Shaping Up Your Business
By: Eric Reyes
Venture capitalist firm Bay Partners
recently created a fund specifically to finance startups
that are building applications for Facebook.
Facebook, of course, is the social networking site
college students used to call their own. Since the
site opened up to the general public, its profile has definitely
been on the rise. Bay Partners' Facebook program – called
AppFactory – will be aimed at giving entrepreneurs microbursts
of funds as they need it, from $25,000 to $250,000 in
as little as a few days' turnaround.
That venture capitalists would sustain a
program for such a niche field as social network
applications on a single website speaks
volumes about how strong the tech sector is
these days.
In fact, most nonmanufacturing businesses
are riding pretty high. Venture capitalists
are bolstering this image with their
wallets, putting $25.5 billion into companies
in 2006, according to PricewaterhouseCoopers,
Thomson Financial and the National
Venture Capital Association. That's up 35
percent from the previous year. While that
is less than the $52-plus billion VCs put into
firms at the height of the dot-com boom in
2000, it is still 85 percent higher than the
lowest of low points for investment five
years ago.
In the online advertising and performance
marketing industries, there is similar
reason to celebrate. Venture capitalists
and equity firms are in a buying mood, too,
as they realize that many start-ups are making
their funds last longer, having learned
their lesson from the outrageous burn rates
of the go-go late-1990s – companies such
as Pets.com went through $110 million in
about two years.
While start-ups are getting less from VCs
(about $8 million, on average; down from
$11 million in 2000), their ideas are better,
fulfill better-defined business goals and,
more importantly, stay lean enough to make
them very attractive to larger companies
looking to buy adjunct technologies and
services. ValueClick, for example, owners of
Commission Junction, Search123 and others,
has acquired several companies this year
and "are clearly not done yet," according to
company officials.
This wild west of mergers and acquisitions
in the online advertising and performance
marketing space means great opportunities
for smaller and midsize companies with
three to five years since launch and profits
or a road map to profits. Of course, it isn't
that simple. Start-ups can't just have a cool technology and a
funny mascot anymore. Being acquired or becoming a target
for acquisition is a lot more difficult than calling up a big ad
network and asking if they are interested.
It's About People
More often than not, VC firms are the ones spearheading
these complicated dances and advising smaller companies
with an innovative technology or compelling business plan
on what to do to make themselves attractive to buyers. Consultants
say that one of the most important signs of a strong
company, ripe for acquisition, is a talented team. Sara Holoubek,
who consults with companies looking to be acquired,
says, "Strategically you need the right vision, but tactically
you need – especially if you are the sole owner – to know
what you need when you sell. Do you want to sit on a beach
or do you want to stay and grow the company?"
She says larger companies looking to acquire prefer when
a founding executive team wants to stay and grow the firm.
A start-up might have a good idea, she says, but the founders
might be very young and not really know when to hire people
smarter than they are. Early on in the life of a company, a few
people do nearly everything and often they have a hard time
giving up those roles. But, she says, those workers are more
likely to stay on and be passionate about the business.
Mike Kwatinetz, a founding partner at Azure Capital Partners,
which invests in early-stage companies, says the hardest
decision to make is to determine whether a CEO and founder
can "take it all the way." In a transition from founder CEO to
IPO, the easiest road to success is to have the
founder stay. But it's an unknown quantity,
he says.
Sam Paisley, chief administrative officer at
ValueClick, who has spearheaded about 13
of the company's recent acquisitions, says,
"Our criteria are that it must be complementary
to the online performance marketing
world. Our aim is to be a full-service company."
Beyond that, ValueClick is definitely
interested in the people at the businesses it
buys. "Sometimes you think that when you
acquire an entrepreneurial company you expect
them to stay nine months," Paisley says.
"And some stay three years or more and some
others are still here." He says it is the people
who know how to make the assets work.
Profits Get Noticed
Profitability is also very important and crucial
for a deal – with ValueClick anyway. "We
love companies that are growing even faster
than us," Paisley says.
Profitability helps a company receive a
strong valuation, ultimately making for a
better purchase price for the seller. "We
love unfinished businesses that can finish
it with us. We put heavy emphasis on postclose
and integration. We have a reputation
of being fair with the deals. We pay a fair
price that treats them fair and our shareholders
fairly."
ValueClick has vetted more than 700 companies
to close on 14 deals. Holoubek, who
was iCrossing's chief strategy officer, says
while her advice is solely strategic and not
financial, profitability is way up there on her
list, too.
Profitability and a great outlook to profits
driven by rapid growth could mean a greater
valuation and indeed a higher purchase
price. Paisley says that they "insist that a
potential target have a same profitability
growth as us," if not more. He admits that a
target company with a better valuation will
ask for a higher purchase price and that they
may be willing to pay more, especially if you
fill a need the company may have strategically
or technologically. He says ValueClick
recently paid $95.5 million in cash for Mezi-
Media because of its presence in China.
Azure's Kwatinetz says he advises companies
that want to be sold that they should
never say they are for sale. Continued on Page 2...
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