In the Bipolarization of Internet Acquisitions, I put together a chart below counting the number of acquisitions in various price ranges by the top players in the category this year. It showed a lumping of acquisitions in both the under $50M range and in the over $500M category, with minimal in between. I summarized by saying,
“There just aren’t that many companies in the $50M to $500M range being acquired by the big guys – they’re either gobbling them up early or waiting (perhaps to a fault) until these startups are too valuable to pass up.”
Fred Wilson expanded upon my post,
“Buyers are either picking things up before they have a business model, scale, and significant VC investment, or much later. The middle ground (between $50M and $500M) is where the effect of VC comes into play.
If an entrepreneur chooses to raise $10M of venture capital and take significant dilution, then the price at which he can sell and make a decent return goes up. And the price at which the VCs will want to sell goes up too.”
I completely agree with his assessment of the situation. (By using the word “bipolar,” I didn’t mean to imply that large Internet companies were acting irrational in any way; I was merely using the term as a descriptive one to reflect the spread of the data).
Moreover, this “VC effect” is actually showing up less in the acquisitions that have been born to date, but rather in the ones that haven’t.
Take the twenty-two acquisitions by AOL, eBay, IAC, Google, News Corp, Viacom, and Yahoo which I included in my original data-set. Of these, only one company I would consider followed a “traditional” VC cycle – Skype. It raised $20M from Bessemer, DFJ, and others and sold for a hefty return for investors.
By contrast, let’s examine the rest of the group. 12 didn’t raise institutional venture money at all, according my research on VentureWire professional (Weblogs, Urchin, Ludicorp, Neopets, Upcoming, Dodgeball, Mailblocks, Gumtree, Android, Konfabulator, WhereOnEarth, Blo.gs). I do, however, realize that many of these did raise some form of “professional angel” funding, but that’s the subject of a future post along this line of thinking. A few were bubble-era leftovers who raised significant funding years ago and clearly didn’t return in line with original expectations (iFilm, Xdrive, Dialpad). Wildseed (formerly GITWiT) had raised an undisclosed sum from Ignition Partners in stealth mode. Others were already public (or part of a public company) and had already provided some liquidity for original investors (Shopping.com, IGN Entertainment, Ask Jeeves, Verisign Online). And finally, Intermix (MySpace) had a unique situation with a recent $4M investment in the entity from Redpoint.
So with all of these acquisitions, only one was a classic traditional venture deal? At first glance, this distribution doesn’t look like a positive one for the venture industry.
What this data doesn’t show, however, is all of the VC-backed deals-in-development that are going to happen in the next 18-24 months. As Fred wrote, if an entrepreneur raises $10M, the price that will make both him/her and his/her investors happy is then well above the “under $50M” threshold. Taking in VC money inherently raises the stakes in the game significantly by increasing the expectations for an exit scenario. My hypothesis is that we will see this bipolarized distribution continue, as new germinating companies are picked up before VCs can get to them and as additional larger post-bubble VC-backed exits-in-waiting ripen fully.
(Note to self, subjects for future posts: Emergence of Professional/Celebrity Angels, VC Investment Only a Binary Proposition – $0M or $10M?)