Finding The Sweet Spot Part 1
The sweet spot for selling right now seems to lie right around a half a billion dollars. More companies than not have sold for less, much less, but there is something about that $500 million number that has many companies saying “I do.” This includes companies like LowerMyBills.com who sold for $380, About.com that went for just north of $400 million along with MySpace, Shopping.com, Shopzilla, IGN, PriceGrabber, all of whom sold right around the $500 million sweet spot, if not a little more. Look through that short list and you’ll see it represents three areas of merger and acquisition interest – comparison shopping, lead aggregators, and ad networks.
At one level, reaching a valuation of one billion is all about the numbers. Most of the lead generation and comparison shopping sites that sold this year generated north of $100 million with healthy margins, and they received valuations based on their financials, not on hype. Were they doing closer to $300 million annually, they could justify a ten figure sale price instead of nine. Thus far, none have achieved that. This week, take a look at some of the more acquisitive verticals and the companies that operate in them to understand the factors of growth and why companies in some of them can sell for more than others.
With respect to lead generation, no company has sold for more than $500 million. Of those that remain, two seem bent on going for more than that, Quinstreet and Nextag. The former makes its money almost exclusively from lead generation, whereas the latter operates in two verticals. They started out in comparison shopping but used their comparison branding goodwill and media expertise to move effectively into the mortgage lead generation space. Quinstreet is in many ways, the LowerMyBills of the post-secondary education space. They have a heavy concentration in one vertical and are among only a very small handful of companies that do eight figures monthly in the education space. Their revenues most likely put them close – in the $650 million to $700 million valuation range.
Lead generation and comparison shopping share more in common than it might first seem. The former tends to involve larger transactions and a soft-sell while the latter does well with smaller, very specific, mostly retail items. Despite their fundamental transactional differences, lead generation and comparison shopping both involve connecting a user with a company. Comparison shopping, gets a commission on the sale as opposed to a bounty for the introduction, but fundamentally, they help serve the same purpose. They also share size valuations in common. Both land solidly in the $500 million range, a little more depending on revenue, margin, and position…but close enough really.
My buddy and industry stud John DeMayo encapsulates this well in his “Go Wide or Go Deep” post. LowerMyBills and Quinstreet have both gone very deep; they hold a dominant position in one vertical, perhaps at the expense of others. Others, such as Adteractive and AzoogleAds have done a commendable job at establishing a presence in more than one vertical, although neither has achieved the Holy Grail, i.e. both wide and deep. His wide and deep terminology, though, is helpful in explaining our upcoming evaluation criteria.
On a more granular level, the factors for evaluating a particular segment come down to some combination of the following – number of advertisers, advertiser breadth, audience reach (includes direct buys on media, along with publishers for those that have publisher / affiliate relationships), audience breadth, and advertiser automation / scalability, i.e. the threshold for a profitable client. Combined, these factors make up the wide and deep of a company or segment’s advertising and traffic base, ones that also try to take into account how easily a segment could scale. All together, these should help explain why certain segments produce large companies and why certain companies are larger than others. In Part 2, we apply these factors to several verticals and look at what combination yields the greatest returns.
