2007 has definitely turned out to be an interesting year, what does 2008 have in store? Let’s see:
January
- UGC will waver in interest and hype. Users realize there’s actually very little in it for them to upload low-quality videos of their most recent [insert crap here] on [insert YouTube clone site here]. Invariably, the file sharing platforms will leverage their traffic to dump the UGC in favor of higher quality content.
February
- Privacy becomes the big thing: everything from protecting user data on social networks to creating aliases online becomes the latest fad.
March
- Web video advertising confuses the pundits: 30-second pre-rolls go the way of pop-ups, instead, banner display ads alongside video players rise sharply in value… and the 5 second pre-roll becomes the pop-under, the evolution of the pop-up. More and more, a 2 second animated banner introduces the clip as the clip buffers, users embrace it and video ads shift ever faster online. The ad overlay becomes more and more prevalent, and accepted.
April
- On April 1, Google throws in the towel on its efforts to acquire Doubleclick. Bloggers initially think that it’s an April Fool’s Joke, until an announcement is made that it has instead bought a video ad network. Initially, the market thinks it’s Broadband Enterprises or Tremor Networks, but turns out the seller was Video Egg. In the process, Video Egg drops its pending lawsuit against Google.
May
- With Hi5, Bebo and many others using Video Egg, and Google owning YouTube, Google becomes far and away the most dominating force in search and video advertising. As a result, video ad networks will go through a period of self-discovery as Google/YouTube/VideoEgg sucks out more and more audience and revenue.
June
- Brightcove changes its business model 12 more times, finally gets acquired by Hulu, News Corp. and NBC’s joint venture, files lawsuit against Google claiming Video Egg violated its patent on the overlay ad.
July
- TV networks begin to feel the heat of shift of dollars online. As a result, GE’s NBC and News Corp. tag team and make Yahoo! a leveraged, all-cash offer for $40 Billion, giving each media company 50% of the world’s largest portal.
Microsoft counters with a $50B cash and stock deal. Ultimately, private bankers prevail with a $60B deal. HipMojo.com is asked to handle the M&A transaction.
The next day, Yahoo! sells its search business to MSFT for $25B and 50% of future revenues. MSFT’s market share in search shoots up to from 8% to roughly 30%, according to Hitwise. Google remains king with 72%, up from 65% in August 2007.
The sale of Yahoo!’s search business to MSFT puts $25B back into the private equity bankers’ pockets, Rupert Murdoch fumes over the financial engineering and calls for an investigation into the matter.
The sale also saves Yahoo! over $2B in R&D spending. Subsequently, Yahoo! proceeds to fire 5,000 employees, reducing headcount from 12,000 to 7,000 staffers, saving some $500M per year.
Yahoo!’s 2008 revenues hit $8B, up from $6.4B in 2006.
The cost savings reduce expenses substantially, Yahoo! nets $3B in profits for 2008. Relying on its old P/E of 50 (when it was a publicly traded company), Yahoo! is rumored to be worth $150B, within striking distance of Google, who by 2008 is worth $200B.
The private equity bankers begin to mull an IPO for 2009, once again, they hire HipMojo.com to explore strategic options.
August - Google breaks 75% market share in search by August, 2008. Yahoo!, now technically with 0% market share, is approached by Google to explore a merger of equals, with Google getting 55% of the combined firm and Yahoo! 45%.
September
- MSFT immediately raises anti-trust objections, pointing out that “GooHoo” would in fact command 85-90% market share in search. Behind the scenes, MSFT - still worth $275B - offers YHOO shareholders a 1 MSFT share for every 2 shares of YHOO. Private equity banks accept. Their deal for YHOO ends up making them $102.5B in 1 year:
Acquisition Cost = -$60B
Recovered from MSFT Deal = + 25B
Net Acquisition Cost = - $35B
Revenues in 2008 = + $8B
Total Costs = - $5B
Net Income = +$3B
Capital Gain = 50% x $275B = $137.5B
Net Gain from Transaction = $102.5B
October
- Unscripted programming (news, sports and reality TV) drastically surpasses scripted programming on TV networks and cable channels. Viewers don’t blink, don’t notice and don’t care. Disney’s ABC brings back “Oldies TV” with “Stars from the grave” thanks to CGI. Frank Sinatra has his own late night show, sans smokes.
November
- Third-tier social networks and file sharing sites start to die out as VCs refuse to continue funding losses. This ushers a rapid period of consolidation.
December
- Just over a year after its Series A round, WatchMojo.com raises $100M in Series B funding, acquires 5 properties to close the year, increases its traffic to 30M unique users per month, injects them with its library of original programming, drastically scales revenues and files for an IPO on the London Stock Exchange for 2009.
Give or take a few items, that seems pretty plausible, no?
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WatchMojo NewsletterOm Malik breaks from the herd and serves up an interesting perspective on Facebook’s $300-500M fundraising effort from MSFT.
The Giga Om founder suggests that Facebook is bracing for a MySpace-esque, sexual predator-related subpoena and/or lawsuit. Lord knows that MySpace has spent plenty of resources on cleaning house with all of the reports of sexual predators using the site to target unsuspecting teens. Rupert Murdoch and company deserve a lot of credit for handling the matter with all of the seriousness it deserves, though ultimately, a social network will be a preferred weapon of predators.
Facebook - who had earlier defended its closed network as a model of superior safeguarding against such venom - might have started gloating too soon, according to Malik.
It’s an interesting, though wildly speculative take on things. I don’t think he’s wrong, because any social network runs this risk, frankly, especially one that just opened up last fall and is run by idealistic and relatively inexperienced guys who have yet to have any kids and would not think otherwise.
What I mean is once you are a parent, this is the first thing you think about when you hear social network. Example: during Tech Crunch 40, VC and blogger Guy Kawasaki was sitting on a panel and told one competing company (Kerpoof) to drop the social networking angle because he has a daugher within Kerpoof’s target market and the last thing he wants to worry about is some pervert being on the site trying to befriend her.
It’s true that Facebook’s management young age might dissuade them from expecting the worst… until now, when the stakes have gotten so big and it so large a target than lawmakers will take notice. After all, it’s not a coincidence that MySpace became a major target after its parent Intermix sold to News Corp. for $580M.
Anyway, here is Malik’s piece. See our Part 1, Facebook’s Use of Funds here.
Consider Malik’s argument a Part 2, and we’ll have a Part 3, tomorrow, on another area Facebook very well could focus on if they do raise boatloads of cash.
2007. What a long strange trip it’s been.
This year,
- Microsoft emerged as a staunch opponent to monopolies.
- Apple became a telecommunications dinosaur, frustrating consumers.
- CBS and NBC say that 30% and 80% of users watch full length TV shows to the end online.
- Cisco buys a social network, Tribe.
- Two men who inadvertently gave nightmares to record labels, Kazaa pioneers Niklas Zennstrom and Janus Frist, become defenders of copyright holders’ rights with Joost, their new P2P video platform.
- EMC pays $87M for an online storage and backup company, that does not, apparently, back up anything.
- Henry Blodget, poster child for high-paid, conflicted Wall Street analysts goes open source and shares his insightful insights with the world, for free, on AlleyInsider.
- Jerry Yang, who never (apparently) had any employee report to him all of his life, takes the reins of one of the largest new media companies with 12,000 employees and $6B in annual revenues.
I love this space.
Having worked in the past - and hopefully in the future, too - with Demand Media, I was intrigued to learn that in addition to $220M of funding to date, they closed an additional $100M round yesterday.
There was no word on the valuation, but it was obvious that the company was gunning for an exit of $1B or more in an eventual IPO. Today, in an interesting twist, Bambi Francisco - who left Marketwatch to focus on the Peter Thiel-backed Vator.com - announced that Richard Rosenblatt (Demand Media’s CEO) confirmed to her that this financing round was done at a valuation of $1B. Should be noted that Rosenblatt is an investor in Vator.com and will be presiding over its latest endeavor, too.
Well, what can we say? When the then-unnamed News Corp./NBC joint venture, now christened Hulu, raised $100M on a $1B valuation from Providence Capital Partners, it was inevitable that companies like Demand Media would fetch lofty valuations, too. Sure, they are in different markets, but both have big ambitions and bigger backers.
But, unlike Hulu that remains a concept until now, Demand Media is far from embryonic. It boasts $100M in revenues (this for a company that is 18 months old is nothing short of impressive and breath-taking!), it makes sense that it’s valued at 10x revenues, or $1B.
Of course, this all means that Demand Media’s eventual exit, be it by way of an IPO or a sale by a larger media company, will have to top $1B. Given its growth thus far, young age, acquisition track record and additional funding, there’s no real limit as to how far its value can reach.
It sounds crazy, but Rosenblatt has assembled quite a team and assets in short time, and with his Midas touch on the MySpace deal (he was brought in to serve as CEO of parent Intermix and orchestrated its sale to News Corp. for $580M), nothing is impossible.
Bambi asks: is Demand Media over-valued? Well, with Facebook brandying a $10-15B valuation off revenues of $100M, I would say no. All things are relative, after all.
I wonder what Rosenblatt et al. will do with all that money. Time will tell. But while many have been working on such roll-up companies - including more recently former AOL CEO Jon Miller and former Fox Interactive Media CEO Ross Levinsohn - it’s clear that raising boatloads of cash to amalgamate the online space is proving to be a sound strategy.
And with Rosenblatt, Miller and Levinsohn’s backgrounds, it might not be as risky a bet as some would presume at first glance.
Paid Content reported today that GameTrust sold for less than $50M, after raising $20M over 3 rounds, over the past 5 years. That does not seem like a healthy exit for the numerous VCs, which include: TWJ Capital, NJTC Venture Fund, Patriot Capital, CSK Ventures, Topspin Partners, Silicon Alley Venture Partners, Draper Associates and investor Elon Musk.
So why did this deal happen? VCs supposedly want 5x or 10x on their investments… this was probably not anything close to that, I’d guesstimate. Here’s my take:
Lesson #1 - Just Build It
This supports my belief that if you build something of value, even if VCs don’t see an incentive to invest more money at a higher round (which I presume was the case here), you always have the option to sell… instead of doing a down round, which no one wants to do.
Lesson # 2 - Demand and Supply
A second thing to note, is the demand and supply dynamics in Gametrust’s space, I can name 10 companies off the top of my head who do exactly the same thing. I can’t for my life imagine any leverage in discussions. I can envision Real Networks acknowledging that the investors did not want to lose money and they made them a low-ball offer: $50M on $20M invested ultimately boils down to 2.5x return.
How Much did VCs get?
I know it’s not only a 2.5x return, especially for the first round investors, because investors in the Series A round could have done an investment at a lower valuation, such as $5M, and that would be 10x return.
But the company’s Series B in 2005 was for $9M. Series B, $9M, “oversubscribed”? Add those variables up and Series B was at a steep value… meaning those who came in the second round did not get more than 3x, I’d bet.
The round was led by TWJ Capital and NJTC Venture Fund, and was joined by Patriot Capital. First round investors, including CSK Ventures, Topspin Partners, Silicon Alley Venture Partners, Draper Associates and investor Elon Musk, also participated in the round.
All of those investors seem to be middle market or late stage investors who demand to see sizable revenues. If that is the case, they came in late, at higher valuations indeed.
When you add everything up, I suppose the first rounders CSK Ventures, Topspin Partners, Silicon Alley Venture Partners, Draper Associates and investor Elon Musk got in at a valuation close to $10M - meaning they got 5x - while Series B did 2-3x and Series C probably got just enough not to lose money.
Any way you dice it, the company took in $20M and exited at $50M, that’s not very impressive. In my old company, we exited at $13.5M off $500K in capital. Different market, but still.
Give me $20M and I’ll turn water to wine, then build you a $1B business.
I highly doubt anyone at MSFT is grilling Mark Zuckerberg over what he’d do with the rumored $300-500M he might be raising, but let’s consider some of the options:
#1- Working Capital:
Facebook’s got 300 employees, expect them to add to headcount, labor always eats up a large chunk of total expenses, especially in SF. If the company doled out options more generously, maybe the salaries would be lower, but in today’s climate, don’t count on it. In fact, Google really benefited from the dot com crash to hire engineers for cheap, Facebook? Not so lucky.
#2- IT infrastructure:
We consistently hear that Facebook was built on a more robust platform to scale than MySpace was, really? Good for them. Translation, their massive growth costs a lot of money, servers, and all of those series of tubes. Expect a good chunk to go to infrastructure.
#3- Acquisitions:
a) Search
I could see Facebook buying a search company or two. Let’s face it, your future as a social network is pretty limited if the only society you are in contact with is Facebook’s, and not the world wide web. Everytime someone is on Facebook and they want actual news or information, they leave Facebook, and that means, they have a 65% chance of heading over to Google, who commands just that market share in search. And, as I wrote this weekend, Google is Facebook’s biggest competitor, not Myspace. For more on that, click here.
b) Facebook Apps
Right now, people are free to develop Facebook Apps so long as they adhere to the Rules of Engagement. This means that unpaid teams can take risks, and Facebook can shut them out, duplicate their innovation etc., Probably, it won’t be that evil, it will simply acquire these teams, especially since fbFund was launched to “excubate” such ventures.
c) Ad Networks
It sound far fetched, but AOL’s best deal was in buying Advertising.com for $430M in 2004. By doing so, the previously closed AOL.com now had a foothold online, generating money outside of AOL.com’s walled garden. To this day, Advertising.com accounts for the bulk of AOL.com’s revenue. I suppose Facebook could aggregate all of tha user data and create a pretty powerful behavioral ad network and make quite a bit of money.
I don’t think, with all due respect to Facebook, that they are as strong in business planning as they are in technology. I don’t, in other words, think that they know what to do with the money. But this last idea, far-fetched as it might be, will prove a lucrative one that could create some really interesting revenue streams.
Of course, it will boil down to execution. I’d list the Top 5 Ad Networks they should buy… but that would be helping them out too much.
d) Virtual Worlds
I hate to say this, but this is a sort of natural extension of something they could add… they should technically build this themselves, but don’t kid yourself, their hands are tied as it is just trying to keep the darn thing from falling apart.
What else could they buy?
e) Data Centers
MSFT, Google et al. are all investing in data centers, Facebook will too, and a good chunk of the $300-500M will be just for that.
Of course, you must be thinking, why not sell or IPO? Well, the number of companies that could afford to buy Facebook are limited, and an IPO would currently flop, as their revenues are just not there.
Michael Arrington has a fantastic story on Parakey and how its investors - including powerhouse VC Sequoia - got fleeced in the sale to Facebook.
To summarize:
When Facebook acquired Parakey in July, everyone assumed the stockholders of that fledgling startup would be popping the champagne bottles. No matter what the acquisition price (it wasn’t disclosed), if the sellers got Facebook stock in return for their Parakey shares, it would likely be worth a fortune down the road.
It turns out that wasn’t the case. The acquisition price, say two sources close to the deal, was paid in cash and was “less than $4 million,” providing investors with just a 2x return on their investment. Meanwhile, Parakey founders Blake Ross and Joe Hewitt were rewarded handsome stock options to join Facebook as employees in lieu of any cash compensation.
This story reads like a Harlequin novel. Let’s count the ways:
#1 - Facebook: The Startup That Keeps Slipping Out of Sequoia’s Hands?
The main (only?) reason Sequoia was out of any of Facebook’s funding rounds in the first place is because Sequoia squeezed out Sean Parker from Plaxo (a Sequoia funded company). Parker has the distinction of having his DNA on Napster, Plaxo and Facebook. After being jipped at Plaxo and joining Zuckerberg at Facebook early on, he apparently put the kybosh on any Sequoia involvement. That’s what I’ve read, could be less than true, since perhaps Facebook’s wild valuations had something to do with it.
#2 - Paypal Connection?
What’s more interesting about this, is the Paypal connection. Peter Thiel, Facebook’s first angel investor, was Paypal’s CEO. Roelof Botha, the wunderkind Sequoia VC who invested in YouTube and made the firm north of $500M on a $11.5M investment, was Paypal’s CFO. Is there a story there? Who knows… But you’d think that these two gents would probably connect and get Facebook some Sequoia love, no? Again, who knows.
#3 - Sequoia Screwed by Side Deal?
Sequoia is known to eat their young. It’s a great VC that adds a lot of cachet to any startup, but that means that they get to set the terms. In this case, I am surprised they did not have more rigid liquidation preferences. But if you connect the dots, maybe in Parakey’s negotiations, the founders were explicitly told that they wanted to avoid any Facebook stock to fall in Sequoia’s hands. That’s a brazen suggestion, but a possible one.
#4 - Lesson: Don’t Only Back Known Entrepreneurs
VCs readily admit that they like to back repeat entrepreneurs and folks they know: Blake Ross has a track record unlike any other, so he was probably able to get the terms he wanted.
The lesson - in an ideal world - would be for Sequoia to realize that only backing people who can get money from anyone is not optimal in the end, it does not reduce the risk profile of an endeavor and in fact runs counter to the interests of their LPs… that’s right, invest beyond Silicon Valley’s chummy circle, and maybe you won’t find yourself on the outside.
Alexander Muse has an interesting take on the deal.
eMarketer’s CEO Geoff Ramsey threw out some interesting figures. I always take these projections with a grain of salt, but for discussion purposes, they’re interesting nonetheless:
AS THE ONLY GROWTH MARKET in the world of media and marketing, online ad spending will expand 28.6% this year, according to eMarketer CEO Geoff Ramsey. Next year, digital ad spending will increase 32%–amounting to nearly $28.8 billion, Ramsey said in his opening remarks at OMMA New York on Monday morning. The future? Branded and video advertising, said Ramsey, assuring that branding dollars are fast on their way to matching the budgets spent on search.
“With video, you can do a heck of a lot better job of storytelling,” he said.
Now big business, Web videos are watched by 72% of Web users–or 135 million people–every month. Ad spending around them is set to hit $775 million this year, and $1.3 billion by next year (in 2008).
A few comments:
eMarketer has dubbed video ads to grow to $4.3B by 2011, so that means Ramsey’s analysts suggest a whopping spike from $1.3B to $4.3B in 2009 and 2010. We shall see.
An estimate of the online video ad market for 2009 - set in 2004: $657 million | Source.
An estimate of the online video ad market for 2009 - set in 2005: $1.5 billion | Source.
An estimate of the online video ad market for 2010 - set in 2006: $2.3 billion | Source.
An estimate of the online video ad market for 2010 - set in late 2006: $3 billion | Source.
An estimate of the online video ad market for 2011 - set in 2007: $10 billion | Source.
Second, search has always been estimated to be larger than display/banner and video ads, if Ramsey is suggesting that display/banner and video ads will match search, that is the first I ever hear that. Search is projected to have, and hold 40% market share in online ad revenues, though clearly, the growth will come from non-search areas.
One thing I find interesting is the assumption that Google will suck out the bulk of video revenues by default, having acquired YouTube:
With YouTube in tow, Google is poised to lead the burgeoning video market, and grab the bulk of ad dollars flowing into the medium, according to Ramsey.
While that sure makes sense, I am still waiting to see Google/YouTube execute this. Time will tell.
WPP joined a growing rank of players opposed to DCLK/GOOG’s merger plans. Maybe what they have to say makes sense, but it should be noted, WPP invested in Video Egg. Video Egg claims to have invented - by way of a patent - the video ad overlay Google’s YouTube unit will now be launching with content producers (like WatchMojo.com).
Is that a coincidence. Actually… probably, but one worth noting nonetheless.
Update: Forgot to add, I think Video Egg is jockeying to be bought out by Google. More on this here.
Yes, this is a stretch, but you have to wonder:
By launching a tracking index of media companies, called the ContentNext Media Index, is Paid Content getting one step closer to becoming the Dow Jones of the 21st century?
After all, the Dow Jones & Company, initially a newsletter publisher (like PaidContent) expanded, launched a tracking index:
The Dow Jones Industrial Average (NYSE: DJI, also called the DJIA, Dow 30, or informally the Dow Jones or The Dow) is one of several stock market indices created by nineteenth century Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow. Dow compiled the index as a way to gauge the performance of the industrial component of America’s stock markets. It is the oldest continuing U.S. market index, aside from the Dow Jones Transportation Average, which Dow also created.
Who knows, maybe ’tis not CBS, but News Corp. that will be buying Paid Content after all… after all, if the Web is not the biggest accelerator of content, commerce and communications, I don’t know what is.
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