European tech: Which way to the exits?

By | Exits, Venture Capital | No Comments

Max Niederhofer recently published this chart showing European exits. As you can see there’s been impressive growth in sub $100m exits, but the story with larger M&A exits and IPOs is less compelling. As I wrote last week our ecosystem is making great progress, but clearly, if we are to keep growing then at some point we need to see an increase in large exits.

The good news is that we can reconcile the facts that we have an increasing number of great companies with the fact that the number of large exits isn’t going up: great companies are staying private for longer. Witness mega rounds by companies like Transferwise and Deliveroo that in years gone past would have had to IPO to raise that kind of cash or, as was more often the case, sell to a larger company that could finance their growth.

This ‘staying private longer’ phenomenon isn’t just a European thing. In the US companies are raising amounts of capital previously only possible through IPO with much greater frequency than they are here. Whether that’s a good or a bad thing is debatable (private companies have less scrutiny and therefore lower costs, but arguably the scrutiny makes them more disciplined) but the important point here is that it’s skewing the exit data. That said, if LPs are to keep making new commitments to fund, they need to get cash back soon, so this trend can’t continue forever.

Three types of acquisition – view from a public company CEO

By | Exits, Uncategorized | 2 Comments

At a conference last week Autodesk CEO Carl Bass said that he thinks about acquisitions in three buckets:

  • companies that are really people who have a technology that Autodesk wants to build up (acquihires)
  • middle-size companies, meaning they have product that they’re selling, maybe even internationally
  • large scale acquisitions

He wants to make lots of acquisitions in the first category, a handful in the second, and only rarely in the third. For context note that Autodesk is a $13bn market cap company, and are thus likely to make fewer large scale acquisitions than much bigger businesses.

This sort of tallies with my experience and what I’ve heard lots of investment bankers say over the years, which is that companies get acquired for up to around $100m without having to show that they are sustainable in the long term. But as deals get bigger analysis of forecasts and the financial impact on the acquirer become much more important.

In terms of Carl Bass’s categorisation, I would say that most acquihires are sub $50m and that middle-sized companies get you up towards the $100m level and maybe a little way beyond.

$10-20m revenues is the threshold for most high growth businesses that gets you into what I would call ‘large scale’ territory of $100m+ exits.

Also very important to note is that the number of acquisitions declines precipitously as the valuation rises.

Finally, a huge caveat, I put these rules and recommendations out there because I think they are a useful guide, but the quality of revenues varies hugely between companies and intellectual property and other elements can also drive valuation. Moreover, much is driven by luck in this industry and individual counter-examples abound..

All this is written primarily with ecommerce, marketplace and software companies in mind.




Corporate innovation will harness the power of entrepreneurs

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Jon Bradford, founder of Techstars UK, once said to me that corporate innovation budgets dwarf venture capital. This tweet from Benedict Evans gives an insight into how much. The excess cash from Apple from 2006-2015 was greater than US VC funding in total.

That got me thinking, so I took a look at corporate R&D spend and it turns out that 2014 spend in the US was over $250bn and in Europe it was over $200bn. That compares with $86.7bn in global venture capital investment in the same year.

The interesting thing is that large companies are increasingly looking to the startup world to help achieve their innovation objectives. They, run accelerator programmes, and open ‘labs’ in startup hotspots and make acqui-hires.

These activities are interesting, but small scale. Over the next few years I expect we will see a lot more experiments as large companies work out how to harness the power of entrepreneurs. They have to. New markets are spinning up much faster than they can plan for and exploiting those opportunities requires a tolerance for failure and risk-reward balance that I don’t believe can exist inside large company structures.

I think truly innovative companies will get more sophisticated in the way they monitor the startup-ecosystem, get close to interesting companies, partner with them when appropriate, and know when they can acquire them effectively.

When they do that I predict a sizeable percentage of that R&D spend will flow into the startup ecosystem.

Forecasting ecommerce multiples at exit

By | Ecommerce, Exits | No Comments

Ecommerce multiples

Mahesh Vellanki from Redpoint put up an interesting post yesterday about ecommerce valuations. His major point is that revenue multiples aren’t that high, largely because the market is highly competitive and margins are low – often because of Amazon.

As you can see from the chart above, in Mahesh’s sample most of the companies have revenue multiples in the 1-2x range. Etsy is arguably more of a marketplace than an ecommerce company and marketplaces have higher margins, more defensibility and hence attract higher multiples, so I would discount them. Similarly at the bottom end Groupon and Overstock are troubled companies that we can safely ignore on the assumption that any of our businesses that achieve big exits will be succeeding.

The major drivers of multiples are growth and margin. Fitbit enjoys a 3.3x revenue multiple because it’s strong on both these metrics. They reported 168% YoY revenue growth in the Q3 earnings report and their EBITDA margin is 19%. 1-800 Flowers, meanwhile is valued at 0.6x revenues because growth is much lower – forecast at 5-7% next year, and their EBITDA margin is 8%.

Apologies for getting a bit finance-geeky, and you may want to skip this paragraph, but a bit of corporate finance logic can explain the link between revenues, growth, and margins. At the end of the day a business is worth the net present value of future cash flows, EBITDA is a good proxy for cashflows, and future EBITDA is a function of revenues today, revenue growth and EBITDA margin. Hence the revenue multiple is directly linked to growth and margin.

For ecommerce startups assuming that if the business is successful the revenue exit multiple will be in the region of 1-2x is the way to go. Faster growth, and particularly higher margins will get you to the top of the range. Coupling this analysis with a view on market size and likely market share generates an exit value which in turn should determine the financing strategy. Most good VCs only want to invest in ‘fund returners’ which means that the exit value multiplied by their stake should be around the same size as their fund.

On the Square and Match IPOs and hopes for a correction

By | Exits, Venture Capital | No Comments and Square both enjoyed strong first days after their IPOs yesterday. Match closed up 23% at a valuation of $3.5bn and Square was up 45% at a valuation of $4.2bn.

That’s good news for both companies, because first day declines can sour a stock for months to come. However in the run up to its IPO Square had indicated it would go out at between $11 and $13 per share, and then ended up at $9, and in October last year Square raised $150m at a $6bn valuation. So the share price has been trending down for some time before popping after the IPO.

The interesting question for me is what this means for startup valuations more generally. The obvious narrative is that investors thinking of investing in other late stage private companies are either going to walk away or insist on much lower valuations, which will then have a knock on effect on all company valuations, particularly as Box IPO’d at less than its previous valuation back in January, Fidelity recently wrote down the value of its holding in Snapchat, and there are lots of private companies sitting on valuations higher than similar companies with public listings.

A lot depends on what happens next in the public markets, particularly with the Fed preparing to raise interest rates, but I think there’s grounds for hoping that investors in late stage private companies will have a reaction, but won’t hit the panic button. I say that because investors in the $6bn round in Square have still made money on the deal. They had a ‘ratchet’ which repriced their investment in the event of a down round to give them a 20% return. If you compound the 20% with the 45% pop then when the markets closed yesterday they were showing a 74% profit on the Square deal. That’s a good return, but it came in a way that investors won’t want to repeat.

Hence I think investors will have a measured reaction and if we’re lucky some heat will come out of the market but we won’t have a crash.

European venture backed IPOs triple

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Screen Shot 2015-01-28 at 12.50.09 Screen Shot 2015-01-28 at 12.49.57

These are two great charts!

With IPOs like this European venture funds must be performing better, and that will bring more money into the market.

It has taken us a long time to get over the 1999/2000 bubble and build a sustainable ecosystem. It would be nice if we could expect a recognisable moment when we all know that we have achieved critical mass and crossed over into sustainability, but unfortunately things don’t work that way. The best we can hope for is to be able to look back retrospectively and say 20XX was the year when European venture finally came of age.

As the months go by the positive evidence is accumulating and I’m starting to think that 2014 or 2015 may be that year.

eCommerce inflection point coming in 2018: invest now

By | Ecommerce, Exits | One Comment

Screen Shot 2015-01-21 at 11.59.21

I just saw this chart in a Morgan Stanley investor note with the subtitle eCommerce Hits it’s Stride. Firstly it’s good to see that top investment banks continue to see a lot of growth ahead in eCommerce, but more exciting is the notion that an inflection point is coming towards the end of this decade. If that’s true then growth for ecommerce businesses will peak around 2020. Company valuations are highly geared to growth, so we can expect them to peak around the same time. That makes 2015 a great time to be investing in eCommerce startups.

Google acquires the most, Apple hasn’t bought big (until now)

By | Exits | 2 Comments

Screen Shot 2014-08-06 at 13.29.34

Tomasz Tunguz of Redpoint ventures posted this table as part of a long analysis of M&A by leading tech companies over the last 15 years. Here are the takeaways:

  • Google comes out as the most prolific acquirer by far, with almost twice the number of acquisitions per year as Facebook who sit behind them.
  • Most surprising for me was that with the exception of the $3bn acquisition of Beats (which is missing from the analysis above) Apple hasn’t paid more than $390m for a company in the last 15 years. Beats may be a one off, or their acquisition strategy may be changing under Tim Cook. One to watch.
  • Of particular interest to us as an ecommerce investor is that Amazon is the most infrequent acquirer. Other data in the post shows that the bulk of their acquisitions fall in the $100-300m range.


Bubble watch: a comparison of 1999 and 2013

By | Exits, Uncategorized | 2 Comments

The markets are hotter now than they have been for a while and people are (once again) talking about bubbles. The data points below show that in terms of the IPO market at least the heat is nothing like what it was in 1999.

  • Median sales of company at time of IPO — $12m in 1999 vs. $106m in 2013
  • Median price/sales ratio at time of IPO — 26.5x in 1999 vs. 5.5x in 2013
  • Total # of tech IPOs — 369 in 1999 vs 45 in 2013
  • Total IPO proceeds raised — $33.5 billion in 1999 vs $8.5 billion in 2013
  • Average first-day stock price increase at IPO — 81% in 1999 vs 20% in 2013
  • Total venture capital dollars raised — $55 billion in 1999 vs $17 billion in 2013

This data is from a Ben Horowitz annotation of a David Einhorn post on RapGenius.

As a side point I’m loving the power of inline commenting on Medium and RapGenius. Commenters can talk directly to the point they are interested rather than having to comment on the whole post or explain which part of the post they are talking about. That makes the comment more powerful and easier to write. I’d love to bring inline commenting to this blog.

Amazon the most aggressive acquirer in ecommerce – by far

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Click on the chart below to get to an amazing interactive visualisation of 15 years M&A by Apple, Amazon, Google, Yahoo, and Facebook.

From our perspective as ecommerce investors the most interesting thing is confirmation that Amazon is the only volume acquirer in our market, and generally not at huge valuations. That makes it crucial that ecommerce startups can get to high valuations based on fundamentals – i.e. the ability to generate profits and cash.

Click image to see the interactive version (via Simply Business).