Today, Yahoo! announced that it was buying Buzztracker. The amount was reported to be $5M.
A small, immaterial sum for Yahoo!, but having bootstrapped the project and having so many competitors (TechMeme, TailRank, Megite, etc.), the deal makes sense to Buzztracker’s founder.
Clearly, with Yahoo!, Buzztracker will scale in size and reach. They’re also apparently going to do something we suggested and dubbed TechMeme’s Killer Move.
The question is, did Yahoo! miss the boat by not going all in for TechMeme? Mathew Ingram asks the question everyone is wondering: did TechMeme’s Gabe Rivera (and Sphere) ask for too lofty a valuation?
The Beginning of Something New?
We’ll get to that later, first, let’s look at the deal. According to Alan Warms:
The decision to sell the business and move to Yahoo! was relatively simple. As anyone playing in the online space understands, online media is all about scale. The ability to garner real CPMs, the ability to sell ads directly, the ability to provide innovative solutions to advertisers, all depend on having tens of millions of unique visitors.
I definitely understand and appreciate that. At my last gig, I was the VP of ad sales for an online publisher, working with both small and large advertisers and global ad agencies and trust me, it’s not obvious. We had over 5M unique users, we were a mid-sized publisher but in the men’s lifestyle space, we were the largest one. Despite that, we still faced challenges getting through directly into marketers’ offices and indeed, unless you are Yahoo!, MSN, AOL, etc., you always will.
Ultimately, we sold to IGN, who was also in the men’s content space, albeit a different, larger one: video games.
The idea was we needed more scale, more resources. To my colleagues (who owned a large chunk of the shares), the deal made sense. We never had too many companies approach us, we had one Canadian media company come up to us in 2000 and then nothing from 2001 to 2004. During Euro 2004, IGN’s VP of Corporate Development emailed advertising@ourcompany, the email came my way… and so began an 11-month song and dance which culminated in the sale.
Oddly enough, some time in late 2004, we got an email from Insight Venture Partners, a NY-based VC who wanted to invest in our firm. I was for it, thinking we could raise some money, grow the business, and sell for more. But having been at the company for 5 years, constantly butting heads of items large and small, and frankly not having much upside to invest more time, I didn’t push that strategic option and went along with the sale. I considered staying but it was clear I was not needed, or wanted… so I left in December 2005 to start Mojo Supreme.
Selling Low vs. Selling Early
Anyway, at my old company, in our case, we did not sell too early, but the 2001-03 period was morbidly silent and inactive. Today times are different: since summer 2006 - a mere six months after we launched - our company has had 7 companies inquire about an outright acquisition. That’s a lot of activity for a company our size.
We’ve grown quite a bit, we’re growing, but that’s a lot of movement nonetheless. I’m not sure how many options a site like Buzztracker had, but if you’re going to sell, clearly Yahoo!’s not a bad pick. But Buzztracker’s decision to sell so soon and so low probably had a lot to do with demand and supply.
Entrepreneurs Need To Understand Demand and Supply
The reason, frankly, has to do with demand and supply. I always figure: “if you look for a company with 5M unique users, $5M in revenue or even $5M in EBITDA, you’ll have a lineup of 100 entrepreneurs going around the block, but if you look for a company like ours, I very well might be the only bloke sitting in front of you.” It’s a somewhat ballsy thing to say, but it’s true.
So in our case, we didn’t get the best deal (it was extremely cheap by every metric) but we didn’t exactly sell too soon. We sold some 6 years after launching in late 1999 (I joined in 2000).
In Buzztracker’s case, the question should be asked: did they sell both too early and for too little? The public stance that “a larger media company makes sense for us” does not always make sense.
After all, Yahoo! has both a very good and very bad integration record (like all companies, I think).
Del.icio.us’ integration within YHOO? I’ve always wondered why they did not bundle Del.icio.us with Flickr, turn on the video switch and basically do YouTube? Well, because startups vs. corporations are very different, in other words, if you take every single element and variable of YouTube and put it in Google, you don’t get the legendary story that is YouTube, you get, well, Google Video. A worthy player but nowhere near the viral story that became, in our opinion, the most explosive startup of all time.
What about Webshots and CNET? Why doesn’t, for example, Webshots get promoted across stories etc.? I still don’t get that one. Maybe they have bigger plans. I wouldn’t know, I’m not in that room.
It’s the End of the Road…
The point is, once you sell to a larger company, don’t kid yourself, it’s the end. Sure, some startups, like Myspace, go on to triple within the new entity. But Rupert Murdoch and his lieutenants deserve credit for leaving MySpace alone where it counted (Tom is still your friend, the site is still wildly chaotic, etc.) and investing where it mattered (back end, under the hood, protecting children, etc.).
We’ve heard the MySpace story, Tom and Chris’ version that is. We’ve also read Brad Greenspan’s version. The truth is somewhere in the middle, I presume. Today I read that some bloke namedBrett Brewer invested in some company, so I looked him up. Apparently, he has a version of the facts, too:
Today, MySpace has an estimated 130 million users and was sold to Newscorp in October 2005 for about $675 million.
“We decided to sell based on the fact that we were a public company, so we had certain obligations to get the best return for our shareholders,” says Brewer. “Our stock was like $6 to $7 that summer and Newscorp paid us $12 a share, so to some degree, honestly, that was the biggest reason. But the other nice thing was Newscorp was the kind of company that could help it grow.”
Good news for MySpace users is that over the past year Newscorp has done a fantastic job at preserving the integrity and culture of the site.
(Source).
MySpace, of course, is a cultural phenomenon. It was also a major success story by the time it sold. I think entrepreneurs need to understand that once you sell, that’s it, you sell.
You are no longer in control of your destiny.
Independence Day
Selling or staying independent naturally boils down to a choice between wanting to remain boss and being an employee. Can you imagine Mark Zuckerberg now reporting to Barry Diller, or Terry Semel, or Steve Ballmer? He can’t, or couldn’t, and that’s why he stuck to his guns. Mind you, he was able to stick to his guns, because he had a demand vs. supply advantage to start off with, but his VCs avoided making the biggest mistake some VCs make.
I don’t care what anyone says, when you sell your company, it marks the end in many more ways than it marks the beginning. We’ve all heard countless jokes about how women (and men) change after they say “I do”, well, trust me when I say the same applies to selling your company.
When a company is pursuing you and wants to buy you, they will whisper sweet somethings in your ear for the first half of the conversation, then in the second half, when you start thinking of how much greener the grass is, they’ll start talking down your company to get a better price. You have to be very careful on both sides, but once someone really gets into thinking about the prospects of cashing out, it’s a fait accompli.
Then, you sign the deal, and fuggedabout it.
People…
Price and deal structure are just some of the dicey variables, the biggest consideration is the culture clash, potential turf battles. Large corporations have to put this atop their potential threats to make the deal a successful one. With startups, these are lesser examples concerns in some ways, but if you have a very driven and ambitious CEO selling, the chance exists that he or she intimidates or simply rubs off the buying party’s senior managers the wrong way.
In large companies, growth opportunities are slim, so if you come on board and have a lot of runway, you’ll be stepping on some toes and some egos will be bruised… so that will actually hurt the prospects of the merged entity and your career (if you wanted a career in the new entity).
Runway vs. Platform
Speaking of runway, it’s important to stress that deciding whether you wish to sell has a lot to do with how much runway your venture has.
Jack Welch would equate runway with one’s potential. If you have a lot of runway, you are better off remaining independent. If your runway is limited, then you need a greater platform. I think Buzztracker’s runway was limited because TechMeme.com seems to be a hit, and for Buzztracker to make up the lag, they’ll need a great platform. These things are intertwined, naturally, if Alan Warms has a tremendous amount of runway, then a platform should in theory only help him.
But, that has a lot to do with whether Yahoo!’s management team can handle him, and whether Yahoo! can successfully integrate Buzztracker. As we’ve seen, neither one of these things are a fait accompli.
How M&A Fundamentally Differs from VC
When a company buys you, you take a back seat to the company. That’s great, for some. If your runway is considerable, that might not be optimal. It all boils down to timing, mind you. How an M&A path is fundamentally different from a venture capital route is the following: a VC really does not want to compete for your job, and he knows you won’t be competing for his. As such, all they want is to give you the tools and resources to make them as much money as you can.
In other words, it’s ok to aim big and aim high, no one’s egos will be bruised.
Of Bulls, Bears and Hogs
When the dust settles, the simplest way to look at it is this way:
- if you are a bull on your prospects: you raise VC.
- if you are a bear on your prospects: you sell.
- What makes you a hog? That’s for another post.
I also don’t want to pretend that what works for one entrepreneur or company applies across the board. I myself was torn for some time in this debate, but ultimately, I think it’s a simple decision for me: if you raise VC, you can always sell later on; but if you sell, that’s it, you cannot stay independent and deliver on your potential.
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September 14th, 2007 at 8:57 pm
“I think it’s a simple decision for me: if you raise VC, you can always sell later on”
Except that’s often not true (assuming you mean “sell at a profit”. First, VCs will often push for “get big or go broke” whereas entrepreneurs can opt for “slow and steady” (as Gabe seems to be doing with Techmeme et al). Second, you can’t sell for anywhere near the same price (and come out even), especially with liquidation preferences and any built-in multiple for the VCs.
There are plenty of arguments on the other side too, e.g. a competitor may be able to just overwhelm you with marketing dollars. Not an easy choice.
September 14th, 2007 at 9:00 pm
Scott
nothing is straightforward, that’s for sure, and you raise excellent points re: liquidation preference.
Basically, indeed if you sell you take your chips off the table and cash ‘em, whereas by raising money you continue to risk your chips.
My only point is that even sales are not so obvious and risk-less, take Google’s acquisition of dMarc or Dodgeball… I doubt the sellers in those deals felt they did the right thing.
Ash
September 15th, 2007 at 3:49 am
Ash, please, enough speculation! I suppose at this point I can share some of the details.
I didn’t ask for “too lofty a valuation”. I informed Yahoo that I would agree to sell given (1) $4 million up front (2) $2 million earn-out over no more than two years (3) a lifetime supply of the delicious Y! peanut butter Brad G. wrote about and (4) a purple and yellow unicorn.
Tom Cruise, Yahoo’s lead in the negotiations, made it clear some of my requirements were not acceptable. Discussions ended amicably.
Warmest congratulations to both Buzztracker and Yahoo, of course!
September 15th, 2007 at 8:24 am
Gabe, that might be the best comment, ever.
I would have walked out when Tom Cruise walked in, so you have more discipline than I do.
But if that’s all it takes, I’m sending out a check for $7M in the mail as we speak: $6M to match your price, $1M should get you the peanut butter… and unicorn.
September 17th, 2007 at 5:13 am
[…] in very funny was Gabe Rivera’s of Techmeme’s comment to the Yahoo acquisition of BuzzTracker, which I also broke last week, on a posting by HipMojo’s Ashkan Karbasfrooshan on the deal. […]