How Much Equity Do VCs Really Get?
In challenging economic times like this many folk are tempted to break out of their personal economic straight jackets by launching a technology startup. ‘Capital-light’ startups are the rage today, thanks to the extremely low costs of hosted services and the plethora of open source infrastructure software solutions. Many newbie entrepreneurs look to venture capital as the best way to finance the launch and development of their business. A common question raised by many of these entrepreneurs is ‘how much equity do VCs typically get?” Thanks to the folks at OwnYourVenture.com, entrepreneurs can now use a web based tool to model the impact of multiple rounds of venture capital funding. This post explores not only the math behind how founders’ equity gets diluted by venture capital, but it also models what founders’ ultimate payoffs can be in various exit scenarios. One pof the key takeaways is that you should worry more about how much VCs will own at the end of the fund raising process and what your exit will look like versus how much equity you give away in your Seed or Series A round.
Why I’d Prefer 1,500 Mid-Market Customers over 25 Fortune 1000 Customers
As the reality of 2010 sales forecasts settle in, enterprise software firms are beginning their annual hunt for new revenues. Many of them are considering moving ‘down-market’ into the mid-market space. This is a re-post of a piece I did last summer that talks about why I’d rather have 1,500 mid-market versus 25 Fortune 1000 customers.
SaaS Valuation Update January 2010
Interest in public company SaaS valuation trends continue to grow. This post presents an update on key valuation metrics for public SaaS companies as of January 2010. Includes metrics on Enterprise Value, EV/Revenue, EV/EBITDA, Gross Margins, EBITDA MArgins, Revenue Growth Rates, and YoY Stock Market Returns.
What the Proposed Carried Interest Tax Means for Private Equity Portfolio Companies
Congress is looking to raise $24 billion over the next 10 years by changing how private equity firms are taxed on the profits of their investments. If you are a senior executive at a private equity backed portfolio company you need to understand how this tax change will impact your owners and their attitudes toward your business. As noted in a recent Wall Street Journal article there are very different opinions about the tax law change. “Private equity will endure, but the draconian tax hike, if enacted, will unquestionably slow the flow of capital to companies struggling to get back on their feet during this very fragile economic recovery,” said Doug Lowenstein, president of the Private Equity Council, a trade group. “It’s amazing to me that at the same time the U.K. is imposing a 50% excise tax on bankers’ bonuses, the private-equity guys aren’t even willing to pay the usual ordinary income rate,” Mr. Fleischer said. “You would think they would recognize a fair deal when it’s offered.”
Whether the tax is fair or not is not the major issue for portfolio company executives. The real issue is that private equity owners could push for the sale of your business in 2010, at significantly reduced prices, to maximize their yield on the investment in your firm. Click through to read the whole post and take a look at the math and its implications for your business.
Manufacturing Revenue 2010
If your company’s products/services are in the middle to latter parts of the life cycle, it is harder to sell new customers. In 2010 a lot more companies will be looking to acquire social media analysis/monitoring platforms, hardware/software virtualization, and cloud computing services than those looking for ERP solutions, mainframe job scheduling, or electronic data interchange. This does not mean that there are not significant revenue opportunities for older technologies – it just means that you have to work a lot harder since most buyers do not wake up in the morning and say “I really need to buy some middle-aged technology today!”
Manufacturing revenue is a harsh reality for most tech companies today. Over the next few days we are going to be exploring a few techniques you could leverage at the start of 2010 to get you closer to hitting your revenue numbers. The first approach is euphemistically entitled “The Bowling League Sales Program.” This program focuses on building awareness of your brand and customers’ successes via a geographically focused customer success blogging, social media broadcasting, and digital body language monitoring program. It’s a lot of work but it enables you to effectively leverage some of the most active and effective marketing technologies in today’s world to drive new revenues for your business.
Amend, Extend & Pretend
2009 saw a record number of PE-backed firms filing for Chapter 11 protection. 83 firms went bust in 2009, versus 46 in 2008 and just 2 in 2007. The numbers could have been significantly higher in 2009 if the infamous ‘amend, extend, & pretend’ phenomenon didn’t start kicking in after Q1 2009. Click through to the full post to see the detail behind the numbers.
Mary Meeker on Steroids
Morgan Stanley’s Mary Meeker, the “Queen of the Net”, is famous for her in-depth analyses of technology markets. In 2009 Mary and her team have been heavily promoting mobile Internet as the next big wave in the technology market. Several copies of her 68 slide October “Economy & Internet Trends” presentation from the Web 2.0 Summit have circulated around the web. Recently Morgan Stanley released the 671 slide presentation, the Mobile Internet Key Themes Report, that underlies Mary and her team’s research. Click through to the full post to review the entire presentation or to download it from Morgan Stanley.
Suing Gartner Won’t Solve Your Magic Quadrant Problems Part Deux
The ZL Technology/Gartner litigation continues. After having their first case dismissed, ZL has filed an amended complaint charging Gartner with defamation and trade libel. Given the high standard of proof in American libel litigation it is unlikely that ZL will fare any better this time around than they did the first time. Perhaps ZL might consider the advice of Vivek Wadhwa, an entrepreneur turned academic. He is a Visiting Scholar at UC-Berkeley, Senior Research Associate at Harvard Law School and Director of Research at the Center for Entrepreneurship and Research Commercialization at Duke University. In a recent TechCrunch article Vivek describes how he turned his developers into the best enterprise sales people in his market. Vivek’s experiences are interesting for not only startups, but mature companies as well. His strategies certainly have a much higher probability of success than ZL’s quixotic litigation approach. See more details inside the post.
Supply Chain Management Exits
Supply Chain Management is not the most glamorous or valuable software market. In Q309 public Supply Chain Management companies had media EV/Revenue metrics of 1.3x and EV/EBITDA metrics of 9.8x. According to the Software Equity Group Supply Chain Management ranks 19th out of the 24 software technology categories they track. Interestingly enough, there have six major exit/corporate development events in the past two months in this market space including a major dividend, two major acquisitions/mergers, a large secondary offering, and two IPO filings. If boring old Supply Chain Management can generate this much activity then perhaps the rest of the tech market can look forward to a happy new year as well.
Suing Gartner Doesn’t Work After All
Recently ZL Technologies Federal lawsuit against Gartner was dismissed by the Federal Court for the Northern District of California. ZL had sued Gartner over their placement in the email arching Magic Quadrant and Gartner’s supposed bad acts that had cost ZL millions in sales. ZL will not be able to cash in on the $1.696 billion in damages they had claimed. This post explores the details behind the Court’s ruling on the seven claims ZL made. We also provide some advice from a noted industry expert on how companies like ZL can actually use marketing, sales, and branding to positively influence their relative MQ positioning.
JDA & i2 Part Deux or The ‘New Normal’ for Tech M&A Deals
In late 2008 JDA attempted to acquire i2 by primarily funding the deal with new senior debt. As the credit markets melted down JDA was unable to close the financing and ended up walking away from the deal by paying i2 a $20 million termination fee. Barely 11 months later, JDA and i2 have struck a new deal at a higher price, but with a radically different transaction structure that is engineered to ensure certainty of closure for the i2 shareholders. This post explores the history of these two transactions and the creative structure that JDA is proposing. This new structure has the potential to become the blueprint for technology M&A transactions in the post-credit-crunch world.
SaaS Company Valuation Trends
How does the market value SaaS companies in comparison to other software companies? Out of 25 different categories of software companies, pure play SaaS companies are the third most valuable category. Not surprisingly, SaaS companies are faring well on exits as well. In this post we will take a look at SaaS valuation and exit trends as well as some interesting trends that potentially foretell a significant slowdown in SaaS company revenue growth and valuations.
Using Wisk to Clean Up Your Social Media Reputation
Earlier this week, the makers of Wisk (the ‘ring around the collar’ folks) announced a Facebook application (Wisk-It) to help you remove pictures on Facebook that you really don’t want the whole world to see. This post explores the social media reputation repair community, including the infamous Dr. Phil’s recommendation for how to fix your social media faux pas. We also ponder what other well known brands (Ivory Soap, Clorox, Preparation H, etc.) could get into the social media reputation repair business.
Suing Gartner Won’t Solve Your Magic Quadrant Problems
On May 29th of this year ZL Technologies sued Gartner Inc. and one its analysts, Carolyn DiCenzo, for defamation, trade libel, false advertising and other charges over Gartner’s placement of ZL Technologies in the 2009 Email Archiving Magic Quadrant. In their original complaint ZL asked for over $1.696 billion in general and punitive damages, plus attorney’s fees and disgorgement of any of Gartner’s profits from the unlawful acts claimed by ZL Technologies. While I can empathize with the challenges of being placed in the ‘Niche Quadrant’, I also know from experience that strong execution can improve a firm’s Gartner rating over time. This post explores the details of ZL Technologies’ lawsuit as well as the grim reality of how their competitors have scaled their businesses to the point that ZL has little to no chance of ever achieving market leadership, except by suing Gartner.
Mary Meeker Internet Trends October 2009
Everyone is looking for the looking for the next big wave to ride in the tech marketplace. While social media has exploded in the past year it has not created a wave of hyper-valuable new companies aside from Facebook, MySpace, Twitter, and Zynga. Morgan Stanley’s Mary Meeker thinks the next big wave will be Mobile Internet. Mary details her thinking in her Web 2.0 Summit presentation “Economy & Internet Trends” As TechCrunch’s MG Siegler noted “She thinks the mobile web will be 10 times as big as the more traditional desktop Internet, and that it will grow much faster.” The entire presentation is embedded in the post, along with a copy of the presentation she developed in March 2009 that described the background of the current recession along with her perception of the emerging Internet and Social Media opportunities.
Putting Recent IPO / M&A Hype in Perspective
In the past two weeks there has been a huge buzz about how some recent IPOs and M&A deals signals a return to the good times of great technology company exits. Thanks to some decent stats from the National Venture Capital Association and Thomson Reuters, the reality of the situation is pretty grim. Most tech companies stand a better chance of winning the Lotto than getting a 10x return exit. This post takes a look at the numbers as well as examining how minority investments may be the best short term exit alternative for tech companies.
Will Twitter Dis-intermediate Investment Bankers?
It was bound to happen sooner or later. Twitter is now being credited with playing an important role in two companies selling themselves. This post reviews the recent sales of Tinkoff Restaurants and JobVent, both of which marketed themselves for sale via Twitter.
How to Build an Exit Strategy
Exit strategies for technology companies are like sex in high school – everyone talks about it but only a few are doing it right. The objective of this post is to layout a basic approach your company can use to achieve a successful exit. There are three major components to an exit strategy: 1) Understanding Exit Options, 2) Identifying Likely Exit Scenarios for Your Firm, and 3) Developing and Working a Specific Exit Plan. The post also includes a model you can use to estimate the value of a strategic acquisition, leveraged recap, sale to a minority investor, sale to a financial sponsor, or conversion of your business to a cash flow / lifestyle model.
Did Meetup Beat Facebook to Profitability?
Both Facebook and Meetup achieved important milestones recently. Facebook became cash flow positive while Meetup actually had real profits. Facebook’s news came via a blog post from Mark Zuckerberg, while Meetup’s information came from shareholder documents leaked to TechCrunch. While this post doesn’t get into the ethics of leaking, it does take a deep look at Meetup’s numbers. In a nutshell, Meetup is a great example of how a SaaS startup can scale revenues and profits from nothing to probably over $8 million in three years. While it may not be as exciting as what Twitter’s revenues could potentially be someday, Meetup is a great example of what a typical, successful startup can achieve.
So Private Equity Isn’t Evil After All . . . .
Private equity has been compared to ‘swarms of locusts” or “financial wolves” that fall on companies, devour all they can, and then move on. While such statements make good political theater it turns out that the reality of the situation is a bit different. As noted in the EY report “The most significant finding of our research is that, in aggregate, large businesses across Europe achieved impressive growth and performance improvement under PE ownership. Our findings show average per annum growth of 15% in profits, 5% in employment, and 9% in productivity from the time of acquisition to exit.” This post reviews the background behind the infamous locusts and financial wolves myths associated with private equity and explores the key findings of the EY report.
How to Build an M&A Strategy
This post presents a basic primer on how to develop an M&A strategy for your company. If your company is interested in leveraging mergers, acquisitions, or divestitures you should have a basic strategy that has been documented and reviewed/approved by key stakeholders such as the executive team, board of directors, key investors, and debt holders. […]
How Do Angel Investors Really Decide What to Invest In?
A recently completed analysis of angel deals closed in the first half of 2009 showed some surprising results – the quality of a venture’s management team was four times more influential in funding decisions than more traditional factors like the venture’s economic model, deal structure, and projected revenue growth. Check out a detailed presentation from Venture360 on their analysis of angel investments that were analyzed using their new online platform.
Does Venture Capital Pose a Systemic Risk to the Financial System? Tim Geithner Thinks So . . .
Evidently the $200 billion venture capital industry is a source of systemic risk to the financial system. As part of the financial system regulatory redesign, venture capital firms will be required to register as investment advisers with the SEC. This will impose a significantly higher compliance burden on VCs as well as requiring VCs to comply with anti-money laundering regulations imposed on financial institutions post 9-11. I wonder how long it will be before an enterprising VC funds a SaaS/Business Process Outsourcing company that will provide regulatory compliance services for small to medium sized VC firms?
How to Calculate the Enterprise Value of Your Private Company
This post presents a simple process to calculate the enterprise value of your private company. It assumes that you have access to your firm’s financial statements. This post walks you through the steps of extracting relevant information from your financial statements as well as a process to estimate the value of your company’s equity by analyzing the valuation of some of your publicly traded competitors. The post also provides some guidance on how to find and leverage fairness opinions developed by investment bankers to support acquisitions or mergers amongst your competitors.
Everything You’ve Ever Wanted to Know About Mergers, Acquisitions, Divestitures, & Exits . . . but Were Afraid to Ask
Cisco, Google, IBM, Oracle & Microsoft are masters of the tech M&A game. They have the teams, financial resources, and connections to effectively leverage acquisitions to drive huge growth in their revenues and shareholder value. What about the rest of us? Many small to mid-sized tech companies, however, do not have a lot experience or expertise in mergers, acquisitions, divestitures, or exits. As a result, they tend to shy away from using classic corporate development techniques to grow the value of their business or to achieve a significant exit. Over the next six weeks DevelopmentCorporate is going to publish an eleven part series that is designed to provide a basic introduction to corporate development techniques. The topics include how to build an acquisition strategy, an exit strategy, how to analyze an acquisition candidate, and even how to pitch an acquisition to a board of directors, private equity firm, or VC.
This series begins with calculating the enterprise value of your firm. Decisions about mergers, acquisitions, divestitures, and exits are typically made in context of your firm’s enterprise value. If your company is public, calculating enterprise value is a piece of cake – most stock quoting sites do it for you. If your firm is privately held you need to do a bit more leg work, but you can develop a reasonable estimate in less than an hour. The balance of this post walks you through the steps in the calculation and where you can readily obtain information about comparable firms in your industry.
Tech Private Equity is Like 2003 Again . . . And That’s a Good Thing
The last great wave of technology M&A activity began in late 2003 and came to a crashing end in December 2008. In 2003 and 2004 there were lots of tech companies that had low valuations. Aggressive private equity firms entered the market and snapped up a lot of platform companies using primarily cash and limited debt. By 2006 and 2007 the market had shifted and debt became the primary acquisition currency and debt refi’s became the primary liquidity vehicle for private equity firms. As the credit markets melted down in 2008 so did tech M&A.
It’s been interesting to see in the past few months how aggressive private equity firms have stepped back into the tech market using primarily cash as their acquisition currency. This post takes a look at three recent private equity deals: Symphony Technology’s acquisition of MSC Software, Vista Equity Partners Acquisition of SumTotal, and Infor’s acquisition of SoftBrands. While these deals had a lot in common, there were unique and interesting aspects to all of them. The post ends with a challenge as to how the private equity firms can leverage newly found free cash flow in these deals to build innovative solutions to drive true organic revenue growth in these properties to support prosperous IPO or acquisition exits three to five years from now.
The Details Behind Amazon’s Valuation of Zappos
Cold hard facts make it much easier to understand Amazon’s acquisition of Zappos. Amazon’s recently filed S-4 provided a ton of fact based insight into the Zappos deal. This post helps you navigate through some of the more interesting sections of the document including the timeline of Zappos’ discussions with Amazon (hint 478 days between the start and end), the key factors that were used to value the Zappos business, the size of the now famous liquidation preference shared by Sequoia, Venture Frogs, and select executives (another hint – it was about $181 million), and copies of Zappos’ financial statements for 2007, 2008, and Q1 2009 (final hint – they were pretty good after all). Finally, there’s a roundup of a few other posts about the Zappos deal that provides some very insightful commentary.
Did You Know Mafia Wars & Zynga Are Generating >$200 Million a Year?
It was certainly news to me. It looks like Zynga is one of the first companies aside from Facebook and MySpace that have successfully monetized the social media market place. TechCrunch’s Sarah Lacy has written an excellent post about a potentially serious threat to Zynga and any other provider of ‘virtual goods’ that get exchanged in sanctioned or unsanctioned secondary markets. Click through to learn more about Zynga’s background, the serious threat that Sarah Lacy uncovered via an anonymous source from one of Zynga’s competitors, and how the Senate’s discussion today about imposing a 10% excise tax on plastic surgery might lead to the taxation of virtual goods.
Why Don’t Fortune 100 CEOs Care About Social Media?
It is simply irrelevant to them and there’s no upside. ÜBERCEO posted a couple of presentations on Slideshare that I admit I was link-baited into reading. The presentations do a good job of documenting the lack of presence Fortune 100 CEOs have on Twitter, LinkedIn, Facebook and Wikipedia. The pitches then exhort those CEOs to take advantage of the opportunities they are missing. What the authors failed to understand is that there is practically no incremental benefit and a lot of downside for a Fortune 100 CEO to engage in social media. The opportunity costs are simply too great. Two minutes to draft a witty tweet could cost a typical Fortune 10 CEO $2,800 in ‘revenue opportunity’. The impact of social media, however, for a more typical sized company between $100 million and $1 billion is a different story. The full ÜBERCEO presentations are embedded in the post, along with a few fun stats about the Fortune 100 CEOs as well as a summary of how Tony Hsieh’s Zappos grew revenues by over $140 million last year by using social media as one, of several, innovative strategies.
Andreessen-Horowitz Core Principles & 5 Other Things Marc Said
What’s the thinking behind Marc’s latest $300M idea? Last Sunday Marc Andreessen and his long time partner Ben Horowitz launched a new venture capital firm aptly named Andreessen-Horowitz. Marc summarized his feelings about the current venture capital world in the following quote “The problem is that there aren’t valuable companies being formed. And there never have been,” Andreessen continues. There are, he says, on average 15 tech companies launched a year that will ultimately do $100 million a year in revenues, and these companies are responsible for 97 percent of the returns in the venture industry overall. “There just aren’t that many great founders.” Andreessen-Horowitz and their initial $300 million fund are designed to address this problem.
As part of the rollout both Marc and Ben did a number of media events. From those events we have assembled some interesting information – including the eight core principles of the new Andreessen-Horowitz firm, the role he and Ben plan on taking with the firm and their investments, as well as what they are specifically looking for in entrepreneurs and potential investments. Additionally, there were five additional comments Marc made in an interview with TechCrunch’s Sarah Lacy that provide some deep insight into his opinions about Twitter, Digg, Sarbanes-Oxley, and how many VC’s will go out of business in the next 5 to 10 years.