KD has decided that he should do a fairness of valuation opinion because in all honesty, it should be done. Sequoia is the largest shareholder of Google as well as YouTube so there are obviously some conflict of interests here. I have mixed feelings about the Youtube acquisition because I have not been able to determine whether the valuation was fair. I think that Youtube has built a great website and product for its customers, but they only began to scratch the surface of their business model. Let's dig in and see if there is more "meat on the chicken".
Many people claim that Youtube did not make any money but I fail to believe that. Here are the reasons:
First, they did have some unique video advertisements and also adwords. And if you know anything about online ads now, you know that one can build a business simply by Google Adsense. If you have 34M uniques, by GOD, someone is clicking through those adds! In addition to those, just before the acquisition, Youtube did strike several deals with large media houses.
Secondly, Youtube raised $8M on the first of April. LEt's do a quick cash flow extrapolation. They had 67 employees so they are burning $500k in opex and another $1M in bandwidth per month. But this obviously ramps up so let's say they burn $2-3M per month. Youtube funded the 8 months of the operation with $8M so the net burn was clearly less than $1M per month. Therefore, they were probably doing a few million per month in revenues before the acquisition and probably break even or higher the month before the acquisition ($3-4M) so they would not have to raise another round of financing. I don't think Google would buy a company about to go bankrupt, do you?
With that, there was an inherent projectable value in the business. Then, I'm sure Mr. Mckinsey, CFO Paypal, Roelof built some large financial model justifying the long term value of each unique monthly visitor to a potential acquirer. In fact, several weeks before the acquisition he said the company was worth $1.5bn.
Why wouldn't a savvy CEO have strung them out? Did buying them now prevent them from being a $2,3,10bn acquisition 2 years from now? What if Google waited for them to raise another round of financing and to build a more substantial business model? Let's investigate the valuation.
1) So let's assume that 1 year later they built a company with $10M per month from the content deals and adwords in gross revenues (because Chad said that he could in a newspaper article) and they have to share 50% with the content holders and others so they actually make $5M per month. As previously stated, they had 67 employees so they are burning $500k in opex and another $1M in bandwidth per month. But this obviously ramps up so let's say they burn $2-3M per month which yields a NPAT of about 1.2M per month or about 15M per year. Google trades at 60P/E so they pay the same multiple for YouTube, assuming a PE/G of 1:1 and the projected valuation is $900M. If you tube grows its earnings faster than that, say 2x, then a P/E of double that is justified and so is a $1.8bn valuation. An IPO in 2-3 years could have well exceeded that number.
2) According to Techcrunch, Viacom acquired iFilm and AtomShockwave (3.3M and 1.3M uniques per month) for $50M and $200M respectively suggesting per user value of $15 to 150 per unique). Sony acquired Grouper for 65M which was about 100 per unique. The Japanese have a tendancy to overpay for US entitities so we have to discount this. Youtube had 34M uniques per month suggesting a fair value of $3.4bn. Google only paid $48 per eyeball.
3) Google paid Myspace $900M to embed its search bar which is a deal they are definately not losing money on. Google is not going to hurt its gross margins of 60% so they probably are making about $1.5bn in revenues on that deal (60% of 1.5bn is 900M). Assuming Google would pay YouTube the same for such a deal and then have access to a whole new medium of media why not just pay $1.5bn for complete ownership of the website and they breakeven on an embedded search deal. It makes sense to me.
4) Lastly, Youtube does not represent a new medium for watching TV. I don't think people will watch TV shows on Youtube. People merely are entertaining themselves by watching their videos and their friends videos. I don't think any of this crazy legal issues are issues at all. Not many people are going to watch CBS, NBC, ESPN shows and so forth. All people want to see is someone fall of their bike or throw a pie in someone's face. This is the new medium and one that no large media company can capture and no one every will again.
KD's final assessment on the YouTube deal is I think Youtube got the short end of the stick. They should have held out for $2bn. I also think it was savvy for Youtube to sell now, not because of the legal risk which I discount, but because they had peaked the success of the website without having a partner like Google.
KD
Monday, November 27, 2006
Public Market: PeopleSupport
KD continues to think that cross border investment opportunities are ripe and available for investment. Just now has globalization really created mass scale businesses and there will be more to come. Earlier this year KD speculated that PSPT, peoplesupport, was highly undervaled, trading at 9x P/E. The call center business has aggressively shifted from US to low cost labor in India and Philippinnes. And most recently, the Phils has won over business from India. With this simple insight, KD made a bet on PSPT at $8.90. Today the stock trades at $21 and he will take that gamble to the bank.
Deal #1: Integrian
Integrian #1 in Southeast:
From Pete Durand CEO, "Last night, Integrian was honored to receive the award for the Fastest Growing Company in the region, as determined by Price Waterhouse Coopers and the Triangle Business Journal. The event was the “Fast 50” awards Gala at the Embassy Suites in Cary, NC. There were 650 people in attendance in an “Oscars” type atmosphere. The 50 companies were ranked 1-50 and they did a countdown format by announcing #50 all the way through #1. The best part is that nobody knew who the winner would be. The tension mounted as fantastic company after fantastic company was honored, yet the question remained – “Who is #1?”. Finally, they announced Integrian as the fastest growing company, and played a very professional video about the business. I was honored to accept the award on behalf of all of our employees worldwide.
The real honor is how the award was determined. Rather than a popularity contest, this reward is based on actual financial data, reviewed by PWC and crunched in an objective formula. So, based on % revenue growth, $ revenue growth, and profit growth over the past three years, Integrian was the fastest growing company of the 50 finalists – and there were hundreds of companies reviewed."
From Pete Durand CEO, "Last night, Integrian was honored to receive the award for the Fastest Growing Company in the region, as determined by Price Waterhouse Coopers and the Triangle Business Journal. The event was the “Fast 50” awards Gala at the Embassy Suites in Cary, NC. There were 650 people in attendance in an “Oscars” type atmosphere. The 50 companies were ranked 1-50 and they did a countdown format by announcing #50 all the way through #1. The best part is that nobody knew who the winner would be. The tension mounted as fantastic company after fantastic company was honored, yet the question remained – “Who is #1?”. Finally, they announced Integrian as the fastest growing company, and played a very professional video about the business. I was honored to accept the award on behalf of all of our employees worldwide.
The real honor is how the award was determined. Rather than a popularity contest, this reward is based on actual financial data, reviewed by PWC and crunched in an objective formula. So, based on % revenue growth, $ revenue growth, and profit growth over the past three years, Integrian was the fastest growing company of the 50 finalists – and there were hundreds of companies reviewed."
Long on Hot-Lanta
After spending a few days in Atlanta, i have decided that Atlanta is the last untapped niche in the US for the venture industry. Stanford and MIT have created a vast amount of great venture returns for those willing to take risks. Additionally, RTP has served a few small investors well. But I think the opportunity in Atlanta can be the third largest VC market in the future. Here is why:
Silicon Valley and Boston are each driven by one technology institute, Stanford and MIT. Georgia Tech is one of the best engineering schools in the nation. They create more patents per R&D $ spent than either Stanford or MIT. They also graduate more total engineers than either school and specifically more RF engineers than either school.
Lastly and most importantly, Georgia Tech students have the profile of great entrepreneurs that have come out of both schools. Many students are from overseas including India, China, and Eastern Europe. These people are more inclined to start companies and take risks. Many of these people also have very advanced engineering degrees which are needed for high tech startups.
What GT doesn't have is a real venture capital community. They have a few small seed stage and angel groups but they don't possess enough capital to drive a company from concept to exit. A true Sequioa or KPCB model in Atlanta would be effective. Many of the venture companies have received capital from Boston and Silicon Valley based VC's. Local VC's have not been active in a lot of opportunities. Take for example the following recent deals:
IISS: KPCB (Recent $2bn acquisition by IBM)
Stealbox: Sierra Ventures
Air2Web: Carlyle Group
N2Broadband: Highland Capital
JBoss: Matrix and Accel ($400M acquisition)
These deals show that the market is ready for a true VC fund ($400M) that can invest $10-20M in the lifecycle of companies and there is no better talent than Georgia Tech to do so.
KD is bullish on Atlanta and the opportunities within. Long on Hotlanta.
Silicon Valley and Boston are each driven by one technology institute, Stanford and MIT. Georgia Tech is one of the best engineering schools in the nation. They create more patents per R&D $ spent than either Stanford or MIT. They also graduate more total engineers than either school and specifically more RF engineers than either school.
Lastly and most importantly, Georgia Tech students have the profile of great entrepreneurs that have come out of both schools. Many students are from overseas including India, China, and Eastern Europe. These people are more inclined to start companies and take risks. Many of these people also have very advanced engineering degrees which are needed for high tech startups.
What GT doesn't have is a real venture capital community. They have a few small seed stage and angel groups but they don't possess enough capital to drive a company from concept to exit. A true Sequioa or KPCB model in Atlanta would be effective. Many of the venture companies have received capital from Boston and Silicon Valley based VC's. Local VC's have not been active in a lot of opportunities. Take for example the following recent deals:
IISS: KPCB (Recent $2bn acquisition by IBM)
Stealbox: Sierra Ventures
Air2Web: Carlyle Group
N2Broadband: Highland Capital
JBoss: Matrix and Accel ($400M acquisition)
These deals show that the market is ready for a true VC fund ($400M) that can invest $10-20M in the lifecycle of companies and there is no better talent than Georgia Tech to do so.
KD is bullish on Atlanta and the opportunities within. Long on Hotlanta.
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