June 2011 Corum Webinar

Social War, Social Sellers, and Alternative Exits

 

INTRO and GLOBAL ECONOMY OVERVIEW

 

Ward Carter

 

 

I'm Ward Carter, chairman of the Corum Group, speaking to you from our headquarters near Seattle, Washington. You are part of a group of hundreds of software and technology executives who from over 20 countries who have registered for our event today. Here is our agenda for the next 60 minutes: We'll start with a market overview. We'll hear from a guest speaker talking about a very creative exit path that he took. We'll review recent Corum deal closing and data on technology deals and valuations, followed by an entertaining talk with Robert Scoble, known by many of you for his highly popular Scobleizer blog. Then we'll close with a special panel of CEOs who have recently sold their companies to Google and Facebook. Following that, we'll open up the floor for Q&A.

 

Our slate of speakers today includes a number of people from the Corum staff including Nat Burgess, Jon Scott, Dougan Milne and his team on the research side, as well as our guest speakers Robert Scoble, Bill Cavanaugh, Dan Shapiro, and Peter Wilson. 

 

As far as logistics today, we'll try to keep this event to about 60 minutes, but you'll want to stay tuned for the Q&A session at the end. As for the Q&A logistics, feel free to ask questions of our panelists or speakers at any time, but we'll only address all questions during the Q&A session at the end. To submit a questions, please use the Q&A window on the right side of your screen and make sure to send your question to “All Panelists”. If you select host or any other option, your question will not be seen and not included in the question queue.

 

 

This recorded event will also be available on the Corum Group website under Conferences and Events on the left hand side of the menu. Or, you can email a request for the archived recording to pats@corumgroup.com. 

 

 

With that, I'd like to turn it over to our president, Nat Burgess, who will be conducing part of this session. He has been one of our senior deal makers and has been involved in a number of transactions, including those with Google and Microsoft. Nat?

 

Nat Burgess

 

 

Thank you, Ward. I'm really excited about this month's webinar because we will be talking about areas that are experiencing explosive growth, CEOs who have harnessed the power of the social revolution that is happening now, and some of the opportunities that are happening for CEOs out there today.

 

We have over 200 registrants today from over 20 countries, so we have a great audience, we have great panelists and speakers, and it will be a great hour. Thanks everyone for joining us.

 

In our past events we talked about two economies, and we're still seeing this tale of two economies. I'm going to start with some macroeconomic news and updates. On a grand scale, Goldman downgraded US growth again for the second time in a month, taking our forecasted quarterly growth down to 3% and they already see downside risk in that estimate.

 

US manufacturing is losing steam, there was a sharp drop in hiring, the housing glut continues to create problems, and yesterday we had the worst day of the year for the Dow and the S&P 500, and so far today it looks like that trend is continuing.

 

On a global scale, it looks like Japan is in trouble again. It is not just the nuclear crisis, although that will hit them hard. A lot of the manufacturing that was happening in Japan will move to China as we have a supply crisis, but the banks are in trouble, there are a lot of problems there. China is slowing as well, we're seeing the canary in the coal mine with US-listed Chinese companies that are showing some stress under accounting issues, rationalization of valuations. Europe is still in trouble, we have the sovereign debt crisis that is spreading now to Italy. We have not a lot of confidence over there. Business seems to be humming along, but there are a lot of hidden challenges and Chinese stock is not doing so well either.

 

We have a new global happiness index that was just issued. We don't just measure the financial events at Corum here, we look at things on a global scale and the happiest places on earth are China, followed by North Korean, then Cuba, then Iran, and then Venezuela. The US comes in dead last at 203. It looks like the source for this is Chosun Central TV in North Korea. Guys, we need to work on our research and sources!

 

Anyway, this report came out of North Korea and has been all over the blogs in China. One blogger in Shanghai said “Please send me to the US so I can share in the suffering.”

 

On to tech turmoil, we have two economies in tech as well. Tech generally is doing okay, but activity shareholders are seeking change. Balmer is the number one target, people are unsatisfied with the progress at Microsoft. Verisign over the last 10 months has quietly issued a billion-dollar dividend to shareholders. They could have put that money to work in growth and M&A, instead they just raised the white flag and gave it back. I was talking to the guy who engineered their restructuring yesterday, he sold off 13 companies and he was saying that the board did not have confidence that they could execute, so they gave the money back.

 

And we also have continued challenges in the cloud with hacking problems, Amazon got hacked, Sony's been hacked twice recently, and the trouble continues there.

 

On the other hand, the topic of this month's webinar is Social Explosion. Smart Phone tweets have driven a Twitter surge and are bringing a new age demographic to Twitter, it is moving up and we're going to see boomers on Twitter before too much longer.

 

“Cisco sees web traffic up 4x by 2015 to almost a zettabyte.” There is a new word for your vocabulary. I hope someone has already registered the URL.

 

And there is the cloud music death match with Amazon versus Google. We're going to hear from our VP Dougan Milne on this topic a little bit later and of course Apple has thrown their hat in the ring with iCloud. Steve Jobs will tell us more about that on Monday.

 

And an interesting side note here, the most popular and photographed attraction in New York City is no longer Rockefeller Center, Times Square or the Statue of Liberty, it is the Apple Store!

 

A little over 10 years ago, Bill Gates said that his single biggest mistake was missing the Internet wave. Last week, Eric Schmidt from Google, former CEO, said his single biggest mistake was missing the social trend, and Facebook is roaring along, and LinkedIn is roaring along, basically catching up.

 

Lots of new IPOs, especially the LinkedIn deal are paving the way. Just to put some numbers and context on that, they moved the price up, doubling it, offering it in the $40s, it traded up to $122, it has pulled back a little bit, but yesterday the price to earning ratio of LinkedIn was $1,556. That is not a typo. The market cap is $7.3 billion. That is new capital, new wealth, available to drive an M&A strategy that will be very aggressive and we'll see a lot of activity from them and from the IPOs that follow.

 

Okay, I'd like to now move to our first speaker, Bill Cavanaugh. He is here today after having gone through a very interesting set of transactions to achieve a couple of goals, including liquidity for his shareholders and growth capital, and he did it in a way that would have been impossible three years ago. The fact that he succeeded in this strategy is really a sign of the economic recovery and his skill as a CEO, guiding his company through this. I would like to now introduce and hand over the microphone to Bill Cavanaugh.

 
ON POINT CEO

Bill Cavanaugh

 

 

Well, thank you for that introduction. As you said, my name is Bill, I'm the president and CEO of OnPoint Medical Diagnostics. We're a cloud-based, SaaS solution for the accreditation of medical imaging equipment. However, before I really get started, I'd like to thank the Corum Group for this opportunity to present my “creative exit story” and for their efforts in scheduling this webinar. Everyone I have interacted with at the Corum Group has been extremely professional and knowledgeable and they have really made the engagement process straightforward and trouble-free. So, thank you to them.

 

 

On April 15 of this year, I actually completed what is called an alternative public offering, which was a reverse merger of OnPoint into a fully-reporting public shell, along with a $5 million pipe. I've been asked to take about 5 minutes to explain why we chose this funding strategy and share with you my experiences with this process, how we made it work, what to watch out for, where the big ticket items are hiding, and ultimately when and why you might consider this strategy for your own company.

 

 

A little bit of history however, to give you some perspective. I was a non-founding CEO, hired by an incubator parent company in February of 2010 to really launch and run OnPoint, which was a business-founded commercialized MRI quality assurance technology developed at the Mayo Clinic here in Rochester. Unfortunately, there were several, shall we say, misrepresentations made relative to the financial status of both OnPoint and the incubator, prior to my joining the business, and to make a long story short, about 4 months after I started, OnPoint and the incubator were completely insolvent, we lost our technology license from the Mayo Clinic, I inherited about $1.3 million in debt on my balance sheet and about 130 shareholders as part of a cap table that was totally upside down.

 

 

These shareholders were getting pretty anxious and looking for transparency as well as some type of exit for the investment that they had made through the incubators' fund. OnPoint itself needed about $4 million to execute it's business plan and to get to break even. The environment we're playing in, especially here in Minnesota, is one where the angel community was strapped, broker dealers were growing weary of the lack of discipline in private companies, shareholders were wanting more communication and disclosure, and everyone was getting tired of dilution and looking for faster exits in their strapped investment portfolios.

 

So I spent about seven months pitching to the venture capital community. For a pre revenue company seeking $5 million in capital, we're getting a $2-3 million pre-money valuation and pretty much handing over the keys to the farm, and my founders wanted nothing to do with this.

 

So, with our backs really against the wall we felt that we really had only one choice to get this right. A personal alternative for me was simply to walk away from the entire mess, but what you don't know about me is that I love a challenge where I'm told it can't be done.

 

So I started looking at this reverse merger process, which to be honest I thought was crazy, given the state of the business. However, I did a lot of homework, read a bunch of case studies of success stories, but plenty of disaster stories, too, and talked to some CEOs who had been through the process. Eventually I felt prepared and ready to take the plunge and put together my game plan.

 

It started with securing an agreement with the founders of the business to surrender 80% of their shares and resign from the board. I severed all ties with my incubator company and converted the $1.3 million of debt on their books to equity, which gave me a clean balance sheet and a workable capital structure. With an investment banker we found a fully-reporting public shell, which on the surface appeared to be very clean. It had been dormant for a few years, had a strong shell sponsor, with a track record of success, and a CEO who actually liked software and Mayo technologies, as well as a board that was willing to complete the transaction for equity only, no cash, which was pretty important to me.

 

I actually went out and hired one of the best legal firms in the country, a NYC firm with a track record of success in pipes, reverse mergers, and dealings with the SEC, but I have to tell you, they were not cheap. I actually found a smaller, public accounting firm with a partner who had successfully completed over a dozen reverse mergers, and I picked him up at an excellent price point. I renegotiated my license agreement with the Mayo Clinic and provided them complete transparency into the critical milestones with a lot of communication in between. I qualified for the business through the Minnesota angels tax credit program which provided at 25% credit to individuals invested in the business.

 

My plan called for about $600,000 to keep the lights on and get me through the merger process and to the pipe offering. So I put together a bridge round of convertible note financing, targeting about $800,000 in capital. I then worked very closely with my investment banker who had close relationships with my shareholder base, and frankly went on a public relations campaign with these 130 shareholders to tell our new story and raise the bridge financing. It took me about 3 months to raise the $800k, 90% of which came from our existing shareholder base.

 

On January 8 of this year we signed a letter of intent with a company called Vertical Health Solutions, a public shell company. Less than a month later, on February 1, we signed a definitive merger agreement with VHS and proceeded to complete all of the mandatory filings with the SEC, and then literally held our breath for 10 days waiting to hear comments back from the SEC. After the 10 days, we actually made it through with no SEC comment, which I'm told never happens in this space.

 

On March 2nd, then, we actually closed our bridge round of financing at $1.3 million and we commenced our $5 million pipe offering which consisted of a common stock at $1 per share and 50% Warren coverage at $2 per share. Contrast this with our VC valuation at $2-3 million, we were bought at an $8 million pre-money evaluation in the public space.

 

On April 15, we closed our merger and officially became a public company. This week we just broke escrow on our first round of pipe financing. So from insolvency stage, kind of game plan to public status, the process took about 7 months. From letter of intent with the shell company to going public it was about three months, cost approximately $250,000, and we gave up 8% equity to the public shell company to complete the merger.

 

Some key takeaways and lessons learned:

  • Hire an experienced legal team and audit team.
  • The upfront cost can actually save you significant time and money in the long run.
  • Partner with a really good investment banker and work with them closely on the pipeline investors and timing of capital. And if you have shareholders, make sure you talk to them.
  • Create your internal controls and make sure your board is ready for the public rigor.
  • Don't skimp on shell due diligence.
  • Pay close attention to the mandatory filing deadlines and waiting periods. Someone needs to play the role of project manager and look out for the critical path milestones and dependencies.
  • Make sure you have adequate capital to take you through the entire process. It will likely take your more time and money than  you think.

 

To wrap this up, I believe one of the primary responsibilities of a CEO is to be a good steward of the shareholders' interest and ultimately for the shareholders of OnPoint, the going public process through a reverse merger was the fastest path to securing the most amount of capital with the least amount of dilution while providing liquidity to meet the unique needs of my individual investors.

 

Thanks for your time and I'll turn it back over to Corum.

 
Nat Burgess

 

 

Thank you, that's a great story and a reminder to everyone that we need to think broadly, we need to be agile, and sometimes we can provide a magic trick like raising $5 million with only 8% dilution, so nicely done and congratulations on that. We have a field report from Corum VP Jon Scott on recent Corum transactions. Jon, over to you.

 

CORUM M&A REPORT

 

Jon Scott

 

 

Thanks, Nat. Let me start by discussing Silicon Valley-based Pubmatic's recent acquisition of Boston-based Revinet, which was announced a couple of weeks back. Corum represented Revinet in the transaction. Both companies play in the digital advertising space, where there has been a lot of strategic moves and consolidation going on. The fit between these two private companies was excellent, very synergistic.

 

Pubmatic had some nice investors behind then, including Draper Fisher. Pubmatic provides premium online publishers, typically publishers that are creating their own content, and they provide them with one holistic selling platform, with a high touch service to increase their online and mobile ad sales. Examples of their applications include real-time bidding, audience targeting, and brand protection. The whole goal for Pubmatic then is to help the publisher sell their ad inventory more efficiently and at higher revenue levels. Revinet provided some excellent tools to help publishers monetize their remnant advertising, and essentially that is the advertising left over after the direct sales force is unable to sell it. It's kind of like an airline that sells a few open seats on the airplane because once it has left the gate the empty seat, or in this case the ad space, can't be sold or monetized.

 

Revinet brought in some marquee customers to the deal and a staff of really experienced digital advertising experts, so this was a really interesting transaction.

 

Let me jump onto the next transaction, and that was PlumChoice acquiring Tific. This is interesting, PlumChoice is a Boston-based company and Tific is based in Sweden. Corum represented Tific in this deal and this was another deal with strong synergy. The acquisition brings together PlumChoice's award-winning platform for delivering remote service relationship management with Tific's self-service and self-healing IT tools. Essentially the integrated continuum of these two products is support protocols that allow companies to more efficiently provide customers with a full spectrum of support technology, starting before the first service call all the way through supporting all the customer's problems.

 

Tific's automated support solutions are used by some of the world's largest companies and they automatically diagnose and resolve technical problems to help technicians before the problem occurs, the customer is actually able to have their system take care of the system and support it. If they then need to deal with a call center individual, the information on the work they've done already is accessible, so it is really integrating PlumChoice's platform with Tific's, and that really came together nicely. Both are privately held and were venture funded companies.

 

The final transaction I'll mention is TalkSwitch, a Canadian company and a client of ours, and their acquisition by Silicon Valley-based Fortinet. This was announced a couple of weeks ago as well. TalkSwitch was a privately held company focused on development and delivery of award-winning VOIP phone systems and these were systems for companies at locations with less than 64 phones. The company had moved more than 100,000 products through their network. Fortinet is a worldwide provider of network security appliances in the unified threat management area, and their products and subscriptions provide integrated high performance protection against security threats while really simplifying the IT security infrastructure. Their customers include some very large companies and government entities. For Fortinet these talks were designed to expand their portfolio and reach into the multi-service business gateway market. This is an interesting acquisition, taking these two technologies and putting them together.

 

Corum also has another client that closed in the customer engagement space, and that has not been announced yet, but we'll talk about that next time.

 

Nat, back to you.

Nat Burgess

 

 

Thanks, Jon, we appreciate that update, its definitely an exciting time with a lot of transactions closing a lot more in LOI.

 

INDEX, VALUATION AND RESEARCH

 

 

We're now going to go back to the Corum research team with Alina Soltys and Tomoki Yasuda, who will take us through the Corum Index.

 
Alina Soltys

 

 

Thanks, Nat, we have a great seller's panel coming up, so we're going to breeze through the Corum Index and the sectors, but stay tuned for next month, where we will have our half-yearly report and take a deep dive into all the sub sectors.

 

 

Let's take a look at the three-year public market performance here, and we see the upward trending continuing from the depths of the recession, but this has slightly tapered off in the month of May with both the Dow and the NASDAQ going in a negative direction.

 

 

Let's take a closer look at the 12-month view. We see here that the month of May has once again been going down because of all of the problems in the worldwide economy. The Greek debt crisis has shed some light on Europe not being out of the woods just yet, and also the downgrades by Goldman on the US economy, as Nat mentioned, are not doing us a favor in the public markets.

 

 

Oddly enough, the S&P Tech Index is still up, we saw the LinkedIn IPO, we saw Yandex, the Russian Google's IPO as well, and these have driven tech up, despite all the sober news on the economy continuing forward.

 

Tomoki Yasuda

 

 

Indeed, tech has weathered the storm there, Alina, and some may argue that the tech industry itself is the coming storm, looking at recent valuation for hot stocks like the ones mentioned. Now let's turn to deals, and this next chart is courtesy of our friends at the 451 group. We have deal value and buying for each consecutive month in 2011. As you can see, we're hitting higher deal volumes and value in the past three months, which are signs of a very healthy and active tech industry. Overall, deal value has doubled since February, with March being the exception there AT&T's proposed acquisition of T-Mobile for $39 billion. If you back out that sum, we're seeing a consistent trend of $20+ billion in value and hopefully that continues moving forward.

 

 

Continuing on to the Corum Index, where we have come key deal metrics. In the megadeal section, we have Microsoft's acquisition of Skype, and of course everyone who hasn't been living under a rock has heard of this deal. We really like this strategy, and I cannot emphasize how excited I am to see the kind of applications Microsoft can deploy with Skype. One thing that definitely comes to mind is combining the Xbox and Skype, possibly with the Kinect and transform that living room experience, which in my mind I think of as the next frontier for consumer technology.

 

Alina Soltys

 

 

Microsoft is not the only Old World giant switching strategies. After the terrible nuclear disaster in Japan, Toshiba has also decided to change directions, and instead of relying on the constant growth that they forecast for their nuclear business, they are branching out and using acquisitions to grow other parts of their energy business. They set aside $9 billion for M&A deals and the first of the deals that they did was for Landis+Gyr, a Swiss smart metering pioneer and they will provide Toshiba with a broad base to build upon. PEs have also been using acquisitions to continue growth.

 

 

But let's take a look at the PE value. Tomoki, which is there such a large difference?

 

Tomoki Yasuda

 

 

Yeah, there is a discrepancy here. Last year we saw Silverlake buy out IBC for $3.4 billion. Now taking that into account and backing out that one particular acquisition, we are still seeing consistent deal volume and value from the financial buyers, all things are looking good. VC-backed exits still looking healthy, averaging about 50-60 exits per month for VC portfolio companies, and the other statistics remain about the same.

 

Switching to our six broad market segment, we'll speed through this quickly, so please bear with us. I'll kick things off with the acquisition of OffSync by Jive Software. OffSync offers social media add ons to Microsoft Office products, and what is interesting to me about this deal is we are seeing a trend on how knowledge based workers, analysts, associates, etc, essentially anyone who is working at a desk, are incorporating a variety of web-based tools to aggregate and analyze information more efficiently. With this acquisition, Jive will be able to turn Office products such as Outlook into platforms that can utilize social media tools, such as tagging and commenting and enable efficiency gains that aren't realized in traditional properties.

 
Alina Soltys

 

Our next sector focuses on more specific tools in the engineering space. National Instruments hasn't made any deals in the last three years, but all of a sudden they decided to jump in with both feet and in last May they acquired two companies on the same day: AWR and Phase Matrix, for a combined deal value of $96 million. AWR provides EDA software for designing radio frequency components and systems, and when combined with NI's current offerings, customer productivity will be boosted significantly. There is a great fit between both products in creating a design validation and production continuum. Now if you add the Phase Matrix acquisition, that adds the manufacturing component as well. So, NI has just acquired their entire production process in the RF space, plus they are acquiring great teams and great management from both companies.

 
Tomoki Yasuda

 

Another deal that focuses on team also, albeit on a much smaller scale, is Twitter's purchase of AdGrok, who provide campaign management services for Google Adwords. The reason for this purchase is that Twitter is really focusing on that revenue generation via ad monetization and they needed talent quickly to fill those key roles. What they hope to do is build out a better platform for advertisers to use without polluting everyone's Twitter streams. This really is a step in the right direction. Dick Costello, Twitter's third CEO is really trying to build out longer-term strategies step by step, and it's not going to happen overnight, but it is refreshing to see some long-term focus there.

 
Alina Soltys

 

 

For our next deal, instead of focusing on revenue like Twitter's third CEO, Iron Mountain's management is under pressure to focus on killing off divisions and instead focus on higher margins. They are changing their business plan after Elliot Management Corp, an activist shareholder with a 5% stake told them to leave the digital data business and instead focus on their traditional business model. If Elliot Management sounds familiar to some of you, they are also part of the group that brought Novell into play. Iron Mountain is selling digital backup and archiving technology solutions to Autonomy, who has built up a $1.1 billion war chest in the past year. They have actually been pursuing this deal in the background for over a year now. Iron Mountain got into the position of having to divest by having an unfocused acquisition strategy. They built up their entire digital division based on acquisitions from different platforms and they just weren't able to achieve those cost synergies. So those unfit divisions have now been cast off the island.

 

 

Another company that has been cast off is Yahoo! They have had so many disappointments with layoffs and declining web presence, even as far as their Ali Baba stakes slipping away, which is still being worked through. But they have not stopped their acquisition streak. This was their third deal this year, with 5to1.com, which is actually in the same space as Revinet, our client that Jon mentioned.

 

 

5to1 has a proprietary platform that brings together publishers and premium advertiser inventory and because of their proprietary platform, they are able to achieve really great multiples.

 

 

Tomoki, what do we have next?

 

Tomoki Yasuda

 

 

In the same space as Revinet, we have PublicisGroupe acquiring Rosetta for $575 million. Publicis, is of course one of the big four ad agencies and Rosetta is the number 2 digital ad agency in the US. Publicis has been very active in trying to increase digital revenues, which total about 30% of its total revenues online, and it has ambitions of bringing that up to 35% by 2013, so look out for more potential acquisitions in the coming future. They also acquired Razorfish in 2009, another digital agency and it seems to me like they're trying to be the big fish in the digital ad pond.

 

That does it for research, and I'll turn the mic over to Dougan.

 
SOCIAL WARS and ROB SCOBLE

 
Dougan Milne

 

 

Thank you, Tomoki and Alina, for the Corum Index, some great information there. I'm looking at the clock, we are running a little bit behind schedule, and I say that because we have some excellent guest speakers today, and we definitely want the chance to hear from them in all their glory. I do want to take just a couple of minutes to talk about what we're calling the Social War, and I think it is important to understand what we're talking about when we refer to this. We're looking at two fundamentally different wars going on right now, but both are quite closely related.

 

There is the war for the consumer and there is the war for the social graph. The primary differences here are in the form of the broad business models and the desired revenue streams between them.

 

In the consumer battle, this is a conversion game, find out what they want, get them interested, and get them to click that buy button, which means you'll also need their credit card info. On the social side, it's a slightly different angle, and this is a game for eyeballs and the primary source of revenue here is actually coming from advertising which obviously does point back to the consumer model, but in the pure social graph, companies here are far more interested in eyeballs and head counts and unique users, and ultimately they're interested in engagement and retaining that engagement.

 

So while the war is being fought on so many different levels and in so many different scenarios, we're going to be focusing on the four primary battle grounds, music, video, photo, and networking or communications. I know there are a number of other headline grabbers, including discounts and coupons, and we have Dan Shapiro here to talk with us in a few moments and he'll be talking about what he has learned about the discount model from Sparkbuy. There are other huge ones too, like the social and casual gaming industry. Corum will actually be hosting an M&A session for Casual Connect in July, that's the largest social gaming conference in the world.

 

But for now, we'll look at these four core issues. Music is an industry that has been more augmented than any other over the past 10 or 15 years. I don't to sit here and talk about the invention of the mp3 or the introduction of the iPod, but the point here is that the business models are still evolving and while we have some dominant players in the space, we still don't know who is going to win this battle. Apple introduced us to the purchase of digital albums through the iTunes store, and they also acquired LaLa in 2009, which was a streaming music service, and we all thought they were immediately going to become a streaming music company, but that has been a couple of years, and hopefully next year at Apple's WDC conference we'll learn a little bit more about the iCloud and how that is going to be competitive against some of the others in this space. In streaming music we have Pandora, we have Spotify, they are definitely at the top of the heap, and Spotify is exclusively European, though they have been threatening to come to North America for the past couple of years. Pandora has already filed for IPO, which we should see in the next few months. We're excited to see that, because it will be the first streaming music company to go public. Of course Amazon was first to market with the digital music locker, they beat Apple and Google to the game, and they are already facing plenty of lawsuits, but that is the price you pay for business here.

 

Another industry that we have seen a major shift in delivery model and business models for is with the video space. Again, we have iTunes with the pay to rent or pay to own model, we have Netflix with the monthly subscription buffet, and then Amazon with their annual prime account, Hulu with the free basic model, upgradeable to the premium service, and YouTube with their advertising model. As far as movies go, gaining nearly 300% in the public markets over the past 18 months was Netflix, we cannot deny there is something very special about that company. Streaming is now well over 50% of their business with their views at this point and at only $7 a month, it's hard to say no. Hulu took a different approach, they are trying to capture the network TV viewers, Hulu actually acquired a Chinese company called Mojiti to put a social layer on top of their streaming service. Sony has Voodoo and then Amazon is fairly new to the game but a good video delivery service as well. YouTube is the black horse to watch.

 

In the photo space, there was recently an interesting article on TechCrunch looking at the past 15 years of photo sharing exits and all the IPOs and acquisitions combined still have not equated to the transaction price of YouTube, the further premise being that if photo sharing is such a small ticket item, why would an entrepreneur choose this path over video? This is where we hit our first big divide between social and consumer. Because unlike video and music, photos have always been about the user, they have always been user generated and always been our primary inroads to social.

 

Lastly, and I know I've just flown through these, is the networking and communication side. There is a dominant player here, and we all know who it is, Facebook. There have been plenty of rumors over the past years about the IPO, but they have shut it down. I don't think it's going to happen this year, certainly. LinkedIn recently went public and Nat talked about that earlier, which has created a surge in secondary or private market shares for Facebook. But there are some other competitors in here. We talked about the Microsoft Skype deal, and you have to realize that really is more than just a communication site, that is the deal for social for Microsoft. There are some big regional players, that penguin isn't Disney's Penguin Club, but 10CQQ. They are huge, a beast, and that is another one to watch in the future.

 

I went through these pretty quickly, but we have some great guests coming up and at this point, he doesn't need that much of an introduction, I think we all know who he is, the scope, the Scoblrizer, Robert are you there?

 
Robert Scoble

 

 

Thanks for having me on.

 

Nat Burgess

 

 

Let me start with a broad-based question. For a lot of the traditional software companies out there that have spent 20 to 30 years building their firms, then only to watch the newly minted social company get acquired for more money than they are worth, their question is, what the hell is going on?

 

RS

 

 

I think that this is about growth and these companies are now growing faster than the older software companies. I think that the new virality is really what is happening here. It started with ICQ, I remember that was released on November 1, 1996, to 40 people, and by the time I joined it in mid-December there were 55,000 people on it. Today that kind of growth seems very slow. I just interviewed MyPad, for instance, in San Francisco, they make a Facebook App for iPads, which only have 20 million users so far. They already have 8 million downloads in about 5 months. That is the new bar for growth and that is why these companies are getting valued so highly, is because they're growing so fast.

 

Nat

 

 

Well let me ask you a question then, you're referring to some exciting things that happened in the early days of the internet. Is LinkedIn a flash in the pan? Is Facebook a flash in the pan? Or is this is a wave that is as big and important as the original internet explosion in the 90s?

 

RS

 

 

I think so, the latest stuff I've been trying to tweet, nearly everything is using Facebook as a login, so Facebook is now the identity that you are going to use to log in to a raft of new services and connect them together. I don't see them stopping any time soon. I expect them to be one of the biggest IPOs the world has ever seen, in fact GM I think was the biggest, right, a $30 billion IPO? And I think Facebook could easily blow through $100 billion.

 

Nat

 

 

Amazing. That'll be exciting to watch.

 

RS

 

 

And LinkedIn is not a flash in the pan, I mean the market is saying its not, its staying at about a $10 billion valuation. Not too bad.

 

Nat

 

 

That's true that's a good point. What about the recent acquisition of Skype by Microsoft? Why the big price tag, and is that a sound strategy on Microsoft's part?

 

RS

 

 

I'm seeing a whole lot of disruption in the enterprise. Companies like Fox.net or SalesForce, Jive, Spigot, and a few others, are taking little tiny bites at Microsoft. And those bites are now starting to hurt. Fox.net has 5 million users and they are doubling every 14 months. Microsoft is saying well how do we make sure we don't lose everything and everyone to these new players? The users on Skype are the best users in the world, so they paid a lot of money for it. I told Gates to buy it back when it was under $2 billion.

 

 

You look at the new Windows 8 that was shown off last night, they're trying to deal with Apple and some of the disruption that is going on in the world to their business model and Skype is a key piece, I think, to keeping people at least interested in the Microsoft/Windows ecosystem.

 

Nat

 

 

That is very true, it's a great brand. Now Skype is interesting because it harnesses the end user's hard ware, there's almost no cost to Skype to take care of customers, and that is true for a lot of these startups, so with costs so low, technology is being built out of the cloud, on rack space, and elsewhere, very little need for capital. Are VCs still relevant today.

 

RS

 

 

Yeah, because of the fast growth these companies still do need capital to pay their hosting bill. While they are cheap, they are not free. I think that the acquisition cost of customers is going to go up. I'm looking at my iPhone and I've just deleted about 150 aps off there and I only have a small fraction of the aps that are available. There are 400 or 500,000 aps, and I only have two or three hundred. The industry calls me a heavy aps user, which means the normal user is only using 20 or 30. When I talk to audiences and ask how many aps they use, very few have more than 100. Getting new customers and being seen as a leader in a space is still pretty touch and I think that will still need capital. You'll need advertising, going to conferences, sponsorship. South by Southwest, for example, is becoming bigger, and therefore more expensive, to reach all the attendees there. The competition for billboard space, promotions, for parties, its all going up and that means that there is still a need for capital.

 

Nat

 

 

Definitely. I have 10 more questions I wish I could ask you, but I encourage everyone to go to Scobleizer.com. Robert actually has insight on a lot of the companies that he's mentioned today and we should all be watching carefully.

 

RS

 

 

I'm the chief learning officer for Rackspace so I go around the world and interview people at a lot of tech companies. Last night I put up a tour with Ford, I do dozens of interviews a week right now.

 

SOCIAL ACQUSITIONS and WRAP-UP

 

Nat

 

 

Great. We'll all spend some time there and thank you very much for sharing with us today. We're now going to transition over to two of the CEOs who are doing exactly what Robert mentioned in these up-and-coming companies that are either taking a bite out of Microsoft, Google, and Facebook, or becoming an important part of their ecosystem, two CEOs who created companies, built teams, and then were acquired by Google and Facebook, respectively, in an astonishingly short period of time. I'd like to welcome Peter Wilson and Dan Shapiro to the call today. Guys, we're going to move quickly because again I'd like to spend an hour, but we don't have it. Peter, I'd like to start with you if you can introduce yourself and explain briefly your transaction with Facebook.

 

Pete Wilson

 

 

Hi, I'm Peter Wilson, I started a small company called Rel8tion, which started off as myself and two friends. Eight months later, we were acquired by Facebook and now we work out of Facebook's Seattle engineering office.

 

Nat

 

 

And Dan?

 

Dan Shapiro

 

Thanks, Nat. My name is Dan Shapiro. I started a company called Sparkbuy and I got Pete beat by two months. We founded the company with three full employees and four contractors and six months later...well,  I'm calling you from the Google Kirkland office now. It was quite a ride.

 

Nat

 

 

Let me ask a question. Pete, in the press when you left Google after spending time in Kirkland, you cited “entrepreneurial ambition” as the reason for leaving, which sounds like a disease. Is that something you ever get over? You're working for a bit company again, you're a serial entrepreneur, how's that going?

 

PW

 

 

Actually, when I left Google it wasn't so much that I wanted to be an entrepreneur per se, but rather than I wanted to create my own work environment and create a place that I'd like to work and where people I'd like to work with would like to work. We did that to some degree with Rel8tion, but when I look at Facebook, it is a great environment to work in, and many of the things I wanted to do I can do here, plus I get their resources. So we were actually quite specific about saying we wouldn't sell anybody but a short list, and Facebook was one of them.

 

Nat

 

 

And that was really a function of maintaining a workplace and an environment and a vision that you were happy with.

 

PW

 

 

Yes, the reason to go work for a tiny company is that you get to do a larger number of things and you get to see your impact really clearly. If I look at Facebook, I'm not sure what the ration is for other companies, but I'm pretty sure if you look at users per engineer, Facebook is sort of off the charts compared to other companies. In terms of impact, there's really nowhere else like it right now. Then, in terms of self-direction, all these new style technology companies are very light on management and give people the opportunity to pursue ideas. So, to some degree, Facebook and Google have a lot in common with GE in that they are big companies, but the similarities stop there, they have more in common with startups in how they work on a day to day basis.

 

Nat

 

 

What about you Dan? You're definitely a serial entrepreneur, back under the umbrella of a larger company. Do you find that you are able to pursue your original vision with Google?

 

DS

 

 

I get to pursue a much broader vision, which is part of what is exciting. With Sparkbuy we had this really exciting idea about how we could make it easy for consumers to find what they're looking for by combining a deep structured with some really unique search tools. But being a startup, we were limited in terms of what we could do. We had to sort of take easily available business deals, we were small so we didn't have a large business development team, so we couldn't put together deals with large banks and things like that to address larger projects and more interesting opportunities. So, one of the really exciting things about this transaction was to get to take the vision of Sparkbuy and scale it up by many orders of magnitude, both in terms of product scale and of course in terms of the immediate impact on the world. We get to skip the years of building audience and go straight to providing something terrific to a really large group of people, which is really fun and I'm excited just to be starting with it here.

 

Nat

 

 

I think in your Seattle Time interview you said something like instead of six years and four funding rounds you were able to go to Google's scale in less than a year, which is an exciting opportunity.  Now let me ask a question of both of you, jump ball here, I've been involved now with three deals with Google and on the side lines with LinkedIn and Facebook on a couple of others. I recognize how important the employee interviews and the employee fit and cultural fit can be, and I know a lot of deals get filtered out just because the employees just aren't a good cultural fit for the companies. Everyone refers to these buys as talent buys, but there is more to the story, isn't there? These are also idea buys, they are chasing startups that have identified a cohesive vision that is relevant on a grand scale and they think that is big enough that they should own it.

 

My question to you is for the entrepreneur out there contemplating a startup, how should they be thinking about their valuation proposition, their business plan in the context of being relevant to a Google or a Facebook.

 
PW

 

 

If I can start on this, when we talk about the relation acquisition being a talent acquisition by Facebook, the conversations we have are across both engineering and product. So the engineering guys talk to engineers and see if they seem like a good fit. On the product side we had a conversation that entailed what are the problems you are trying to solve and are they a set of problems that Rel8tion can help Facebook solve better. To that degree it was about ideas.  I have actually not seen good examples of people who build companies and then sell them into other organizations where there is a long-lived value there, where the design of the company was specifically to sell it. Facebook talks about all its acquisitions being talent acquisitions, which is despite the fact that growing rapidly, having people stick around is more valuable than the short term boost of incorporating a single product or idea.

 

Nat

 

 

You just said something that is very important that was maybe lost in some of the commentary. That is, in your experience, a company that is simply built to be sold to a Facebook or Google, is not as successful or viable as a company that is founded around a valid standalone vision. Is that what you were saying?

 

PW

 

 

Absolutely. At Google we would see companies come in where clearly you could see from the beginning that they were built to be integrated into Google. Then you drill down and you find the people did not share the Google vision and want to stick around, so that would lead to deals not happening, because it wasn't a particularly good fit.

 

DS

 

 

I would say you do see the pure talent acquisition which is you see two or three people, they put the new technology on the shelf and hire them. There are no economics about it that are particularly exciting for anyone and they go to work on something totally unrelated. That is really just a glorified name for a company shut down and hiring the employees.

 

 

What I think you see happening in Pete and my cases and what I'd encourage is that if you build a company with a really exciting idea, something that has meaning and impact across a large swath of the ecosystem, then it is very natural that a lot of people will be excited about that. Whether they buy your company and continue to run it, with the much larger purchases you see, the company continues to run in its existing form, or whether they buy the company and integrate it or whether, as in our case, they say that the code that we wrote over the course of six months isn't going to continue to be used, we're going to reinvent that product in the Google infrastructure. There is real value there that is created through the vision, through the opportunity and through the minds of the team as they go and sort of take on that opportunity at a broader scale and with with a different flavor in our case, but on a Google scale opportunity.

 

 

There's one other thing too, that I think is sort of important and that is that while we were thinking about the tradeoffs here, one of the things that just kept coming back to me is that this is a tremendous market for sellers. It was important to me to take advantage of this, so one of the things that was very present on my mind was that it was silly for us not to sell some portion of the company, and the only question was would we do a financing and sell a minority stake or would we go through the conversation with Google and do a full on acquisition. I think it is also just a matter of market timing, too, this is a really great time to be on the seller's side and it would have been foolish on our part to just sit on the sidelines and not raise money, not sell the company, but continue to move along at the original plan. Because when the market is hot it is important to take advantage of that.

 

Nat

 

 

Yeah, that's an interesting comment. I mean, last year Google did 48 deals and if this happened last year you'd have been one of them. This year you're only one of 10. That raises the question as to whether that market atmosphere is changing. Let me go on to a question that is related to your comments, Dan, and that is this. You founded a company, you identified a market need, you said you were trying to buy a laptop, you couldn't find a valid comparison engine to intelligently look at the options, so you created one. There was a stand alone idea there that made sense and then along comes Google and says, “Wow, that looks pretty cool, let's get to know each other better.” For Pete and Dan, as you guys weight the option of should I sell now, just do the deal, cash in my chips, or should I stick it out and build a stand alone company, how did you make that decision, what were some of the factors that you considered.

 
DS

 

Beside the timing factor, which I already mentioned, one of the ways that I think about this is that in the world of startups, there are very few outcomes. There is IPO, which represents a tiny fraction, there is long-term profitability, but you never sell, go to IPO, or shut down, which is uncommon for companies that take significant outside investments, there is selling, and there is bankruptcy. So if I took out the IPO as a wonderful long shot, but not something to consider likely, and bankruptcy, it is very probable that at some point this company will be sold to somebody. I was really excited of all the somebodies out there, I was excited about Google, their caliber of people, guys like Pete and folks that I knew. I was excited about learning how they did things and I could think of no better place to wind up. Having the opportunity to do that early, given the right economics, just made a ton of sense for us.

 

PW

 

 

We had a very similar debate. Basically the question came down to, are we as excited or more excited about working at Facebook than we are working for Rel8tion. That kind of drives into a lot of things, what technologies are we using, what products are we building, how much money are we likely to make, we were at an interesting point where we were in the middle of an $8.2 million raise and we had $800,000 committed, so we were at the point where we could kind of turn our back on that and as part of the acquisition

 

Facebook didn't have to pay off any investors, so basically we had a similar argument to Dan's, it seems like this success for us was inevitable, if not now then when? Also there was an element, frankly, that if we didn't take the Facebook offer, at every milestone along the way we would have looked at Facebook's valuation and wondered if we were doing better or worse. So it was a combination of fear and excitement that made us do it.

 

Nat

 

 

Interesting. Let's move on to a couple of questions about the acquisition process, but being respectful of confidentiality. What was the one thing that surprised you the most going through the acquisition process?

 

PW

 

 

From my perspective, it was how quick and easy it was. Clearly, Facebook had done this many times before, they had a playbook and executed well on it.

 

Nat

 

 

In fact, a lot of the professionals working there in M&A were trained at Google, as it turns out.

 

What about you, Dan?

 

DS

 

 

You know, this is the second time I've gone through a major transaction like this. It was interesting to me to observe how true the conventional wisdom is. I'm still fairly new to this, it's only my second one, but I've had the advice and counsel of great folks like you and some of the folks I worked with on the Photobucket deal, the VCs and so on. All the conventional wisdom is more true than you could possibly imagine. It really does matter that you have leadership and sponsorship, not just from the corp dev team, but from the product team and someone in engineering. And it matters that you have a back channel person you can call and ask if everything is okay or whatever the case may be. All of that wisdom about building relationships around your transaction, every bit of it proved invaluable, because over the course of the conversations there were 1,000 places where the deal could have gone wrong and at every one of them we managed to keep it on the rails in a way that was successful.

 

Nat

 

 

Talking to both of you during your respective processes, to see those questions come up and see how quickly you were able to manage them with the buyer was impressive.

 

 

I'm going to go ahead and frontload this next questions. We're at the end of the hour, but we have an audience of CEOs on the line here who are all building their companies, starting new ones, etc. Let's close from each of you with one or two tips for a CEO who is building a start up, wants to make something relevant in the emerging landscape. What are the pieces of advice you would give today?

 

PW

 

 

Mine is that if you're building something in the social space, really commit to it, to make social the central principle of your product. You saw that with Zynga being able to market fairly ho-hum games into a market by deeply integrating social. So I look out there and see all the social sites and I think that as people figure out the way to win markets, we'll see a massive overturns as entrenched players scramble and new people come on.

 
DS

 

 

My advice to someone who is looking to build something in social/mobile/cloud is don't. There are a lot of great reasons to choose something as the basis for your company, but the fact that something is hot right now is the worst of the bunch, because by the time you're out there and in the mix of things, that opportunity will be gone and we'll be on to the next thing. Follow your passion, the idea you're excited about. Do something that you're a deep domain expert about. Do something where you think there is a phenomenal business opportunity where the fundamentals are overlooked, but this area is hot to the point of melting, and this is not the time to go jump in, this is the time to go look over the horizon to the next thing.

 

Nat

 

 

Really great advice from both of you. Pete and Dan, I know you're very busy, congratulations again on your transactions and thank you so much for joining us today.

 

 

We're going to close this month's webinar with a quick look at some of the upcoming Corum events that are available at discounted rates to the attendees today.

 

 

Daniel?

 

Daniel Holland

 

Thanks, Nat. This is Daniel Holland, I do the marketing here at Corum. Just a quick review, we have several events over the next five weeks in five different countries. The key point here is that all of you attendees are eligible for a VIP pass to attend these, so please don't hesitate in cashing that in for this or another event in the future. We'll be in Oslo, Sweden, Georgia, Montreal, Dublin, and Austin, plus we have a very exciting mid-year M&A monthly webinar on July 7. We'll be focusing on deal disasters as well as the M&A process stages to success and how to avoid the disasters. Feel free to visit our website for more information on this and other events. Thanks!

 

Nat

 

 

Thanks, Daniel. That concludes today's conference.