Tuesday, October 24, 2006

Off to Cape Cod

Well, I'm off to Cape Cod Wednesday morning. I'm attending my friend Doug's wedding in Harwich, which should be a lot of fun. Also, my grandparents used to have a house in Chatham and I spent many weeks there in the summer growing up, but I haven't been back since I was about 12 years old. I'm definitely looking forward to seeing two friends get married and re-living some of my old memories from Chatham like Oyster Pond, the wind mill, the Ben Franklin toy store on Main Street and the Chatham Athletics baseball diamond. It should be a fun couple of days.

Friday, October 20, 2006

Movie Masher Launching to Sell???

VentureBeat reports that a new video editing startup called Movie Masher simultaneously launched and put itself up for sale on VentureBoard last week. Most web 2.0 startups are looking for angel or venture money around the time of their launches so advertising for an outright sale is unusual and I am curious to see the outcome. Here are some of my initial thought-bites:

1)I’m not a heavy video watcher or editor but Movie Masher does look cool. I haven’t used its competitors like Jumpcut or Eyespot, but Movie Masher seems to (or at least claims to) have more advanced editing features and given the current interest in video (and despite the fact that editing seems like a feature rather than a full blown business) I do think there is room for more than one video editing exit.

2)Launching with the intention of selling strikes me as a bad idea because it reduces the startup’s leverage in any acquisition conversation. The ability to say “no” or walk away creates leverage during negotiations. Normally, startups have two ways to say “no” to potential acquirers:

  1. Staying independent (bootstrapping, raising venture capital and/or IPO)
  2. Having multiple prospective acquirers join the bidding

Movie Masher has told the world that they don’t want to bootstrap or raise venture capital so now they can only create leverage in their negotiation by finding multiple prospective acquirers. (Of course I do wish them the best of luck and as I wrote above, I am very curious to see how this turns out.)

3)My observation of the current environment is that consumer internet startup valuations are derived primarily from user growth, management team and advertising revenue because web 2.0 technology is not generally to be considered deep, valuable or protectable. Given that Movie Masher just launched with virtually no traffic compared to Jumpcut or Eyespot and that its investor prospectus implies that the founder does not want to stay with the company beyond a “negotiated deployment contract,” it is hard to see much value in the company through current market measurements.

4)I don’t understand the valuation method in the investor prospectus, which focuses on the potential cost of development. While M&A transactions are fundamentally about the prospective acquirer’s decision to “build, borrow or buy,” the old sales saying that pricing is based on value not cost certainly comes to mind in this situation. In fact, I don’t think that I’ve ever heard of a company valuing itself based on how much it cost to get itself to its current state. Typically value is derived from some form of DCF projection, competitive bidding or some other industry specific metric (which is essentially a long-term proxy for some variation of DCF anyway), as is the case with users and web 2.0. Furthermore, the cost estimates are based on hourly development rates of $80 and $100. I don’t know much about outsourcing, but I have heard that talented Indian software developers earn about $12K per year, which would imply significantly lower hourly development costs. If I were going to use cost to think about valuation, my thought process would be more likely to focus how much it would cost me to add Movie Masher’s unique features if I were to buy Eyespot, which wouldn’t get me into the $2M range that the prospectus suggests.

5)However, Jumpcut was acquired by Yahoo for a reported $15M at the end of September. Alexa reports that Jumpcut had exponentially more traffic than Movie Masher at the time of acquisition Jumpcut wasn’t exactly a major Internet brand or destination either. Furthermore, the video space is really hot and I could see someone wanting Movie Masher’s technology despite everything I’ve written previously. If a sale were to be negotiated today, my gut feeling is that a value of $250-500K would be fair… but getting any kind of user traction over the next couple of weeks/months would change everything… and again, I truly hope the founder gets as much as possible for his hard work.

6)Lastly, does writing about a startup posting on VentureBoard represent another conflict of interest at VentureBeat? To me this issue is not clear-cut. On one hand, VentureBeat is definitely bringing extra publicity to a company while it is also selling them services. On the other hand, I do think this is an interesting startup development and I obviously believe that it is newsworthy as I’ve take the time to write about it myself.

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