Benjamin Kuo’s Blog

At a recent Orange County Venture Group event, focused on the experience of Entropic on the IPO market, one of the panelists, investment banker Ernie Ruehl of Credit Suisse, made the comment that when you file a registration statement, “you’re putting a ‘for-sale’ sign on the company.” In fact–in my own discussions with CFOs, investment bankers, auditing firms, and others recently, I’ve heard the same comment–that an IPO filing today is a signal to the market for buyers–something people have told me is referred to as the “dual path.”

To be sure, any company filing an IPO is likely to try to get to the market. But, increasingly–due to Sarbanes-Oxley, and the current market climate–companies are more often than not also hoping that a strategic buyer will step up to the plate and purchase the firm, avoiding the hassle of having to deal with quarterly filings, regulatory scrutiny, analysts, and the hassles of a roadshow.  The service providers I’ve talked to tell me that simply, if you’re able to file for an IPO, you can show companies that your books are clean–are disclosing full financials–and essentially are ripe for an acquisition.

Storm clouds are gathering on the venture industry, as M&A and IPO exits are declining — at least according to the Dow Jones report on VC-backed liquidity released today. Dow Jones reported just $8.2B in exits, and only a handful of IPOs in Q1. It remains to be seen whether slowing liquidity opportunities will scare off venture investors (as it did post dot-com) or whether, this time, the investors in the market are instead set for the long haul and not “quick flips.”

I’ve noticed some speculation lately across the web about how the proposed acquisition of Yahoo might have an affect on possible exit opportunities for startups, how startups might want to raise more to live longer because of a perceived reduction in exit opportunities, and so on.

Those sentiments echo the comments I have been hearing during the last few years, where startups have told me that they’re strategy is to be acquired by Google/Yahoo/Microsoft (or name any other large, market leading company).

I might be jaded, but usually, starting and/or running your company hoping that Google, or Yahoo, or some other company will suddenly notice your company and buy you for millions is not high on the list of ways to build a business. If you’re spending all your time trying to figure out how to get in front of the M&A folks at those firms, you’re most likely not spending enough time building your product and business, and gaining true traction in the market. If you’ve truly built something useful, Google, Yahoo, or Microsoft will come and find you.

If you look at the list of recent acquisitions by those firms, it’s not a huge list. Yahoo acquired something like six companies in 2007; Google acquired 17, including the giant acquisition of DoubleClick, which is not relevant to startups; Microsoft only acquired 8 companies in 2007. I see at least that many companies venture funded every week; making the assumption that Yahoo disappears, that’s a whopping six companies acquired we’re talking about. You have a better chance of going to Vegas, putting all that venture money on black, than one of the big guys acquiring your startup.

It’s fairly instructive to look at depth at the firms Microsoft bought in 2007. Their acquisitions in 2007 included:

• Multimap (mapping): market leading position in the UK; huge number of users; founded in 1996
• Global Care Solutions (healthcare software): product since 2000; big Microsoft partner; deployments everywhere in Asia
• Parlano (enterprise chat): founded in 2000; lots of enterprise customers at acquisition
• AdECN (advertising network): founded in 2003; already had a business that was working well, and was contacted by Microsoft (see my interview with Bill Urschel at AdECN here about that deal)
• aQuantive (big public company)
• Tellme Networks; founded in 1999; market leading position in voice call services
• Medstory (health search); founded in 2000; product well-launched and meshed into Microsoft’s build up of a health division.

Key takeaways from this, at least if you want to be acquired by Microsoft: you really need to expect to be in business for at least seven to 10 years; you need a lot of traction and a product that people have been using for awhile; enterprise software is hot, consumer web services are not; and you need to have a fit to their strategic plans. That’s not exactly a prime candidate for making your Web 2.0 startup rich.

Quickly glancing at Yahoo, they only made around six acquisitions last year:

• BlueLithium (online ad network, founded 2004)
• Rivals.com (online sports content, founded in 2001)
• Right Media (founded 2003, online advertising) - Yahoo was an investor in 2006
• MyBlogLog (blog tools, founded in 2005)
• Zimbra (collaboration tools, founded somewhere around 2004)

Of those, MyBlogLog and is the closest to the “cool web startup with no revenues” — and MyBlogLog was a fairly small, $10M deal. Zimbra, which went for $350M, was actually an enterprise software play with a lot of companies using them for their collaboration tools. BlueLithium and Right Media were in the Internet advertising space, and clearly in Microsoft’s strategic sights on that market. Not a lot of exits there of “cool”, Web 2.0 startups, either.

CNET reports that Los Angeles-based video sharing site Revver has put itself on sale for between $300K and $500K — a fire sale considering the millions that have been invested in the company. Revver has raised capital from Bessemer Venture Partners, Comcast Interactive Capital, Draper Fisher Jurvetson, Draper Richards, and Turner New Media.

Revver is one of a (huge) number of YouTube-era companies which provide user-generated video sharing: a few of the other local firms  that started in this space are Veoh Networks (tilt towards professional content distribution), VMIX (shifting towards selling its software for social networking sites) ; LiveDigital (an offshoot experiment of Oversee.net; the site now reads “looking for a new home”); and Eefoof (angel backed, renamed VuMe, and now appears to be filled with blog posts about how bad the service is).

In some local M&A speculation, the New York Times is reporting that Spark Networks, the operator of JDate and a number of other online dating sits — based here in Los Angeles — is looking for a buyer. Among the speculated suitors are Pasadena-based eHarmony and Los Angeles-based MySpace, in addition to Barry Diller’s Match.com and Yahoo.

Happy New Year to everyone, we’re back out of hibernation. We’ll be ramping up our coverage as people return from vacation (though, judging from our bounce/vacation notices this morning there are still a substantial number of people still traveling or out of the office!).

Top coverage today:

• Interview with Gene Alexander at angel funded firm MaMoCa
• A slew of merger and acquisitions: Twistbox/Mandalay Media, Managed Data Holdings/Data393, Gibbs Associates, plus three acquisitions for Teledyne

Colin Stewart, a blogger over at the Orange County Register, commented today on the buyout of Irvine-based U-Nav by Atheros, mentioning that the deal values the firm at roughly $1M per employee — roughly par for the course as M&A deals go. While the professionals mostly concern themselves over multiples of revenue a company sells for, for a lot of venture backed companies without publicly available revenue numbers, it’s often useful to compare the buyout price given their employee levels–along with how much in venture capital went into the firm–to figure out if the deal was a dud or not.

Here’s an interesting item: Silicon Alley Insider is reporting that Scripps is trying to sell Shopzilla, which it purchased in June of 2005 for $525M. According to the Insider, Scripps is hoping to get somewhere between $500M and $600M for the company.

There’s more money going into the online advertising  sector again, with the announcement this morning that Specific Media has raised an astounding $100M to invest in mergers and acquisitions.  This space is hopping. Some local companies recently in the news in the sector: Santa Monica’s The Rubicon Project recently raised $6M in October from Clearstone for their online ad optimization software; Los Angeles-based Gorilla Nation, which reps advertising for online sites grabbed $50M in a round in May; Spot Runner raised $32M in August; and Santa Barbara’s AdECN was acquired by Microsoft in July. Not to mention, a continual swirl of rumors around whether or not ValueClick is or is not the target of acquisition.

I was sitting at a lunch the other day at a conference with David Moore, Chairman of 24/7 Real Media (which was recently acquired by advertising giant WPP for $649M) and were were talking about this, and I asked him when the merger/acquisition frenzy in the Internet advertising market was going to end. He told me that right now it’s a giant game of “whack-a-mole” — everywhere you look, a new Internet advertising firm pops up, and then some player in the industry will buy them.

Linksys has been one of Southern California’s big success stories — bootstrapped by Victor Tsao, it was purchased by Cisco for $500M in 2003. Until now, the brand has continued as a separate product line over at Cisco, but there’s been some debate over whether or not to kill the brand name and just go with Cisco. Link to the Slashdot article, plus Om Malik has more over at GigaOm on the ongoing debate.

If Linksys does disappear, the brand will go the way of many other, Southern California businesses which were purchased and disappeared (for example, Overture Services, which is now Yahoo’s advertising unit). Personally, as a consumer (and former product manager) I’d keep the brand name, which has a lot more brand equity than Cisco does in the consumer market; in the consumer hardware business, where margins can be razor thin and consumers gravitate towards brands they have used and trust, it’s probably worth more to be a Linksys than a Cisco.

Interestingly enough, the technology industry hasn’t yet sided with the consumer goods industry, where branding and brand management is a huge deal and no one dares to kill a trusted brand (some examples: Best Foods and Hellman’s; Edy’s/Dreyer’s Ice Cream).