Web Start-Up Values Soar

The Wall Street Journal

Investors Bid Up Internet Firms to Levels Reminiscent of the Last Dot-Com Boom

 

 

The technology-heavy Nasdaq Composite Index is relatively flat this year. Yet tech company valuations are rapidly rising in one area: closely held consumer Web firms.

Venture-capital investors and others have been bidding up the valuations of consumer Web start-ups this year, particularly of the firms that show the most user traction. In an echo of the 1990s dot-com boom, some investors also are giving lofty valuations to Web firms that have no revenue and that barely have a product out.

Among them: question-and-answer website Quora Inc. in March raised around $14 million in a financing round that inputs a value for the whole company of about $87.5 million, people familiar with the matter have said. The Palo Alto, Calif., firm didn't publicly launch its service until June and hasn't said how it will make money.

Another company, Blippy Inc., which allows people to share and discuss their purchases online with friends, raised $11 million in a deal valuing the whole company at $46 million earlier this year. In June, mobile-technology firm Foursquare raised $20 million in funding at a company valuation of $95 million, up from a $6 million valuation less than a year earlier, a person familiar with the matter said.

Valuations for closely held companies are typically guesswork. But the strong numbers for consumer Web companies indicate how parts of Silicon Valley's start-up market are bouncing back following the recession. The recovery already started showing up last year, when Twitter Inc. was valued at $1 billion during a round of funding, up from $95 million in mid-2008 when it raised a previous round of funding, according to research firm VentureSource, a unit of Wall Street Journal owner News Corp.

Some investors worry the lofty numbers signal that froth has returned to the Web sector. That can create false hopes for a company's performance, pressuring entrepreneurs and investors to gamble to live up to such expectations. Many investors won't recoup their investments, especially with the stock market having been relatively unreceptive to initial public offerings in recent years.

"Anytime you take an increase in valuation, then you're making an implicit promise that you have to meet and that's what's challenging," said Matt MacInnis, chief executive of Inkling, a San Francisco interactive textbook start-up. Last month, Inkling announced a funding round led by venture firm Sequoia Capital that included a bump-up in valuation to the tens of millions of dollars, said Mr. MacInnis. "Now the onus is on the entrepreneur to knock it out of the park or fail," he said.

The escalating valuations for consumer Web start-ups are reflected in the secondary market, where investors buy and sell the shares of closely held companies such as social-networking company Facebook Inc. On SecondMarket, which operates an exchange where investors can trade the stocks of closely held start-ups, the share prices of six actively traded private companies—including four consumer Web start-ups—rose an average of 39% between January and August, according to the company.

In contrast, the Nasdaq—which includes publicly traded tech behemoths such as Apple Inc. and Intel Corp.—is up just 3% so far this year through Tuesday. "There's a big disconnect between the public market and the private market," said Saar Gur, a venture capitalist at Charles River Ventures and an investor in Blippy.

While hot Web companies garnering high valuations aren't new, the speed with which valuations are jumping has quickened, said Silicon Valley start-up investors. Driven by the Internet's growing scale, Web companies can take off more quickly than before if they gain a toehold with consumers. That leads to valuations soaring more rapidly than in the past as venture capitalists and other investors fight for a piece of the momentum.

Deal-of-the-day site Groupon Inc., for instance, was founded in 2008 and quickly brought in consumers eager to tap its discounts. By April when it received a $135 million investment from Russian investment firm Digital Sky Technologies Ltd. and venture firm Battery Ventures, Groupon was valued at about $1.35 billion.

"Before, people didn't expect growth trajectories to be as fast," said venture capitalist Patricia Nakache of Trinity Ventures. "A lot of consumer Web companies are going from a seed investment and leapfrogging" in valuations.

Some Web entrepreneurs said they now have more power to drive high valuations than in the past. Since Internet firms are relatively cheap to build—all that's needed is several staffers and some computers—many entrepreneurs don't need lots of cash when investors call, said Philip Kaplan, a Blippy founder.

As a result, entrepreneurs may turn down funding until "investors say 'What do we need to do to make this happen,' " he said. "The ball is in our court."

10 Mistakes That Start-Up Entrepreneurs Make

The Wall Street Journal

When it comes to starting a successful business, there's no surefire playbook that contains the winning game plan.

On the other hand, there are about as many mistakes to be made as there are entrepreneurs to make them.

Recently, after a work-out at the gym with my trainer—an attractive young woman who's also a dancer/actor—she told me about a web series that she's producing and starring in together with a few friends. While the series has gained a large following online, she and her friends have not yet incorporated their venture, drafted an operating agreement, trademarked the show's name or done any of the other things that businesses typically do to protect their intellectual property and divvy up the owners' share of the company. While none of this may be a problem now, I told her, just wait until the show hits it big and everybody hires a lawyer.

Here, in my experience, are the top 10 mistakes that entrepreneurs make when starting a company:

1. Going it alone. It's difficult to build a scalable business if you're the only person involved. True, a solo public relations, web design or consulting firm may require little capital to start, and the price of hiring even one administrative assistant, sales representative or entry-level employee can eat up a big chunk of your profits. The solution: Make sure there's enough margin in your pricing to enable you to bring in other people. Clients generally don't mind outsourcing as long as they can still get face time with you, the skilled professional who's managing the project.

2. Asking too many people for advice. It's always good to get input from experts, especially experienced entrepreneurs who've built and sold successful companies in your industry. But getting too many people's opinions can delay your decision so long that your company never gets out of the starting gate. The answer: Assemble a solid advisory board that you can tap on a regular basis but run the day-to-day yourself. Says Elyissia Wassung, chief executive of 2 Chicks With Chocolate Inc., a Matawan, N.J., chocolate company, "Pull in your [advisory] team for bi-weekly or, at the very least, monthly conference calls. You'll wish you did it sooner!"

3. Spending too much time on product development, not enough on sales. While it's hard to build a great company without a great product, entrepreneurs who spend too much time tinkering may lose customers to a competitor with a stronger sales organization. "I call [this misstep] the 'Field of Dreams' of entrepreneurship. If you build it, they will buy it," says Sanjyot Dunung, CEO of Atma Global, Inc., a New York software publisher, who has made this mistake in her own business. "If you don't keep one eye firmly focused on sales, you'll likely run out of money and energy before you can successfully get your product to market."

4. Targeting too small a market. It's tempting to try to corner a niche, but your company's growth will quickly hit a wall if the market you're targeting is too tiny. Think about all the high school basketball stars who dream of playing in the NBA. Because there are only 30 teams and each team employs only a handful of players, the chances that your son will become the next Michael Jordan are pretty slim. The solution: Pick a bigger market that gives you the chance to grab a slice of the pie even if your company remains a smaller player.

5. Entering a market with no distribution partner. It's easier to break into a market if there's already a network of agents, brokers, manufacturers' reps and other third-party resellers ready, willing and able to sell your product into existing distribution channels. Fashion, food, media and other major industries work this way; others are not so lucky. That's why service businesses like public relations firms, yoga studios and pet-grooming companies often struggle to survive, alternating between feast and famine. The solution: Make a list of potential referral sources before you start your business and ask them if they'd be willing to send business your way.

6. Overpaying for customers. Spending big on advertising may bring in lots of customers, but it's a money-losing strategy if your company can't turn those dollars into life-time customer value. A magazine or web site that spends $500 worth of advertising to acquire a customer who pays $20 a month and cancels his or her subscription at the end of the year is simply pouring money down the drain. The solution: Test, measure, then test again. Once you've done enough testing to figure out how to make more money selling products and services to your customers than you spend acquiring those customers in the first place, roll out a major marketing campaign.

7. Raising too little capital. Many start-ups assume that all they need is enough money to rent space, buy equipment, stock inventory and drive customers through the door. What they often forget is that they also need capital to pay for salaries, utilities, insurance and other overhead expenses until their company starts turning a profit. Unless you're running the kind of business where everybody's working for sweat equity and deferring compensation, you'll need to raise enough money to tide you over until your revenues can cover your expenses and generate positive cash flow. The solution: Calculate your start-up costs before you open your doors, not afterwards.

8. Raising too much capital. Believe it or not, raising too much money can be a problem, too. Over-funded companies tend to get big and bloated, hiring too many people too soon and wasting valuable resources on trade show booths, parties, image ads and other frills. When the money runs out and investors lose patience (which is what happened 10 years ago when the dot-com market melted down), start-ups that frittered away their cash will have to close their doors. No matter how much money you raise at the outset, remember to bank some for a rainy day.

9. Not having a business plan. While not every company needs a formal business plan, a start-up that requires significant capital to grow and more than a year to turn a profit should map out how much time and money it's going to take to get to its destination. This means thinking through the key metrics that make your business tick and building a model to spin off three years of sales, profits and cash-flow projections. "I wasted 10 years [fooling around] thinking like an artist and not a business person," says Louis Piscione, president of Avanti Media Group, a New Jersey company that produces videos for corporate and private events. "I learned that you have to put some of your creative genius toward a business plan that forecasts and sets goals for growth and success."

10. Over-thinking your business plan. While many entrepreneurs I've met engage in seat-of-the-pants decision-making and fail to do their homework, other entrepreneurs are afraid to pull the trigger until they're 100% certain that their plan will succeed. One lawyer I worked with several years ago was so skittish about leaving his six-figure job to launch his business that he never met with a single bank or investor who might have funded his company. The truth is that a business plan is not a crystal ball that can predict the future. At a certain point, you have to close your eyes and take the leap of faith.

Despite the many books and articles that have been written about entrepreneurship, it's just not possible to start a company without making a few mistakes along the way. Just try to avoid making any mistake so large that your company can't get back on its feet to fight another day.

Apple Steps up Startup Pace in Race with Google

Bloomberg

Apple Inc. Chief Executive Officer Steve Jobs is accelerating the rate of acquisitions as his company vies with Google Inc. for mobile technologies and talent.

Apple said it bought two closely held companies last week, mobile-application startup Siri Inc. and semiconductor designer Intrinsity. Those deals came after January’s takeover of mobile- ad network Quattro Wireless and the December buyout of online music service LaLa Inc. Terms weren’t disclosed.

The timing of those purchases suggests Apple may be feeling pressure from Google, which has announced nine takeovers this year as it moves into new markets including mobile devices and the software and advertising that run on them. Apple got a new rival in the growing smartphone market last week when Hewlett- Packard Co. struck a deal to buy Palm Inc. for $1.2 billion.

“The pace has really picked up, there seems to be a strategic shift,” said Charlie Wolf, an analyst with Needham & Co. in New York. “It looks like there’s an acquisition frenzy going on between Google and Apple in the sense that there’s an increasing urgency on Apple’s part to stay even if not ahead of Google in the phone space and apps space.”

Apple, the maker of the iPhone, now counts Google and its Android operating system for smartphones as a rival in the rapidly growing market for mobile devices, software and ads. Worldwide smartphone shipments will jump 36 percent to 247 million units this year, researcher ISuppli Corp. estimates. The U.S. market leader is BlackBerry maker Research In Motion Ltd. with a 42 percent share, according to ComScore Inc.

Decide Now
With more than $23.1 billion in cash, Apple has plenty of money to keep purchasing small startups. To avoid publicity and possible rival bids, Apple in some cases has offered a target only a three-hour period in which to accept the terms of a sale, according to one executive with knowledge of the situation.      Patent filings may provide clues to potential targets, said Will Stofega, program manager at researcher IDC in Framingham, Massachusetts. Apple recently sought patent protection for mobile purchasing and touch-screen technology, he said.     A would-be acquisition in wireless payments is Vivotech Inc., a Santa Clara, California-based maker of technology that lets users wave their phone by a cash register to pay for items, Stofega said. Apple rival Nokia Oyj is an investor in a payment service called Obopay Inc. Vivotech CEO Michael Mullagh didn’t immediately respond to a request for comment.

‘Smaller’ Targets

Apple declined to comment on potential targets or its acquisition strategy, said Steve Dowling, a spokesman for the Cupertino, California-based company.

“Apple buys smaller technology companies from time to time, and we generally do not comment on our purpose or plans,” he said. Since returning to Apple as CEO in 1997, Jobs has made 13 acquisitions, according to Bloomberg data. Of those, five happened in the past seven months alone.

Apple rose $5.26 to $266.35 at 4 p.m. in Nasdaq Stock Market trading. The shares have jumped 26 percent this year. Google gained $4.91 to $530.60 and has declined 14 percent this year.

Another reason behind Apple’s spending spree may be that it wants to keep certain startups out of Google’s hands, Needham’s Wolf said, recalling that Apple and Google’s sparred last year over mobile-ad market leader AdMob Inc.

Jobs, speaking at a company event last month, said Apple tried to buy AdMob before Google came in and “snatched them up because they didn’t want us to have them.” Google’s $750 million takeover of AdMob is pending government approval.

‘Land Grab’

“They learned a good lesson with AdMob” because they had to settle for “second-fiddle Quattro,” said Brian Marshall, an analyst with Broadpoint AmTech in San Francisco. “They’ve got the resources. They have the team to do acquisitions now. It’s a technology land grab right now.”

Google, owner of the world’s most popular search engine, also is more acquisitive after pulling back during the financial crisis last year. Last week, the Mountain View, California-based company agreed to buy LabPixies, an Israeli developer of mini- applications such as games and calendars that Internet users can post on their personal pages. Over the weekend, Google announced the purchase of Bump Technologies Inc., a maker of 3-D software.

As for competing with Apple, Google won’t discuss other companies’ acquisition strategies, spokesman Andrew Pederson said in an e-mailed statement.

Last year, Apple hired a Goldman Sachs Group Inc. investment banker, Adrian Perica, to help the company develop deals, people close to the company said earlier this year. They say they believe Perica is the first dedicated M&A specialist on Jobs’s staff.

Risk Aversion

Even with the new attention to M&A, Jobs, 55, likely will maintain his strategy of focusing on smaller companies rather than taking on the risks of integrating large ones into Apple’s culture, Wolf said.

Counting long-term investments that the company can “liquidate in a day,” Apple had $41.7 billion in cash at the end of the last quarter, Broadpoint’s Marshall said. In comparison, Google had about $26.5 billion, he said.

Apple finance chief Peter Oppenheimer, speaking this month on a call with analysts, said the company’s investment priority continues to be “preservation of capital, which has served us well in the current environment.”

Investors said they’re happy to see Apple put some of its cash to use.

“I want them to reinvest their cash in the business,” said Michael Obuchowski, managing director at First Empire Asset Management Inc. in Hauppauge, New York, which oversees $3.8 billion in assets including Apple shares. “They are sitting on more than $30 billion in cash that is earning close to nothing.”