What a difference a year makes.
Last April, I posted that:
Europe has always had problems gaining start-up momentum – there’s no epicenter, there’s no critical mass- and there are no Heros.
The Wired 100 list has gone a long way towards making 100 heroes visibile. Big applause for the Wired team. This year’s Wired 100 is on stands now – one person I was happy to see on the “bubbling list” – John Taysom. He’s an awesome guy. I’ve got a few other personal favorites that aren’t on the list yet, but I’ll cheer for them in silence… oh, and obviously congrats to everyone that’s on the list.
Europe *has* a start up scene now – and fortunately for me – most of it revolves around London. Spotify, Mind Candy (Moshi Monsters), Soundcloud – all amazing companies are doing well on a global stage. Young startups like Groupspaces or Lightbox (go David, go Thai) are popping up and getting funding from tier 1 investors.
I could count on one hand the number of hot European startups two years ago. I can count them on two hands now. I might even have to throw in a toe or two as well.
Silicon Roundabout is real now – thanks largely to initiatives like techhub. Seedcamp continues to expand it’s footprint and pulls together the who’s who of the European start-up world during seedcamp week each September. There’s an event this weekend spear-headed by Songkick for developers – silicon milkroundabout. Sign up for it here. This just wasn’t happening 2 years ago…
There’ve been some interesting companies getting acquired -M&A activity is picking up significantly – and money is getting returned to investors in Europe. But, we need to see more high-profile European IPOs. Skype
is grabbing for the ring, just got bought by Microsoft for a cool $8.5bn, Daniel Ek at Spotify is (rumored) to be gunning for an IPO. (That would be awesome if you did Daniel.)
All of this is coming together to make London a hot spot. It’s a great time to be here… (plus the weather’s really great this year). One more turn of the wheel and I think we’re there –
January… a month for reflecting and prioritizing the new year.
I always kick off the year with a quick retrospective of M&A activity, with graphics thanks to my friends at ICON Corporate Finance, based here in sunny London.
This picture says it all:
Average exit valuations have returned to pre-recession levels, above 2x sales, and are outstripping the ratios seen in recent years. In the UK, the highest multiple was Moneybookers, which sold at 9x sales. In the US, both Facebook and Groupon made headlines with their paper valuations at $50bn and $6bn, implying multiples of 25x and 12x, respectively. (Remember that Playfish was acquired by EA in 2009 for $300M, which was reported to be 4x revenues.)
While Facebook wasn’t an exit, and the Groupon offer was just that – an offer, 2011 looks like it’s going to be the Year Things Change. There are numerous venture-backed companies generating $100M+ in revenues that are going to IPO (some of our portfolio included). The NASDAQ was up 17% over the course of 2010, and 2011 is starting off well. My employer, Qualcomm, has already announced a $3bn acquisition of Atheros this month. Linkedin, Skype, Zipcar, etc. are all teeing up IPOs this year. I’m very bullish that 2011 is going to be the year we’ve all been waiting for. VCs and Entrepreneurs alike.
Hold on to your hats.
Congratulations to Andrew Valentine, CEO at Streetcar on the company’s sale to Zipcar. I’ve known the company for a long time, and have watched it grow since Streetcar presented to the London Business Angels network when I was the “gatekeeper” there…
More info on the exit is available over at Techcrunch.
Every year I start off with a retrospective of what’s just happened over the past 12 months. I guess the difference this year is that everyone knows 2008 was simply awful across the board…
Icon Corporate Finance has provided the data points though, demonstrating that 2008 looked very grim:
You’ll notice the vast majority of exits were sub $100M last year, while valuations outside of this band are falling fast. This means the venture portfolios are in for tough times… and capital intensive companies will find it much more difficult to raise capital. Already I’m hearing the “10yr limited life” venture fund model being challenged. People are realizing it might take longer than 3-4 years to build and exit a company. Plus LPs are simply choking…and VCs are feeling the pinch as well in terms of LPs reneging on capital commitments. Yes, some venture funds continue to raise new funds- this is the exception (Accel’s $1bn closed in December and Balderton’s recent $400M come to mind…)
To state the glaring obvious, 2009 will spell the end for many venture funds and venture backed companies. I believe there was always venture funding overhang from the early 2000s- that will have fully corrected by the end of this downturn…
The word on the street in California is “this downturn could be as bad as the great depression”. The word on the street in London still seems to be, “what recession?”. Look for “Sale Now On” signs to change to “Going out of Business Sale” in 2009.
I posted last year’s figures from Icon Corporate Finance, showing how exit valuations were 1.5x -2x sales. I use figures like that as 3rd party data when discussing valuations.
This year’s data focuses on one of the same two metrics used last year price/EBIT (no price/sales data was provided). What’s clear though is that the multiples for 2007 are trending down from those of 2006…
If you’re an entrepreneur out fundraising, you need to keep these multiples in mind. Many companies I’ve met with over the past 12 months have really pumped up their valuations. If the exit valuations aren’t increasing, then the entry price isn’t going to be increasing…
Fred summed it up well just before Christmas: funding in 2008 isn’t going to be the party its been over the past 2 years, so hold onto your hats.
P.S. Bonus points for spotting Fred in a Darth Vader mask in 2008!
[Update 28 January 2008]
Stacey over at GigaOm (thanks for the link love) has a good post on venture valuation trends from a US perspective- the party’s coming to an end stateside (and with the recent NASDAQ slide, perhaps even more abruptly):
… But for video startups who raised money based upon the valuations set by Google when it bought YouTube for $1.6 billion, or the open-source startups out there checking out MySQL’s eye popping $1 billion price tag on what’s reported to be about $50 million in 2006 sales, the party may be dragging to an end. Slide’s recent $550 million valuation set by private equity funds notwithstanding, free-spending strategic buyers are showing signs of coming to their senses, so valuations may be coming down…
That seems to be what’s happening to every web-based company these days. M&A activity is really going through the roof…
Glad to see London-based Last.fm in the headlines today as well. Kind of glad to see Blinx in the headlines recently (although Max thinks it’s bad for business in London).
M&A activity is really driving VC exits- how much longer can the good times last?
Continue reading “Going, going….gone!”
Valuation for early stage investments tend to look like horse trading because traditional valuation tools, i.e. P/E ratios make no sense when a company is losing money. Because we invest into pre-profit (and in many cases pre-revenue), we tend to use a price to sales ratio for valuation. For companies that aren’t generating revenue, we can work backwards and discount forecast revenues.
What basis would you use for determining an appropriate multiple?
Icon Corporate Finance have published their 2006 figures for Technology M&A. Their numbers are a good place to start that discussion based on achieved exit prices. You can see on the left hand axis that price to sales multiples tend to fluctuate between 1.5x and 2.0x for 2006: