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 non-manufacturing 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 mid-size 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. “We will try to form strategic partnerships with companies that may be buyers down the road,” he says. “You get yourselves known to buyers without putting yourself on the block.”
Holoubek confirms, “Nobody really wants to know that you are looking to sell.” Kwatinetz says that there is a lot of danger for an entrepreneur who can make a mistake by trying to appease someone who could be a buyer later. “It’s hard enough building a company without going down a rat hole.”
Todd Dunlop, president of British Columbia-based online marketing company Neverblue, brought in KPMG to help advise them when they thought they were ready for acquisition.
“We wanted to see what would be the best market condition,” he says. “When would be the best time to be acquired? We leaned on them a little bit.” Direct marketing services company Vertrue bought Neverblue in February. During the six to eight months it took to close the deal, Dunlop says the hard part was staying focused on “keeping the company going forward while doing this process.”
Get Your House in Order
Going forward means keeping your financials in order. Devon M. Cohen, COO of Customer Acquisition Network and who was CEO of FordDirect, says having a strong financial and management reporting system will make a deal more seamless. “Lots of companies are built on QuickBooks [accounting software],” he says. “And that’s OK, but realize that if you are acquired, you need good financial statements and that they will be reviewed.”
Bruce Kreindel, CFO of Customer Acquisition Network, adds that “young entrepreneurs know their business but don’t know how to measure their own operations.” He says a beautiful core diamond could be muddied by bad bookkeeping.
Conversely, says Holoubek, a company can look great on paper but the principals stumble over explaining the business. This is especially true in marketing companies where services and products can be somewhat intangible. “Marketers are the worst marketers,” she says. They sometimes have “a hard time explaining what their company does.” You want everyone to talk about you but in a positive way, she says.
“Everything is a story,” says Cohen. “What are you selling and what are you buying? What are the strengths and weaknesses of your business? How can we strengthen them together?” Holoubek says to “get your story down tight and understand the process before talking about it. Bankers can’t be fooled.”
Speaking of bankers, a common mistake entrepreneurs make is inflating revenue when they sit down with investors, banks and suitors. Holoubek says that may work well at industry conferences when no one is checking your numbers, but doesn’t when the books are open. She says that a banker may get a call from a company who says it is probably worth $2 million to $5 million, but that banker’s going to say to come back when they are worth $10 million. “If a CEO can’t admit that he doesn’t make $100 million, I walk away,” she says. Kreindel says that, “We may still buy them if they aren’t ready, but the valuation will be different.”
Make Sure It’s a Match
Just as the talent is really with the people behind a company, Cohen says that corporate culture is more important than first thought. “Blending corporate cultures can really be bad for the merger,” he says. His first business sold to Mercedes- Benz but when it came time to integrate the teams, they could not blend them together. ValueClick’s Paisley says, “If you don’t ever have that chemistry, you will never close.” Entrepreneurs who are one of only three people in a company may have a more difficult time not being in charge, not being the one to run the FedEx packages down the street, not being able to pick up the lunch check without approval. Neverblue’s Dunlop says that the similar corporate cultures helped close the deal between them and Vertrue. “We were both very entrepreneurial companies.”
Part of that start-up culture may include a determination to grow the company without any outside help – VC or otherwise. One downside of VC money is the potential control they take of your idea. Just ask Jim Kukral, online marketing consultant who runs AskTheBlogger.com. He hates the idea of start-ups taking VC investment. A recent blog included: “Taking money from anyone besides yourself is risky and complicates the issue. Yes, yes, yes. Perhaps you must take money to grow to a certain level, etc. In my experience, owning what you build is 1 billion times more important in the long run than the money you raised and the control you had to give up to get it.”
Along those lines, experts suggest that just because a VC firm is willing to invest in a company doesn’t mean they are doing so wisely. A company should also do just as much due diligence on the funding firm as they do on you. Equity investment firm Golden Center for Private Equity and Entrepreneurial Finance at the University of Illinois Urbana-Champaign says companies should ask for references from a potential investor, meet up with other CEOs the firm has invested in and grill them on how involved the investors are – do they meddle, do they know the industry, do they come to meetings knowing about your business?
Neverblue’s Dunlop acknowledges that when being acquired, the greatest fear is fear itself. “Fear was around every corner that there would be a problem,” he says. “Or if you let your guard down the acquirer would take advantage of it. We were lucky and smart in our choice of acquirer. Vertrue bought seven or eight companies over the last several years and we talked to some of them. They gave us great insight.”
There were 399 company acquisitions or mergers in the media and information industries in the first half of this year, on track to beat out last year by more than 20 percent, according to The Jordan, Edmiston Group. “Are you ready psychologically and strategically?” asks Holoubek.