Forbes’ Bratt Nelson has a very interesting take on Brash Entertainment’s $400M financing round from ABRY Partners LLC, and including New York Life Capital Partners III, LP, Northwestern Mutual Life Insurance, PPM America Private Equity Fund II, LLP.
Background:
The folks at Brash Entertainment are anything but typical. In late May, the 4-month-old brainchild of Mitch Davis and Nicholas Longano–co-founders of gaming company Massive, which was later bought by Microsoft –scared up a whopping $400 million from a group of private equity firms led by ABRY Partners, which invests in media and communications companies.
Reinventing the Wheel, according to IGN:
Brash Entertainment today announced its launch as a new video game company focused solely on the creation of high-quality games based on tent-pole movie releases, television, and music properties.
(…)
Brash will transform the way great film creativity is brought to life in games. Brash’s innovative business model relies on matching each licensed project with the skills of the best independent development studios, top writers and creative talent. This collaboration is guided by an internal team of experienced producers, under the leadership of video game industry veterans. Brash currently has more than 40 licenses through partnerships with five major film studios, and twelve games in production.
“Brash is founded on the simple premise that top Hollywood creativity plus top game talent should equal great games,” said Brash Co-Founder, Chairman, and CEO Mitch Davis. “We are laser focused on delivering high-quality games. The other aspects of our business are left to the experts— best of breed partners we’ve tapped for their specific expertise.”
Jaw-Dropping Factor, from Forbes:
That’s an extraordinary sum for investors who tend to shop for proven companies with the hopes of making them better and unloading at a handsome profit down the road. As one ABRY partner put it: “This was definitely earlier-stage [for us]. We don’t take business-model risk.”
Dilemma:
The Brash transaction highlights a critical challenge for all entrepreneurs. The specifics of the deal are under lock and key, but Brash management undoubtedly gave up a healthy heap of equity for access to that largesse. Result: a smaller payday if and when Brash sells out to a strategic investor or floats shares in an initial public offering.
Result:
Why trade upside for a cash cushion? Raising money is difficult and distracting, and most small businesses fail because they run out of cash. Raising additional funds in smaller chunks at higher “implied” valuations might let you keep more equity along the way; then again, if you cut it too close, you could end up begging for money at far less favorable terms.
Rationale:
Brash chose to cut out financing risk and focus instead on execution. Its niche: videogames based on other media properties such as movies, television shows and music.
(…)
Brash aims to compete by poaching creative talent from bigger outfits; farming out the coding of the games to smaller, entrepreneurial software shops; and by letting Time Warner’s Warner Bros. handle the tangled logistics of distribution.
Brash will coordinate with the studios to secure licenses to the content and ensure that the story lines translate into games that people will play. “They are thinking story; we are thinking game play,” says Brash’s Longano.
Big is Beautiful?
Once you clear those hurdles, you can start to think about how much money you need–and how much you’re willing to give up to get it. As for ABRY and company, it was go big or go home. “We weren’t going to raise something that wasn’t fully funded,” says the ABRY partner. “It reduces the risk of execution. We would have not invested had they only wanted $100 million.”
Forbes’ Conclusion:
Bottom line: Money in hand today is better than a dream dashed tomorrow. So when it comes to raising early-stage financing, get brash.
Why this is Crazy Talk:
I appreciate Nelson and Forbes trying to rationalize this, but this is crazy talk. For one, since when are private equity financiers the patient kind? $400M is a lot of money, even for a firm that has billions to invest.
One reason why Rupert Murdoch’s $60 per share offer for Dow Jones was so high was that it was intended to scare away both media companies (who could not generate enough efficiencies after paying such a premium) and private equity firms (who are, well, impatient and want a quick payoff).
Investor Expectations:
The simple problem is that $400M in financing ends up doing just the opposite. Didn’t we just last week learn a valuable lesson in Amp’d burning through $360M? I know, Amp’d is restructuring. Sure, so it can burn through more money. That’s madness.
When it comes to financing, and growth in general, you want time to be on your side. And when you raise $400M in financing, you are behind the eight ball quite a bit.
That’s a general advice you can bank on. But in this case it’s even more nutty because, to quote the venerable Forbes once again:
Collectively, movie-based games have not been as popular as Electronic Arts’ sports-based titles or role-playing titans like World of Warcraft, made by Blizzard Entertainment, a unit of Vivendi. One reason: Movie-based game publishers tend to cut corners in development, counting instead on a movie’s popularity to drive demand.
All right, so let me get this straight, the system is broken, the consumers are all wrong, and Brash is going to change the consumers’ behavior. Nice, we’ve seen this before.
Comparables:
Just some food for thought in the game space, let’s look at the major players and their respective market caps:
- Electronic Arts = $15B with 2006 revenues of $3B and Net Income of $76M.
- THQI = $2.26B with 2006 revenues of $1B and Net Income of $68M.
- Take Two Interactive = $1.39B with 2006 revenues of $1B and Net Loss of $185M.
- ATVI = $5.5B with revenues of $1.5B and EBITDA of $85M
- MyWay = $500M with 2006 revenues of $165M and Net Loss of $77M.
On small financing rounds, some VCs like to get say 10 times their investment.
I know, ABRY is a private investor, the major nuance is that they’ll make less, but larger bets. So let’s say that ABRY would be ecstatic with a 3 times return; which is roughly what Hellman & Friedman got after plunking $1.1B for Doubleclick, shedding some assets and then selling a leaner and meaner DCLK to Google for $3.1B.
So if Brash raised $400M and the investors got 51% of the company, that means a valuation of about $800M. Assume that’s pre-money, I’m no investment guru, but in my talks with private bankers, I’ve seen that they usually want control so 51% is - in my humble opinion - low but a conservative estimate for this analysis.
Bear in mind Microsoft bought the founders’ former company Massive for $200-400M so a valuation of a pie-in-the-sky business at $800M is pretty massive. In fact, it could be a post-money valuation of $800M, whereby the company was valued at say $399M, the investors put in $400M and got 51% - but I’m really guessing here.
So if the valuation was in the $800M range, then 3 times that implies a value of $2.4B. Billion. That’s more than 3 of the 5 gaming sites we listed.
My Experience:
Conventional wisdom notwithstanding, my experience says this is not the way to build a company. You want freedom to make decisions, you don’t want investors getting angsty, and with $400M at risk, they will. My last company had 1/34th of the funding of our larger competitor, and we crushed them partially because they were probably more worried with investors than customers (be it individual users/visitors or corporate aadvertisers)…
My Take:
Point is, judging by those publicly traded companies, Brash would have to grow, and grow quickly, otherwise, ABRY will get brash and become a massive pain where you least wish to get a rash.
Related:
- If I had a Billion Dollars: The Private Equity Funded Billion Dollar Conglomerate I’d Build.
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