Category: Web 2.0

What’s next for billionaire Twitter?

-Contact Thomas Rasmussen

At a time when the social networking bubble is quickly deflating, micro-blogging startup Twitter seems to be living in an alternative universe. We are, of course, referring to the much-publicized $1bn valuation the San Francisco-based company received in a recent round of funding. The rich funding dwarfs even the kinds of valuations we saw during the height of the short-lived social networking bubble last year. And it’s pretty difficult to justify Twitter’s valuation based on its financial performance, since the money-burning startup has absolutely no revenue to speak of, nor a clear plan of how to change that. It seems the entire valuation is predicated on the impressive user growth it has experienced over the past year, as well as the charismatic founders’ wild dreams of ‘changing the way the world communicates.’ That’s pretty thin, particularly when compared to LinkedIn’s funding last year at a similar valuation. That round, which was done at a time when the social networking fad was near its peak, nonetheless had some financial results to support it. Reid Hoffman’s startup was profitable on what we understand was about $100m in revenue and a proven and lucrative business model.

The interesting development from this latest funding is that it makes a sale of Twitter less likely, we would argue. This may be fine with the founders, who have drawn in some $150m for the company and will (presumably) look to the public market to repay those investments at some point in the future. But without any revenue to speak of at this point, any offering from Twitter is a long way off. Also, an IPO by Twitter in the future hangs on successful offerings from Facebook and LinkedIn, which are far more likely to go public before Twitter. If both of those social media bellwethers enjoy strong offerings, and Twitter actually starts to make money off its fast-growing base of users, then a multibillion-dollar exit – in the form of an IPO – might not be farfetched. But we should add that there are a lot of ‘ifs’ included in that scenario.

An offering looks all the more likely for Twitter because the field of potential acquirers has gotten significantly slimmer, since not many would-be acquirers have deep-enough pockets to pay for a premium on the startups’ already premium valuation. As we know from Twitter’s own embarrassing leak of some internal documents, Microsoft, Yahoo, Google and Facebook have all shown an interest in the startup at one point or another. But we’re not sure any of those companies would really be ready to do a 10-digit deal for a firm that’s still promising – rather than posting – financial results. Moreover, we wonder if any of the four would-be buyers even need Twitter. Yahoo and Microsoft seem focused on other parts of their business. Meanwhile, Google is hard at work on Google Wave, and Facebook appears to have moved on already with its much-cheaper acquisition of Twitter competitor FriendFeed in August.

Recent high-profile social networking valuations (based on last known valuation event)

Date Company Valuation/exit value Revenue Revenue to value multiple
September 2009 Twitter $1bn $0* N/A
Summer 2009 Facebook $8bn $500m* 16x*
June 2008 LinkedIn $1bn $100m* 10x*
May 2008 Plaxo $150m* (acquisition by Comcast) $10m* 15x*
March 2008 Bebo $850m (acquisition by AOL) $20m* 42.5x*
July 2005 MySpace/Intermix $580m (acquisition by NewsCorp) $90m 6.5x
December 2005 FriendsReunited $208m (acquisition by ITV; divested to Brightsolid in $42m fire sale in August 2009) $20* 10x*

Source: The 451 M&A KnowledgeBase *451 Group estimate

Will Adobe-Omniture marriage prompt online video M&A?

-Contact Thomas Rasmussen, Jim Davis

When Adobe Systems and Omniture announced the details and rationale behind their $1.8bn tie-up in mid-September, some interesting items emerged. Highlighted was the obvious benefit from a combination of Adobe’s popular Flash video platform and Omniture’s analytics capabilities. As the Web analytics market has become more saturated, Omniture has recently been expanding into higher-margin niches such as online video analytics. Combining online video content management with analytics is an area in which some early startups have carved out a profitable niche over the past few years as video has finally started to move to the Web.

However, if the newly bulked-up Adobe truly moves into the space – as we suspect the company will – it will undoubtedly present an enormous challenge to an industry previously dominated by a few well-funded startups. As a consequence of other larger players wanting to get a piece of the booming sector and startups being more inclined to strengthen their position, we believe consolidation in the market is inevitable. With that as our premise, who might be buying, and who are the potential prime targets?

Among a slew of startups in the space, the two primary ones we think could be in play in this scenario are market leaders Move Networks and Brightcove. The two have each taken in roughly $90m in venture capital. It is worth noting that both Microsoft and Cisco are strategic investors in Move Networks, and we think the company would make a great fit for either one since both have a strong focus on video moving forward. Meanwhile, both IAC/InterActive and AOL are strategic investors in competitor Brightcove. While we don’t think AOL is in a position to make an acquisition like this now, we would not put it past IAC. Google with its more consumer-oriented YouTube makes a logical acquirer as well, particularly as a way to add a business-friendly enterprise offering.

And finally, we might put forward rich content delivery networks (CDNs) such as Akamai and Limelight Networks. These vendors have been buying their way into premium verticals recently to escape the rapid commoditization of their core business and would be wise to consider acquiring into the space. From the estimated $40m or so in revenue that we understand Brightcove brings in, a large part of that comes from reselling bandwidth through CDNs.

Intuit mints a rich deal

-Contact Thomas Rasmussen, Brenon Daly

We might be inclined to read Intuit’s recent purchase of Mint Software as a case of ‘If you can’t beat ’em, buy ’em.’ The acquisition by the powerhouse of personal finance software undoubtedly gives the three-year-old startup a premium valuation. Intuit will hand over $170m in cash for Mint, which we understand was running at less than $10m in revenue. (Although we should add that Mint had only just begun looking for ways to make money from its growing 1.5-million user base.)

More than revenue, we suspect this deal was driven by Intuit’s desire to get into a new market, online money management and budgeting, as well as the fear of the prospects of a much smaller but rapidly growing competitor. (Intuit and Mint have been talking for most of this year, according to one source.) In that way, Intuit’s latest acquisition has some distinct echoes of its previous buy, that of online payroll service PayCycle. For starters, the purchase price of both PayCycle and Mint totaled $170m. And even more unusually, bulge bracket biggie Goldman Sachs advised Intuit on both of these summertime deals. (Remember the days when major banks would hardly answer the phone for any transaction valued at less than a half-billion dollars? How times change.) On the other side of the table in this week’s deal, Credit Suisse’s Colin Lang advised Mint.

Intuit M&A, 2007 – present

Date Target Deal value
September 14, 2009 Mint Software $170m
June 2, 2009 PayCycle $170m
April 17, 2009 BooRah <$1m*
December 3, 2008 Entellium $8m
December 19, 2007 Electronic Clearing House $131m
November 26, 2007 Homestead Technologies $170m

Source: The 451 M&A KnowledgeBase *451 Group estimate

Bleak outlook for social networking M&A

-Contact Thomas Rasmussen

In a sign of just how far the social networking market has fallen, brightsolid’s $42m purchase earlier this month of Friends Reunited from ITV Plc stands as the largest deal in the sector so far in 2009. The price is a mere 5% of the value of the largest social networking acquisition in 2008, which was AOL’s $850m all-cash pickup of Bebo. (We would also add that the sale of Friends Reunited netted ITV just one-fifth the amount it originally paid for the property in 2005.) On top of the notably smaller transactions, deal flow so far this year has been characterized by relatively paltry valuations. Friends Reunited garnered just 1.6 times trailing sales, compared to the estimated 42 times trailing revenue that Bebo got from AOL. Add all that together and it’s pretty clear that the bubble of social networking M&A has popped. In the space so far this year, we tally just 28 deals worth a total of $55.5m, compared to 53 transactions valued at more than $1.3bn in 2008.

As an aside, we would note that the acquisitions of Friends Reunited and Bebo have more in common than just ranking as the largest deals of their respective calendar years. The stalking horse bidder for Friends Reunited, Peter Dubens through his investment vehicle Oakley Capital Private Equity, has a close business relationship with Bebo founder Michael Birch. Dubens and Birch formed PROfounders Capital earlier this year under Dubens’ Oakley Capital umbrella. Oakley Capital reportedly offered to buy Friends Reunited for $25m, but declined to bump up its bid above even one times sales. Without reading too much into that, we might be tempted to conclude that except for Facebook, the little value that remains in most social networks is likely to only decline.

Should Cisco dial up eBay’s Skype?

Contact: Thomas Rasmussen

In eBay’s recent report on second-quarter results, the online auction house announced a somewhat disappointing performance in its two core businesses, Payments and Marketplaces, but did see strong results from a surprising source: Skype. The VoIP service increased year-over-year revenue by 25%, while overall sales declined as the legacy Marketplaces revenue sank 14%. Skype revenue hit $170m in the quarter, bringing sales for the division over the past year to $587m. The service is closing in on a half-billion users, finishing June with 481 million users. All in all, that’s a solid performance for a unit largely considered the bastard child of the Silicon Valley auction giant.

However, that certainly isn’t enough to keep Skype inside eBay. The acquisition, which eBay has admitted overpaying for and has written down a huge chunk of the $3.2bn cost, remains largely irrelevant and immaterial to its core e-commerce business. The service has never been integrated into auctions – much less adopted by buyers and sellers – at a level anywhere close to what was planned when eBay picked up Skype four years ago. It stands as the company’s largest-ever purchase and a stark reminder of an ill-conceived deal by the earlier leadership of Meg Whitman. Current CEO John Donahoe has been clear that eBay is returning to its roots, and Skype won’t be a part of that.

So where will Skype go? We see the VoIP vendor on a dual track. It could well get spun off in an IPO. (Provided, of course, that the catastrophe at Vonage hasn’t poisoned the market for VoIP companies.) Or, Skype could look for an acquirer, although we wonder how deep the pool could be for potential buyers that could write a $2bn or so check for it. But we do have one possible interested party: Cisco. Granted, this is a proposal from left field and we’re not suggesting that talks between the companies are going on or anything. However, there is some indication that such a pairing might not be too farfetched. Cisco has increasingly been bulking up its consumer division and its strategy around the media-enabled home is finally starting to come to fruition. Video plays a big part of those plans, and the firm has been talking about expanding its TelePresence offering from the enterprise to the home. An acquisition of Skype with its enormous and growing user base and proven technology on desktops and mobile devices would do just that, and would fit well with its M&A strategy of picking up market adjacencies.

Barnes & Noble: buy and build (but slowly)

Brenon Daly

Contact: Brenon Daly

Nearly six months after picking up a startup that developed an application for reading e-books, Barnes & Noble put some of that technology to work last week as it opened what it is calling the world’s largest electronic bookstore. In early March, Barnes & Noble acquired Fictionwise for $15.7m, which allows the company to offer books for users of Blackberry phones, iPhones and other devices. The firm also plans to expand the devices available early next year, when Plastic Logic’s e-Reader is released.

That’s all well and good, but we wonder why Barnes & Noble is moving so slowly into the digital realm. The world’s largest bookseller won’t even have it’s ‘Kindle killer’ in the market until about a year after the Fictionwise purchase, by which time Amazon.com will have hundreds of thousands of its e-book readers in customers’ hands. (Meanwhile, Sony has had a version of its e-book Reader out for nearly three years, although it has had rather muted success.)

Granted, the digital book sector is a tiny slice of the overall $25bn book market. And clearly, other retailers have struggled with balancing their online sales strategy with the brick-and-mortar reality. But we would think that Barnes & Noble would want to push into this growth segment more aggressively. After all, it recently guided that sales at its bookstores open for more than a year will decline by some 4% in 2009.

Adknowledge inks super deal for social advertising dominance

-Contact Thomas Rasmussen

Rumors of the sale of Super Rewards (also known as SR Points) have been swirling for quite some time. On Wednesday, acquisitive Adknowledge announced that it is indeed the winning bidder in a competitive sales process for Vancouver-based Super Rewards, a bootstrapped, 40-person incentives-based online advertising startup. (We understand that Super Rewards is profitable and generating approximately $60m in gross revenue – a number the firm says could hit as much as $100m this year. Of course, the company’s net revenue is much lower, likely in the neighborhood of one-fourth the gross amount after revenue share.) The purchase of Super Rewards marks the sixth acquisition for Adknowledge in less than two years, and we estimate this transaction is by far its largest yet. The deal also marks a shift in the M&A strategy of the Kansas City, Missouri-based online advertising giant, which has typically been more inclined to pick up heavily discounted distressed assets.

Nonetheless, Adknowledge, which we estimate was running profitably on close to $200m in revenue prior to the acquisition, has made a smart purchase in reaching for Super Rewards. Incentives-based advertising companies like Super Rewards have received quite a bit of attention recently because they seem to have found a way to actually make money off of social networks. (The fundamental business principle of profitability has largely eluded the social networks themselves.) Much like other online advertising niches, it is a sector that stands as a small, faster-growing piece of a much larger overall market. But in order to reach their full potential, incentives-based advertising vendors need the scale brought by established and wealthy companies like Adknowledge, which boasts more than 50,0000 advertisers. Because of that, we weren’t surprised to see Super Rewards gobbled up – and we wonder if the same thing might not end up happening to the firm’s two main rivals.

We’re thinking specifically about Fremont, California-based Offerpal Media and San Francisco-based Peanut Labs, which have taken approximately $20m and $4m in venture capital, respectively. The largest independent startup remaining in the niche sector, Offerpal Media recently said it was doing around $40m in revenue. Potential acquirers include dominant online advertising players such as Microsoft, Google, Time Warner’s AOL and ValueClick. In particular, we suspect ValueClick could be ready to shop as a way to stand out from its larger competitors. The Westlake Village, California-based company certainly has the means to do a deal, since it has no debt and some $100m in cash. Other potential suitors for incentives-based advertising startups include large-scale application platforms such as Facebook and NewsCorp’s MySpace that would benefit greatly from bringing the ad service in-house.

Adknowledge M&A

Date announced Target
July 22, 2009 KITN Media [dba Super Rewards]
March 12, 2009 Miva Media
November 6, 2008 Lookery (Advertising business assets)
November 3, 2008 Adonomics [fka Appaholic]
December 6, 2007 Cubics Social Network Advertising
November 8, 2007 Mediarun (UK and Australia divisions)

Source: The 451 M&A KnowledgeBase

What’s the outlook for mobile payment startups?

-Contact Thomas Rasmussen

The consolidation in the mobile payment market that we outlined recently is still on. Startup Boku announced on Tuesday a $13m venture capital infusion in the form of what we understand was a $3m series A round followed quickly by a $10m series B round a little over a month later. Benchmark Capital led the latest round, with Index Ventures and Khosla Ventures also pitching in some cash. The money was used to acquire two competitors, Paymo and Mobillcash. We estimate that very little of the cash was used to buy the vendors. We understand that the purchase of Paymo, which raised a reported $5m itself, was primarily done in stock. The deals were largely a way for Boku to gain customers and technology, as well as expand its international reach. It’s increasingly important for mobile payment startups to do something to stand out among the dozens of rivals also trying to crack this market. What’s unusual about Boku is that this strategy is playing out so quickly. The company only incorporated in March.

The real question for Boku and other promising startups in the mobile payment space such as RFinity is what will ultimately happen to this hyped market. Despite hundreds of millions of dollars poured into startups, they haven’t been able to generate much revenue, certainly not to the level that would make them viable businesses at this point. We believe the best outcome for these firms is an exit to a larger strategic acquirer. An example of this that may well be in the offing is Obopay, which took an investment from Nokia a few months ago. We suspect that could be a ‘try before you buy’ arrangement for the Finnish mobile company. Research in Motion and others could look to use acquisitions to catch up, as well.

However, we wonder how long it will be before other smartphone providers, platforms and mobile operators do as Apple has done. Micro-transactions are a huge selling point for the new iPhone 3.0 update and, frankly, one of the few bright spots for the mobile payment sector. However, all transactions for iPhone applications are done through Apple itself, leaving companies such as Boku out in the cold. If other vendors – including RIM, Palm Inc, Google, Microsoft and even application platforms like Facebook – stay in-house to develop the technology, there isn’t much need to go shopping. That could well hurt the valuations of mobile payment startups, even those that survive this current period of consolidation.

Could ad slump lead to ValueClick exit?

-Contact Thomas Rasmussen

Recently, we’ve covered the hardships of online advertising companies. However, for a clear example of just how tough the environment really is, we point to the weakness at ValueClick, one of the few remaining publicly traded pure-play advertising firms. Amid an advertising slump and tough competition, the vendor has seen its first-quarter revenue decline 20% from the same quarter last year and its own projections point to a similar decline for the current quarter. With the advertising market seemingly trapped in the doldrums for the foreseeable future, we wonder if an opportunistic acquirer might consider a run at ValueClick.

ValueClick trades at an enterprise value of about $800m. This is about half its 2008 high, and down about two-thirds from 2007, when Google and Microsoft were throwing billions of dollars around to secure market leadership. With $592m in trailing 12-month (TTM) revenue, the company trades at a scant 1.3x sales. This is a far cry from the multiples paid for aQuantive and DoubleClick of 10x TTM sales and 12x TTM sales, respectively.

With $100m in cash and no debt, ValueClick CEO Tom Vadnais has indicated that the company is interested in doing some shopping of its own. However, given the dire state of the economy, we think a takeout is a much more plausible outcome over the next year or so. The potential acquirers include the usual suspects such as Microsoft, Google and IAC/InterActiveCorp; soon-to-be-independent AOL; and large media companies. However, we would hasten to note that most of these vendors have full traditional advertising portfolios, so an acquisition of ValueClick would merely be for boosting market share.

Reality check for mobile ad networks?

-Contact Thomas Rasmussen

Mobile advertising startup Ad Infuse received an infusion of reality last week. The vendor, which has raised $18m in venture backing, had to put itself up for sale after it was unable to secure follow-on funding this year. After being shopped around since last summer, Ad Infuse sold for scraps to UK-based mobile advertiser Velti. We estimate that Velti paid less than $1m for Ad Infuse, which we understand generated just $1.3m in revenue in 2008.

The distressed sale of Ad Infuse comes on the heels of SmartReply’s tiny all-equity purchase of mSnap, as well as several deals involving other niche advertising networks this year. Where does this leave the remaining mobile ad networks that we were bullish on last year as the logical next step of growth for online ad startups?

We suspect there is more VC portfolio cleanout coming, since there are still too many mobile ad startups. That’s not to say there aren’t a few firms that haven’t had some success. For instance, three-year-old mobile ad network AdMob, which has successfully ridden the coattails of Apple’s iPhone AppStore’s rise by providing a way for iPhone developers to monetize their users through ads, is currently at an estimated $30m run-rate. (AdMob has raised nearly $50m to date from Sequoia Capital, Accel Partners, Draper Fisher Jurvetson and Northgate Capital.) And on a smaller scale, AdMarvel is just getting started with what we can best describe as a mobile version of the popular video ad startup Adap.tv. It has raised just $8m to date and is in the process of closing a $10m follow-on round, something its competitor Ad Infuse was unable to accomplish.

Much like what we anticipate will eventually happen in the online video ad space, there will soon come a time when ad giants such as Google and Yahoo will have to buy their way into the mobile sector. In a rare sign of foresight, AOL is the only media behemoth with a sizable presence in the mobile ad vertical following its $105m acquisition of Third Screen Media in 2007.