off too to unleash shareholder value?
Step 1: Defining the Networks
First, some clarifications:
- AOL Platform A is basically all of the disparate ad networks Time Warner has bought over the years, and include: Advertising.com (which we included in our Top 10 M&A Web Deals of All Time), along with TACODA, Third Screen Media, Lightningcast and ADTECH.
AOL’s decision to create Platform A is interesting: it repositions AOL.com - once a walled garden sheltered away from the anything-goes sites and pages of the world wide web - to a network outside of AOL.com, and this just a couple of years after AOL.com relaunched and became an open, free portal. This is very bold and brave from Time Warner, but leveraging Advertising.com, which is the largest ad network on the Web, could make this a success.
- Yahoo! has hysterically been all about the Yahoo! Property: the billions of pages generated on Yahoo!, Yahoo! Finance, Yahoo! Games, Yahoo! Mail, etc. But seeing Google extend its reach online and reach 76% of US users (via AdSense/AdWords) gave Yahoo! an incentive to open up.
This opening up came in a few ways, for one, it did not automatically rebrand companies it bought, namely Delicious and Flickr.
Second, it decided to reposition the Yahoo! Publisher Network and begin repping ad inventory on newspaper sites. These give Yahoo! valuable ad placement on premium sites, something that helps boost Yahoo!’s ad rates by offsetting the long tail of Yahoo! less-than-desired inventory.
Step 2: Buy Networks - Yahoo!’s Recent Acquisitions
But taking this one step further, this past year Yahoo! bought Right Media - an ad exchange - and Blue Lithium.
While Yahoo! paid $300M for Blue Lithium and an eye-popping $725M for Right Media (investing $45M for 20% at a valuation of $225M and then buying the remaining 80% for $680 at a valuation of $850, or a weighted average of $725M), I do not think Yahoo!’s stock will realistically project the value these networks represent. Yahoo!’s stock price will reflect the incremental gains these networks create for the company, but the value these networks have from a capital gain perspective is clearly not captured in the stock.
Step 3: Spin Off the Networks
If I were Yahoo!’s board, CEO or CFO, here is some financial engineering I would consider doing: I would essentially bundle all of the “non-Yahoo property businesses” (so effectively the network business) and spin it off into a separate company.
Step 4: Raise the Money (But How Much Money?)
Method #1
Yahoo! would remain a major shareholder, but by selling a portion of this entity, it could raise a lot of money to compete for deals against Microsoft and Google, who respectively have $19B and $13B in cash. Yahoo!, by comparison, has a paltry $1.5B.
The Yahoo! Network generates well over $100M in annual revenues - the psychological threshold for revenue requirements in an IPO - because Blue Lithium alone did $100M in revenues in 2007 (at least according to a story in Business 2.0 back in 2006, which we covered in this post). Add on Right Media’s revenues, the revenues generated by the newspaper consortium, and all other network-based businesses, you are looking at revenues for the Network business at anywhere from $200M to $500M in revenues. Frankly, the level depends on how you define and separate Yahoo!’s Network business. Using a mean of $350M, we can start to see what value Yahoo! can unleash, if any.
Doubleclick - ironically not even an ad network anymore - got $3.1B in an M&A for $300M in 2006 revenues. So using a Price to Sales ratio (P/S), Yahoo!’s Network would be worth $3.5B, or just over 10% of Yahoo!’s current market cap. If Yahoo! sold 50% of that to the public, it could raise some $1.75B, which would incidentally double its cash hoard.
Method #2
If we wanted to use a Price to Earnings ratio, then we need to keep working a bit.
Ironically, while networks are low-margin businesses (related: why are ad networks such low expectation mofos?), ad networks have better margins than content sites. Yahoo! is not a content site, granted, but it is a media company, so we can confidently say that Yahoo! Network would provide better margins than Yahoo!
Yahoo!’s margins are 10% or so, I think the Yahoo! Network business can garner margins of 25%, if not more. With $350M in revenues and margins of 25%, this means EBITDA of $87.5M. To keep things somewhat simple, we’ll use Yahoo!’s P/E which is 45.
Doing the math the second way, Yahoo! Network would be worth roughly $4B. Selling half of it to the public would add $2B to Yahoo!’s warchest.
Anyway you dice it, Yahoo! Network could effectively:
- reap the same benefits from their recent acquisitions
- simplify the story to Wall Street
- unleash shareholder value
- raise money for acquisitions
Any takers?
Long: YHOO
Reader question:
I am researching an online video article and based on your blog I would like to ask you a question or two about online video company valuations.
How do you go about calculating the average price paid for online video content companies? Is it a multiple of revenues?
If so, what is the average multiple currently being paid and where do you see the calculations going for figuring out what companies should pay for an online video content company?
Thank you very much for your time and for your great blog - I’ll keep reading you everyday.
Answer:
I’d say right now valuations are driven far more, if not only, by demand and supply mechanisms and recent comparables, than any kind of P/E or P/S or even price/user metric.
Google, for example, bought YouTube for $1.65B, in all of 2006, YouTube did $15M. Did Google really pay $100 per dollar of revenue? Probably not. They looked at that, but they ultimately looked at deals such as eBay buying Skype for $2.6B and MySpace being bought out by News Corp. for $580M and then growing 3x since the purchase.
I am not saying that buyers or investors have once again totally forgotten about fundamentals, but in online video, we are indeed where search was in 2001-03, that is a rapidly growing market that is morphing its business model as we speak. As a result, it simply comes down to leverage: as a buyer/investor, you want to own that growth, and seeing just how insanely large and profitable search became, I’d argue greed is outweighing fear in online video, hence the generous valuations.
But the flip side to that is indeed demand and supply, if you are a file sharing social network for example and count 5, 10, maybe 20 competitors, if you ask for too much and try to justify too rich of a valuation… you might lose the deal as the interested VC or buyer will look at someone else.
So once again this boils down to a demand and supply and leverage factor…
Ultimately the same way that entrepreneurs and businesses can’t be greedy, buyers can’t be too stingy; if an investor or a media company wanted to buy WatchMojo.com (for example) and kept going back to working out a multiple of earnings or sales right now, I’d get up and leave. There’s a lot of money being shifted from TV to the web, the key right now for everyone is to grow their content base, their audience and reach… and not worry too much about revenues because put simply, the market is developing… you cannot possibly chase revenue because you don’t yet know what that revenue would look like. Imagine, for example, if Google would have bet the farm on licensing sales… when in fact a free, ad-supported and revenue share model won. Had Google focused too much on revenues too early it would have missed out. Rightfully, Google focused on everything but revenue.
That, I’d say, is driving valuations: users, content, partnerships, reach etc.
Hope this helps
Ash
A few years ago, I joined a search engine called Mamma.com. This was before Google was omnipresent and monetizing every click you and I generated. At the same time, another company in my neck of the woods, called Zero Knowledge, raised something like $90M in VC. ZK’s mission was simple: to make users anonymous as they surfed the Web. The software made surfing the web slow and tedious, and then 9/11 killed the privilege of surfing anonymously on many sites. I’m pretty sure ZK went on to have a successful story as it repositioned itself… but:
More importantly, the mere premise that users valued privacy and anonymity was blown to smithereens as we left morsels of our information across a myriad of websites around the Web.
GOOGLE: THE DATABASE OF INTENTIONS
That, in a nutshell, explains why Google is worth $200B because they own a lot of data on you, me and the intentions that connect us in between. John Battelle referred to Google as the Database of Intentions in his book The Search. Did Google become a $200B machine because it owned all that data or did it become a $200B machine because it was the top dog in search, which is the closest thing to commercial intent? That’s a question that we might need to ask ourselves more frequently.
FACEBOOK: THE DATABASE OF CONNECTIONS
Then, along came Facebook, whom we dub the Database of Connections. Facebook recently decided to justify its paper $15B valuation by launching SocialAds, which freaked a lot of privacy watchdogs by pushing the privacy envelope even further than Google dared trample on.
WHAT IS MORE VALUABLE: ANONYMOUS INTENT OR RECOGNIZED CONNECTIONS?
Naturally, as data equals money and ownership thereof equals value, Google and Facebook are one-upping one another in the data mining conquest.
If the Industrial Age created corporate behemoths out of GM and GE, then the Information Age will surely give us Google and Facebook.
EARNING IT THE HARD WAY
While Google “earned” all of the data it has mined over the years reluctantly (we never really thought that Google would be tracking all of those clicks, did we?), newer breeds of services - namely the social networks - were in fact overtly allowed to collect such data.
MySpace, Facebook et al. all collect a helluva lot of data that we give them. There’s a nuance there people. I’m not accusing Google of anything, after all, they made their search engine available to all for free, did not barrage us with ads, and ultimately created an ecosystem around freeware so more power to them.
FEAR VS. GREED
But their massive success in turn encouraged investors to back firms like Facebook that play by decidedly new rules of engagement. I’m not sure if Facebook will ever make that $15B valuation seem reasonable - as Google did with the $85/share IPO price - but ultimately, I’m still not convinced that data automatically equals value.
For example, Google’s data could drive purchases, Facebook sure does have a lot of data, but their management’s inexperience made them fumble the SocialAds launch (I doubt, for example, if Google ever threw a launch party for Ad Words or Ad Sense, but I digress).
SOCIAL NETWORKS: A HOUSE BUILT ON SAND?
Similarly, I doubt many of the social networks around these days are really worth their weight in gold?
MySpace raised eyebrows when it sold for $580M, then it tripled in size and became the largest site by pageviews. The conclusion (and right one at that) was that the $580M price tag was a steal. But it was a steal because YouTube subsequently sold for $1.65B and Facebook has now grown to fetch a $15B paper value. Is Facebook really worth $15B? Probably not… that implies 100x revenues… but clearly, revenues are moot, I get that.
But MySpace and all of Fox Interactive Media won’t reach $1B by 2008 in revenue… so what could MySpace really be worth? Who knows.
VALUATION: TWO SIDES OF A COIN?
As you go through the numbers, you then start to realize that Facebook isn’t really worth $15B, but rather, MSFT was willing to pay $240M and Facebook’s investors were willing to sell 1.6% of the company for that amount, which is the same thing in one way but not the same thing at all.
WHAT IS DATA REALLY WORTH WHEN THEY’RE SO MUCH OF IT?
Clearly, data is worth something, the question is, what is it really worth? My grandmother passed away this year, today I decided to create a family tree. I recalled Geni.com offered users the ability to create a family tree for free. Should be noted, the company initially raised $1.5M on a $8.5M pre-money for a post-money value of $10M, then later on raised a whopping $10M on a $90M pre-money for a post-money $100M. The investors in the second round for 10%, yikes!
Anyway, the point is: if indeed MySpace, YouTube and Facebook are worth what they are, then sure, Geni is worth $100M. But unless Facebook (the only company of the three that has not exited) can command revenues in 1, 3, 5 years that match Google’s revenues over time, then Facebook’s valuation will come down to earth, as will Geni.com’s.
I’d argue that all social networks are at risk because it is pretty easy for Facebook, for example, to add a Family Tree application which over night would make Geni.com vulnerable, but I digress. More importantly, in that case, I’d argue that one’s existing social network which consists of friends, colleagues and family is worth more than a family tree, but we’re going on a tangent.
REAL VALUE LIES IN SCARCITY
The point I am making is this: Google is eons more valuable than Facebook for the simple reason that the data they collect is pulled out from users anonymously and independently of whether or not we want to give them said data, whereas social networks such as MySpace, Facebook, Geni et al. get more or less accurate data that is widely available on numerous sites and not really hard to get.
GET WHAT YOU BARGAIN FOR
For that reason, I’d argue that the privacy watchdogs need to take a chill pill when it comes to social networks: if we - the users - give up such data voluntarily then the companies should not be blamed to leverage it for profit. Admittedly, changing the terms of use after you provide them the data is not ethical or right… but this is business. Sure, the Web has long felt like a Grateful Dead concert - and that ain’t a bad thing - but as companies fetch $100M valuations, lest $15B valuations - naturally the flip side is that they push the envelope and trample on user’s rights.
The key is prevention: if you are not happy with what a company might one day with your data, then I got a piece of advice for you: don’t volunteer the data in the first place.
TANGIBLE ASSETS
As a commenter below comments: “There are considerable amounts of our data already in corporate databases and yet the technology to exploit that information is not yet fully employed.”
Indeed. And not only is our data already on corporate databases, but these corporations exchange / sell it between one another freely.
Ultimately, if the information is widely available and available to all, then it’s like a common denominator that gets eliminated out of the values of these social networks, and suddenly, the emperor has no clothes.
Building your company on UGC or data is rather foolish, but in the euphoria of Web 2.0 we sometimes forget that.
A couple of weeks ago I asked if News Corp. was planning to spin off some of its assets, notably to unlock value and to fund further acquisitions. But in light of Facebook’s massive implied valuation, the idea is sure to gather steam within Rupert Murdoch’s inner circle:
If Facebook is worth $15 billion, then MySpace is worth $65 billion.
That’s the take of RBC Capital Markets analyst David Bank, who applied the $357 Microsoft ascribed to each of Facebook’s 42 million registered users in Wednesday’s deal to its larger News Corp. rival’s 185 million registered users. (News Corp. also owns The Post.)
Bank put the eye-popping MySpace valuation in a research report yesterday as a way to illustrate that Facebook’s implied $15 billion market capitalization isn’t an accurate reflection of its actual worth.
Nor is MySpace’s $65 billion hypothetical valuation.
“Facebook’s true value isn’t $15 billion,” Bank said. “The deal with Microsoft isn’t the same as buying something for $15 billion.”
Indeed, at $15 billion, Facebook, which only has $150 million in revenue, is presumably worth more than 1,633 other publicly traded media companies worldwide, including such notable ones as Cablevision, InterActiveCorp., Discovery Communications and Liberty Global.
And at $65 billion, MySpace would be responsible for all but $3 billion of News Corp.’s entire market capitalization - which clearly isn’t the case - and would be larger than CBS and Viacom combined.
In reality, Bank said Wall Street currently assigns a roughly $5 billion valuation to MySpace. He said that there aren’t enough data points about Facebook available to determine its true value.
(…)
But Bank did point out several reasons behind Facebook’s lofty valuation. Specifically, Bank said Facebook has greater growth potential than MySpace, if only because the latter has been around longer and is therefore maturing quicker. He added that Facebook is “the darling of a darling space [social networking], which simply gives it a substantial premium.”
Bank said there is a way for News Corp. to get a valuation for MySpace on par with or in excess of the $15 billion that Facebook reeled in from Microsoft: sell a minority stake in MySpace to a partner or the public - “especially if all the hype surrounding Facebook continues,” he said.
Read more. I agree that valuing Facebook at $15B is not at all one and the same as paying $15B for Facebook… but Mark Zuckerberg needs to be really careful because he needs to demonstrate to Wall Street and Madison Avenue that indeed, $1 of Facebook revenue is equal to $7.50 of Google’s revenue… that is something I’m not sold on. Of course, Facebook now has plenty of time to harness its own sales strategy mojo. For more on that, check out Memo to Facebook Sales Team.
The title of this post, Of VCs and Men, is a play on John Steinbeck’s book, Of Mice and Men.
For the record, it does not suggest that VCs are rats, au contraire, it implies that they’re caught in a rat race against one another to find the best entrepreneurs, products, companies and markets… and because of that, sometimes, some of them tend to act, well, less than gentleman-like.
Aim for the Sky
Some time ago, a number of prominent and smart fellas asked if business plans mattered? I recall one statement by VC Paul Kedrosky that was remarkably insightful, because it was coming from a VC and was candid.
After Twitter raised financing by Fred Wilson’s Union Square Ventures, Kedrosky observed:
VCs are professional nit-pickers. Give them something to find fault with, and they’ll do it with abandon. I generally tell people to come to pitch meetings with less information rather than more. Sure, you’ll get pressed for more, but finesse it. Presenting a full and detailed plan is, nine times out of ten, a path to a “No” — or at least more time-consuming than having said less.
Profits are a different issue. Being profitable too soon gives investors, rightly or wrongly, an idea of what the margins are on the business, as opposed to what they could be in some perfect world. As a result, it takes a mighty force for them to not start wading in with discounted present value worksheets, and the like, thus hammering your valuation and generally making funding much more complicated (and equity consuming) than if you were wildly unprofitable.
Revenue Go Home
A lot of people disagreed with that, some even said it was reminiscent of the 1999 mentality. Regardless, it’s not a wrong observation. Mayfield’s VC Raj Kapoor recently observed that valuations are tricky for companies that start to show revenue (let alone profits), because you go from being valued from a growth and user perspective alone to being valued as a function of revenues… and that means that your value falls, only to rise to the pre-revenue levels if revenues and growth maintains. I am paraphrasing, of course, because this is something he said at the recent Tech Crunch 40 shindig that Michael Arrington and Jason Calacanis put on in San Francisco. Either way, Kapoor is deadly accurate as well.
Enter the Fundinistas
This past week, Om Malik wrote something on fundinistas: companies that seem to be in the business of raising money, or in his words “the ones who raise venture capital relentlessly“: Brightcove, VideoEgg, etc., to name a few.
Just yesterday, Helio raised, what $200M? Helio generates revenue, in excess of $100M, but it does so at a very high cost, hence the capital injection.
Understanding Fundraising and Valuations
When you raise money, you have to give would-be investors a sense of how big your opportunity is, how big of a piece you will be able to carve out, and what kind of return that works out to the investor. But for the financier to become your investor, you have to agree on a valuation.
In my first screenplay (which I never produced because I started Mojo Supreme), I refer to the thorny discussions between VCs and entrepreneur on valuations as such (Michael and Marcel are two partners and entrepreneurs):
MICHAEL
Talking valuation with a VC is like talking money with a hooker. You know you have to at some point, but you prefer not to.
MARCEL
Come again.
MICHAEL
The difference is that with a hooker, you have to ask before the act because otherwise, you get in trouble with the pimp. But you have to ask because she will sleep with you anyway. It is your prerogative to turn her down after she tells you the price.
With VCs, the problem is that it is their prerogative to turn you down 9 times out of 10. If we ask them to talk valuation, we turn them off. Get it, we’re the whores… so let them bring this up.
Of course, we’re not really whores; the difference is that we don’t have any pimps to defend us, so we have even less leverage. By not talking valuation, you turn the table and gain some value, they have to bring it up, so in order not to offend us, they will probably offer us more… ideally anyway!
But the point is, sooner or later, you need to talk value. Otherwise, you tend to invest a lot of time to find out you are not on the same page, or worst yet, in the same universe.
In other words, investors need to have a fuzzy idea of what will the exit come in at. An exit can be a sale or an IPO.
The answer to that, my dear friend, will be based on your revenue, costs, profits, multiples, and comparable deals. But while all of the analysis in the world won’t do, is tell you how likely all of your assumptions are.
Valuation has a lot to do with recent deals, but it also has a lot to do with demand and supply: the two sides (company and investor) have to determine some kind of clearing price for the asset. Ultimately, it comes down to how much the investors want to give up for a given level of cash injection.
A Wide Array of Investors
In fact, this reminded me of comments made by Gorilla Nation Media’s co-founder Brian Fitzgerald after GNM raised a whopping $50M from private equity investors Great Hill Partners earlier this year.
Side note: Great Hill Partners invested in IGN, the company that bought my last company; and Brian and I have worked together in the past, so ’tis indeed a small world.
Anyway, referring to the nuance between VCs and Private Equity investors, he said:
Venture firms are usually early stage. Venture guys have a tendency to want to come in early, buy a lower valuation and swing for the fence. They make a lot of very small investments and they take more of a ‘carpet bomb’ approach. They’re going to drop $1.5 million into 40 different plays with the hope they’re going to grow these companies to a level where they’re going to come in for a second round or they’re going come back and bring in other VCs or PE groups. They’re looking for the YouTube hit, they’re looking for the MySpace hit. But at the end of the day, you look at their fund and there’s 17 losses and two hits, which make up for all the losses.
PE groups traditionally don’t operate that way; they’re much more methodical and they make bigger investments and fewer of them. They have to make sure that every one of those businesses is a hit. PE firms also tend to buy in at a higher, more favorable valuation because they’re only buying into businesses where they see a big exit opportunity.
They’re not looking at it like [VCs do], ‘I’m going to put $2 million in and we’re going to sell for $20 and I’ll make 10x.’ PE firms say, ‘I’m going to put $50 million-plus in and I’m going to sell for hundreds of millions and I’ll make a 3x – but that 3x is going to amount to a lot of money.
(my comments on that deal, original Paid Content story where I am taking this quote).
Not All Investors are Created Equally
Clearly, VCs and PE firms are at different ends of the spectrum, but they’re also increasingly clashing, too. And, with the number of billionaires at all time highs, angel investors are also clashing with VCs, too. And, if that were not enough, companies with high stock prices and heaps of cash are getting into the investment game, too. Facebook recently launched fbFund, and they are neither public (thus no stock currency) nor do they sit on boatloads of cash, yet.
The point is: yes, the investment community is not homogeneous, but it’s not all that different either.
What Fitzgerald’s comment alludes to is that it is very different to size up an opportunity in the seed, early, mid or late stage of a company’s growth, as he states: “PE firms also tend to buy in at a higher, more favorable valuation because they’re only buying into businesses where they see a big exit opportunity”.
Determining Your Future Earnings
This now brings us to Kedorsky’s comment, because younger firms that are growing quickly and need growth capital have to tell their story. And, like all large tales, that’s all it is, a story. Sure, there are always validations in that story, but ultimately, it boils down, like Sequoia’s Roelof Botha recently stated in a panel at TC40, to making sure the VC’s greed overtakes and outweighs his fear. Mr. Botha’s comment was equally candid and true.
The problem for a company’s management is simple. The typical dilemma is as follows: suppose, hypothetically of course, that I wanted to raise money. Should I:
- sell the VC on the fact that our revenues are boundaryless, as Kedrosky suggests? I could actually do that and not feel guilty, since our syndication network is on its way to giving us a reach approximating 99.9% of the Web… and our revenue thereof will be a function of that reach, revenue sites make, out cut of the revenue, and our library of content.
- project tangible revenues, but very bullish ones that even I know are not realistic, but would, as Botha says, get the VCs greed to outweigh his fear?
- be moderate and reasonable… with revenues that I could hit with one hand tied behind my back but risk doing what Kedrosky suggests we entrepreneurs should avoid.
- be conservative… with revenues that I could hit in my sleep after a late night partying binge but definitely run the risk, as Fitzgerald says, to turn off a VC because the return might not be 10x, but 5x only?
Here’s the thing, unlike many entrepreneurs, my background is neither in technology nor creative, it’s in sales! I know how to sell quite well… and have, so when I say “we’ll do X”, I know, in fact, that we can do 1.25X, if not more.
I’m not worried about finding revenue spots and opportunities. I’ve self-funded the company hitherto and while the working capital has come largely from underneath my mattress, it’s also come from actual sales, folks.
So that’s my dilemma.
Do I:
1- become what I criticize (fundinistas) and BS a would-be investor to raise money to the tilt and worry about what to do with it later?
2- remain honest, candid and realistic and come up with numbers that are very attainable but risk the VC balking at the opportunity?
3- remain very conservative so that the VC and I both look really good but then (I’d presume) definitely risk them losing interest…
Therein lies the VC route issue: VCs aim for the fence, more power to them.
But they’re lied to (maybe not on purpose) so much by eager entrepreneurs with little sales experience with numbers that don’t add up, so when they see realistic numbers, they discount those too and then see the opportunity as way too small.
What Would Hef Do?
This is indeed a damning dilemma. What would you do? Well, while you ponder what you would do, I can’t help but think back to one Hugh Hefner. I never read Playboy or anything, but I did work in a convenience store in my teens, so I became acquainted with all magazines. It was thus fitting, then, that at the age of 21 I began working at an online men’s magazine, with Hef’s Playboy being one of our indirect competitors.
While Playboy.com was the largest paid site, we grew ours into the largest free, ad-supported site. Anyway, in addition to being the VP of sales and company spokesperson, I was also a columnist and the resident interviewer. Naturally, as a lad mag, I always wanted to interview Mr. Hefner, but as a competitor, we were not fortunate enough to get one. Eventually, when Playboy celebrated its 50th year anniversary and the PR machine was turned on, I got a call back from Playboy’s publicist, and he granted my wish.
In that interview, I asked Hef many questions… but one statement he volunteered, out of the many sexier comments that stuck with me was the following: “When I was young, I was called Honest Hugh. Honesty and ethics are more important than being successful…”
It was odd, because that’s what I think, too. Hugh Hefner left Esquire in 1952 - after being denied a $5 raise - to start Playboy in 1953. By sticking to his guns and remaining honest and ethical, today Playboy boasts a stronger brand than Esquire, but, well, nudity would do that for a magazine, I presume.
Mind you, Hearst Publications is much larger than Playboy Enterprises, and I personally prefer Esquire, frankly, but that might be because whipping out a Playboy magazine in a plane is so not socially acceptable.
Anyway, I recall Hef’s career move quite well because he made the switch at the age of 27… that’s how old I was when I left my old online magazine employer to start Mojo Supreme (though of course, I got into online video, search, etc., and not a competitive magazine.
It’s Your Life…
Ultimately, when I reflect on the lessons offered by Messers Kedrosky, Fitzgerald, Botha and Hefner, I think the one thing that stands out is, indeed, to me anyway, “honesty and ethics are more important than being successful”, and I like to think I’ve accomplished a good level of success for my 29 years that it’s not like I am going to take a turn to the dark side now.
And, if that means that my decisions will make me live with the consequences, which include but are not limited to:
- living in a mansion in California,
- having a personal chef on call 24/7,
- dating not one but 7 women 1/4 of my age, and
- my main professional duties include selecting gorgeous women to photograph in the nude, mind you,
then that is something that I am willing to face.
The following applies to any company in the search space that works in direct navigation, parked URL and what.
I am using Marchex because they’re publicly traded and the data is available… but technically it would also work for NameMedia, too. Bear in mind, these companies would scoff at my suggestion because they are cash generating machines, but:
Today comScore came out and reinforced the fact that Google is creeping closer and closer to owning the search market. Over time, I also think that the parked URL and direct navigation industry faces some major challenges (I won’t name them here), so if you are running one of those companies, what do you do?
Do you continue running a direct navigation, domain parking company or do you leverage your traffic and move into a new direction?
I am a content guy, so I am biased, but I suggest that these companies should add content ASAP. This would boost their SEO ranking (because they’d have content), but by adding content, it would also open them up to display/banner and video advertising opportunities.
But what about a more crazy idea: what if it simply yanked its contextual text links and added video pre-roll advertising before video content (gee, I wonder where they can get the video content?)
I’d be the first to admit that by adding content, any content, overnight the revenue from text links would fall a bit. Over time, these sites would come to life and they’d get more traffic, more revenue, and more importantly, better quality revenue.
But you know what, if any of these companies really was progressive and could see what was ahead in 1, 3, 5 years, they’d shift their business to actually licensing content and selling ads, that would be the new kind of traffic arbitrage.
In fact, if a site like Marchex would swap out its text links (how it makes revenue) and ran video ads before video content, overnight it could create a company three times more valuable.
All I am doing here is extrapolating online video viewership stats and behavior to Marchex’s internal stat of 31M unique users per month.
Today Marchex closed at $385M in market cap, but a little bit of corporate restructuring and financial engineering would yield a company three times as valuable.
In this case, I used 100% pre-roll frequency, which is madness on any other site, but if its sites remain of the direct navigation nature (aka, users don’t return more than once), then this works. Also, the idea of the $20 CPM is simple: with high quality, generic domain names, it’s easy to argue that someone typing in for sushi.com for example is a very targeted user, hence the decent CPM rate.
You can send my consulting fee by mail, cash works fine.
I always tell people that to be successful at their respective professions, marketers need to succeed outside of Manhattan, programmers need to look beyond Silicon Valley and creators need to please audiences outside of Hollywood.
Outside of the 650 or 415 area code, everyone looks up to Yahoo! but that does not mean that Yahoo! does not have problems. What’s Yahoo!’s problem?
How Yahoo’s marketing execs could have let this double opportunity slip by is a mystery. That they did speaks volumes, and the implication is clear: Yahoo’s new leadership has not yet taken control of the company, and in the power vacuum, dozens of middle managers are busy pushing their own agendas.
Oddly enough, Wired is talking about Yahoo!’s presentation and gameplan for Tech Crunch 40. Incidentally, on the second day of the event, I was outside briefly doing a phone interview with The Deal’s David Shabelman, as I’ve done before, for his latest piece on Yahoo!
Dave and I touched on many things, and the biggest one was in fact exactly what Wired talks about (what I italicized). Somewhat surprisingly, David omitted that part, so I”ll mention them.
Yahoo!’s problem is 99% based on human resources and management issues.
- Product-wise, it has fantastic assets.
- Sales-wise, it is magnificently positioned to win in video and display/banner ads. Even its laggard search unit is a very respectable #2… and in the event it were to pull the plug on Panama and go with Google’s program, then it would materially boost revenue and dramatically cut costs, meaning its profits would skyrocket.
A Demoralized Workforce?
But, therein is Yahoo!’s problem. Suppose analysts ran the numbers and decided to do just that, can Panama and partner in search technology and/or search ads with Google, Wall Street would be jubilant but internally, morale would plummet. Yes, employees’ stock might benefit, but sarcasm and skepticism towards future projects would be a major issue. As such, while Yahoo! might be better off doing that in the short-run, in the mid and long run that is disastrous.
Adopt a Long Term View
Coincidentally, co-founder David Filo mentioned that all startups need to consider the long term impact of their actions. I certainly don’t think I was alone in the room to think of Yahoo!’s big mistake before the turn of the century when it decided to use Google’s search on its portal. It got warrants in Google, sure, but that is largely why today Google is worth 5 times more than Yahoo!
Wired is referring specifically to the fact that Yahoo! chose to showcase Yahoo! for Teachers and not Yahoo!’s Mesh, a new social network. Mind you, to me, it’s would have been a tossup, because
a) with Y! For Teachers, clearly they’re trying to compensate for missing out on Facebook, even though today Facebook is about much more than students.
b) there are way too many social networks out there, one more? Puh-lease.
Turf Battles and Fiefdoms
But what Wired adds, is spot on: “dozens of middle managers are busy pushing their own agendas.”
Ding-ding-ding… let’s backtrack: last year, when Brad Garlinghouse [indirectly] leaked the now-infamous memo to the press, it was 1/3 about a senior executive trying to fire up the troops but 2/3 about a senior executive trying to jockey for power.
Yahoo! attracts really smart people. To be fair, I also got to hear Mr. Garlinghouse at TC40 and seemed smart and a no-nonsense guy. But all of those smart people at the top spawn cynicism from the people on the front lines that actually get work done. Yahoo!’s headcount has swollen quite a bit, and I’d guesstimate that ’tis at the top that it’s fattest.
Because promotions and openings at the top are naturally rarer than at the middle or bottom, VPs, Senior VPs and Executive VPs will always spend large portions of their time and energy plotting for career moves instead of market share and revenue opportunities. Why? We know - from projects like Panama or acquisitions like Zimbra - that it takes years to convert tactical and operations move into tangible gains. As such, Yahoo!’s culture has probably created one of politics instead of meritocracy. That’s a major problem.
I’m not sure Jerry Yang or David Filo have what it takes to address that. Filo need not, though he runs technical things to a large extent. Yang, it should be noted, never had anyone report to him until this year. Re-read, and ask yourself if it makes sense for him to be seen as a likely CEO in the mid-run. It does not. As a Yahoo! shareholder I love seeing him run things, but I am concerned (were I a board member) about the likelihood that he will quit suddenly.
Yahoo! has to address this problem: good low-level employees and mid-level managers probably don’t want to work at Yahoo! because of this bottleneck at the top and because the stock has not moved.
Stock’s Caught in Rut
Ah yes, the stock
Yahoo! has been caught in a range of about $22 to $34 for some time now. Worst off, Yahoo! swings to the high end of that range have a lot to do with rumor whilst the dips to the bottom have to do with news and negativity surrounding all-things-Yahoo!
In my opening line, I mentioned that “I always tell people, marketers need to succeed outside of Manhattan, programmers need to look beyond Silicon Valley and creators need to please anyone but Hollywood,” but notice, I don’t share that sentiment about Wall Street, because in the blessed capitalism system, Wall Street counts, quite a bit. Companies are revered because of what they offer Wall Street, not what people on Main Street think about them. That is why Yahoo! will in fact be seen as a takeover target as often as it is thought of as a buyer of an asset.
This is a company that generated $6.4B in 2006 revenues, up 22% from the $5.2B 2005 figure, but its net income fell from $1.9B in 2005 to $750M. That’s not bad. There are many reasons for that, including R&D investment in Panama, and a bloated management rank on top.
$100B Market Cap If Executed Right
I’ve said this before, the choices for Yahoo! are bountiful, but the one that is probably best for shareholders is to sell to a private equity firm.
The deal would also prove lucrative for the PE firm, in our analysis, just by maintaining its grip with regards to market share in online advertising revenue, Yahoo! could be worth $100B by 2010.
According to our analysis:
Yahoo! could be generating revenues of $9 to $18 billion in 2010; its profit margin was 24% and 36% in 2004 and 2005 respectively.
Say it can maintain margins of 25% (hey, they won’t be hiring as aggressively as Google and there is only so much purple paint out there), this means that it can be generating profits of $2.5 to $5 billion per year, at a P/E of 25 (it’s now at 33 today), that’s a market cap of $62.5 billion to $125 billion in 2010, or an average of $93.75 billion.
With those kinds of revenues and margins, it will have more than $10 billion in cash, so a market cap of just over $100 billion.
Will any of this happen? Probably not, but if it doesn’t, it might have more to do with what Wired stated (”Yahoo’s new leadership has not yet taken control of the company, and in the power vacuum”), and not the opportunity at hand…
Disclaimer: I own shares in YHOO
In 2006 and 2007, a lot of video content companies raised a lot of money in additional roundings. Heavy.com, which aggregates more than they produce, raised $20M on top of $10M. Others raised $32M on an additional $5M, for example.
I always wondered where investors got their comparables to justify those investments, but more power to the management teams for raising that much. Hopefully they can exit at high enough levels (ie. not pull a Movielink, basically, which sold for $20M after getting $100M in investment).
This year, we’ve seen more video startups raise substantial sums of money:
- Digital Production Studio Worldwide Biggies Receives $9 Million In Funding
- MyDamnedChannel Launched, Copies Funnyordie, Scores Funding
- Revision3 raises $8M in funding
- NewTeeVee Raises $8M financing
As the executive producer of a video producing property at WatchMojo.com, when I see that, it gives some kind of multiple for fundraising purposes… but in an M&A, how does financing affect valuation?
On the one hand, there is a clear difference between an on-the-paper valuation two parties agree to in order to raise money and grow a company… but it’s also unreasonable to assume absolutely no linear relationship between what companies get valued in financing rounds and sales, no? After all, when you determine a valuation for a company, you look at publicly traded and private companies as well as M&A. Sure, it’s awfully unfair to compare a private startup with an established publicly traded company (no matter what kind of liquidity discount you apply) but nowadays, companies tend to avoid the IPO altogether and simply sell out, so maybe private financing rounds’ valuation is a good barometer. I won’t lie, if it is, it’s fantastic for our business…
I need to do some homework on this, if anyone’s got insight, comment away or email me at ash@mojosupreme.com.
PLAY
