Contact: Ben Kolada
In the past year, networking vendors have acquired many of the independent front-end optimization (FEO) startups, further narrowing the field in this already niche sector. In fact, there are only a few notable independents left. But is this really a race to consolidate the market, or are acquirers simply adding these capabilities to their portfolios by picking up properties at fairly cheap prices?
FEO focuses on getting a browser to display content more quickly, as opposed to dynamic site acceleration and other services that use network optimization to speed content delivery. For the most part, the FEO segment has been made up of a handful of startups. However, consolidation in the past year took three of these companies out of the buyout line. In May 2011, AcceloWeb sold to Limelight Networks for $12m and two months later Aptimize sold to Riverbed for $17m. Terms weren’t disclosed on Blaze Software’s recent sale to Akamai, but we’re hearing that the price was in the ballpark of $10-20m. That leaves Strangeloop Networks as one of the last companies standing, and its fate is basically secured. After the Blaze deal severed Strangeloop’s partnership with Akamai, the company is likely to find an eventual exit in a sale to remaining partner Level 3 Communications.
Firms interested in entering this sector shouldn’t fret over potentially losing Strangeloop to a competitor. Instead, they should actually reconsider their entry into the FEO market. FEO providers, both past and present, have done little to validate the space. According to our understanding, Aptimize was the largest of the acquired vendors, and its revenue was only in the low single-digit millions. The fact that each target sold for no more than $20m further suggests that the market isn’t yet living up to expectations.
With new funding difficult to come by, many cash-burning startups are finding that they have no choice but to take a scrap sale. Those desperate deals cut M&A spending on VC-backed startups in the second half of 2008 by nearly three-quarters over the same period in 2007. From July to December last year, 100 venture-backed startups got acquired, for a total bill of just $3bn. That compares to 153 startups sold for a total of $11.1bn during the same period in 2007.
And we’ve seen more of these types of deals so far this year. Oracle, SAP, Barracuda Networks and Quest Software, among other large technology buyers, have all purchased companies for less than the money raised by the startups, according to our estimates. Consider the specific case of Mirage Networks. The network access control (NAC) vendor raised some $40m before discovering that NAC wasn’t really a market after all. (The eight-year-old company generated an estimated $5m in sales last year.) Trustwave picked up Mirage for some $10m, we estimate. Meanwhile, Mazu Networks will have to hit all of its earn-outs to make its investors whole again. About a month ago, Riverbed Technology said that it would pay $25m upfront for the network security vendor, with a possible $22m earn-out. That’s actually not a bad outcome for unprofitable Mazu, which we understand was burning about $1m each quarter. And yesterday, Netezza picked up the assets of data-auditing and protection vendor Tizor Systems for $3.1m; Tizor had raised $26m from investors.
VC-backed tech startups M&A
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Source: The 451 M&A KnowledgeBase