Tips for Internet Company Sellers
Based on a Case Study of Evite
Here are several tips for sellers of Internet companies culled
from the case study of Evite below:
- Start very early to seek strategic alternatives.
- Cut cash burn immediately and dramatically.
- Identify the core value-creating element of the business and
pare back to It.
- If acquisition is the strategy, start early to identify prospects.
- Competition fosters better prices; try to get at least one buyer
interested and then start contacting others.
- If the property is broad-based, reach broadly to prospective buyers.
- Find an intermediary with a broad contact base and deep understanding
of your business.
- Get to know your friendly neighborhood I-banker now.
EVITE CASE STUDY: Early and Loudly to Market
Evite, Inc. last autumn became one of the first dot coms to turn
its "for sale" sign into a national news event. And last week Evite's
broadcast strategy paid off when Ticketmaster (Nasdaq: TMCS) said
it would acquire the company.
Evite founders and funders see the sale as welcome news in what
they describe as a 'brutal' market, even though the price tag, rumored
in news reports to be less than $25 million, was almost certainly
well below the $38 million that investors had sunk into the startup.
Key to whatever success they can claim, Evite principals say, was
the decision to act early, decisively - and loudly.
The Slash and Broadcast Strategy
Last November, as Silicon Valley began to echo with the crisp snick
of investor purses snapping shut, Evite CEO Josh Silverman took
quick action. Even though Evite still had $17 million in the bank,
Silverman slashed 60 percent of staff and hired investment bank
Chase H&Q (now part of J.P. Morgan Chase & Co.) to shop
the company. And then, in a move fairly unprecedented in investment
banking circles and somewhat to the chagrin of his bankers, Silverman
decided to broadcast his message to the hills. "I picked up
the telephone and made ten calls to reporters telling them, 'I have
breaking news for you, Evite is for sale' " Silverman said. Several
reporters indeed picked up the story and the Evite phones began
to ring.
Flushing Out Buyers and Creating Urgency
Silverman went public with the sale despite fears that a public
announcement would put downward pressure on the selling price. "There
were two things we could do," Silverman said. "One, we could have
the bankers call and pitch each prospect and spend a lot of time
trying to get in front of people who fundamentally aren't that interested."
His other choice, he said, was to take the more public route.
Silverman chose to put out a broadcast in part because he felt
it would be difficult to predict just who might be interested. "You
don't know what's on the white boards of all these companies out
there," Silverman said, pointing out that Evite's offering was attractive
to a broad and hard-to-pinpoint field of potential buyers. "My sense
also was that we needed to create a sense of urgency," he said.
Evite funders agreed with Silverman. "There was no downside to
the approach," said Andrew Anker, a general partner of August Capital,
the venture firm that put $7 million or $8 million into Evite, joining
investors such as Greylock Management and Hambrecht & Quist's
Access Technology Partners. "We meant to sell and we were just trying
to ferret out if there were any buyers. We didn't want to pretend
otherwise."
Both Anker and Silverman believe the broadcast strategy helped
Evite attract several of the seven or eight serious prospects -
a number that eventually boiled down to three hard-core bidders.
"There's no question at all, it brought in a number of new prospects,"
said Anker. "One e-commerce prospect that came out the woodwork",
Silverman said, "was a company that I wouldn't have picked to be
in the top twenty acquirers." But, he added, "When they told me
what is working to drive revenue for them it became clear why Evite
was perfect for them." Another buyer that emerged was an international
buyer that was seeking both the Evite product and Evite's San Francisco-based
operations team as a Silicon Valley development beachhead.
Paring Back to the Core Value Engine
Evite insiders also believe that early and aggressive cost-cutting
was key to making the company saleable. Before deciding to seek
a buyer, the company had been deploying dozens of developers on
several ancillary projects, including sourcing content such as restaurant
reviews and developing "B2B2C" capabilities. Silverman halted all
new development and focused his remaining 27 staffers on refining
the core application and trimming costs in such areas as customer
support. The resulting programming cleanup brought about a 40 percent
increase in performance.
Cutbacks more importantly whittled back cash burn rates, which
are a particularly deadly poison pill for today's buyers. Not only
was a stripped-down Evite able to bring about $15 million in remaining
cash to the table, according to Webmergers estimates, but it also
stripped away bells and whistles that, in the case of Ticketmaster,
the buyer didn't want anyway.
Also, Silverman said, with cash burn under control, the company's
advertising-based revenue model began looking more viable. Boasting
such financially stable advertisers as Heineken and Palm and an
ability to reach such rich prospect lists as individuals being invited
to housewarmings or baby showers, Evite has been able to sustain
an average CPM rate of $20.
The Fit With Ticketmaster
Evite appears to have found an ideal home at Ticketmaster, in particular
with its CitySearch regional directory service. "It's a perfect
fit," said Mary McAboy, Ticketmaster's vice president of investor
relations. "Ticketmaster is about where to go and what to do and
Evite gives you an easy way to invite others to go along."
Ticketmaster has made about ten acquisitions since 1999 and McAboy
predicted the company will find more ways to buy, rather than build,
extensions of its product lines. "There's been a lot of great work
done in building franchises," she said, "Evite is a good example
of that." For example, McAboy said, the company's $22 million January
acquisition of ReserveAmerica, a camping reservations service that
had a nearly identical business model to Ticketmaster's was "a perfect
fit for our strategy." Los Angeles-based Ticketmaster is majority
owned by USA Networks, Inc.
Show-Me-the-Money Buyers
A year ago, Evite's valuation might have been based on page views
or other new-economy measures then in vogue, but in today's tough
climate it focused solely around old-fashioned revenues and how
they could be accretive to the buyer's earnings. "Buyers just want
to see what revenue you did last month.", Silverman said. "This
market is so bad that demonstrating that deal is accretive is a
necessary requirement just for getting in the door," he continued.
"And even if the financial case can be made," he said,
"acquirers are often reluctant to make a deal simply because
they fear punishment from Internet-wary investors. There's a big
hurdle of 'do I want to announce to the world that I just bought
an Internet media company'", he said. In the case of Ticketmaster,
the stock market has modestly rewarded both the Evite and ReserveAmerica
deals.
In a Brutal Market, Competition is the Mother of Liquidity
"It's a brutal market to go do deals in," said Silverman. Anker
agreed. "Look, it's a buyer's market right now," he said. "What
we hear over and over again when we talk to buyers is 'there are
200 other dot coms talking to us [about being acquired]. Tell us
why we should talk to you... Buyers are thinking you're probably
going to go bankrupt, so why spend millions now to buy when you
can spend tens of thousands of dollars to buy you in bankruptcy
court?"
"Evite was in a position of strength relative to most dot
coms," said Anker, in part because its cash reserves gave it
"the ability to just say no and walk away." Equally importantly,
he said, was Evite's ability to gin up multiple bidders. "If you
can't get at least two buyers interested," he said, "you just end
up playing some game of chicken and it's really just a question
of the buyer just writing the terms and you taking them. If you
have an interested buyer, it's much easier to go create more interest
around that," he said, adding, "Companies don't get sold, they get
bought, especially in this market. The reality is that going out
hat in hand is close to impossible in this market... It's not to
say don't try it, but just be realistic."
And Oh, Start Early
One constantly repeated lesson from Evite's case is the value of
starting early to seek buyers." Deals take a month or two months
to negotiate," said Anker. "Once you've found the likely set of
buyers, you've still got two to three months of dealing to do."
Silverman also emphasizes the need to find intermediaries that
have a deep understanding of the marketplace. "The ability to pitch
you effectively is a hard thing to get out of a banker that's been
working with you for a week," he said. Silverman urges entrepreneurs
to get to know a few investment bankers early on, as he did, so
that when the time comes to sell there's an existing base of understanding.
From the Web M&A Update, Volume III, Issue 50, March 13, 2001.
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