How Corporate Development Evaluates Startup Acquisition Price
You may have heard today that Rockmelt, the social browser startup that launched in 2009, was bought today by Yahoo. You might be struggling to recall what exactly Rockmelt even was? You might have remembered hearing about them in 2010 and installing the beta to give it a whirl. But the thing that you might be wondering about the most is…
Was Rockmelt Worth $70M???
Well, like most things in life, it depends…
Normally a company will try to optimize acquisitions around price. This is generally easier to do with startups that have not seen much traction but have either talent or technology (or both) that are attractive to the acquirer. With little leverage, the exit price tends to be around the valuation of the last money in. If the startup was in really bad financial straits, then price gets pushed further down with investors taking a bath. On the other hand, if keeping the talent is critical, the deal price will be sweetened to keep the acquired team satisfied.
But lowest price is not always the most critical factor. An acquisition may be of significant strategic importance (like Facebook buying Instagram to gain in mobile) or it is a competitive play (Google buying Waze before Facebook or Apple did). Then the most important factor is simply getting the deal done. It therefore becomes critical that corporate development has the experience and the relationships necessary to close the deal or to snag it from the clutches of a competitor. That is why you will see some exit prices that seem inexplicably high even when there were no other buyers and the deal was not being shopped.
Which brings us to the Rockmelt deal. With nearly $40 million in funding and close to 50 employees, they had size yet pretty much zero market presence for their products. Their recent mobile push gave them a slight bump, and generally users were positive about the product, but there just was not enough of those users. They plateaued without any strategy or means to grow further. In other words, they became a zombie startup and a drag on the VC portfolio.
Enter Yahoo. They have been on a bit of a tare recently buying company after company. I have no idea what the strategy behind this could be. However, I suspect that Marissa Mayer looked around the company and saw a workforce that was not cutting it. Let’s face it, Google is the cream of the crop in terms of employers in the valley and Yahoo was the safety school. If she was going to reinvent Yahoo, build products users wanted, and compete with the likes of Google, et al, then she needed to draft some serious talent. So if you look at the string of acquisitions Yahoo has made then (outside of big ones like Tumblr), it is easy to see that Marissa is buying talented engineers and designers in the vision of Google.
Putting the Rockmelt deal in perspective then, what we have is a very expensive acquihire. The product is being decommissioned, so it is not the technology that is of interest. What is of interest is the team’s ability to help Yahoo reinvent its horrible mobile products. But you protest, is that worth $70 million? In fact, it is worth it, but not by looking at this deal in isolation.
Who put $40 million into Rockmelt? It is a who’s who of top investors including SV Angel, First Round Capital, AZ16, Kholsa Ventures, and Accel Partners. As some of the top investors in Silicon Valley, they also have access to many of the best startups and best talent. These are not folks you want to piss off if you want to do business in the valley.
So what exactly is value when it comes to a deal like this? If you just looked at Rockmelt’s traction, it would be hard to do anything north of $10 million. If you were evaluating the talent, you might justify $30 million (note that many use $1 million per engineer as rule of thumb). But if you were evaluating the deal as part of keeping the investors in good graces, then the $60 - $70 million number makes more sense. The investors get to save face and even get to lock-in a small return, which is a whole lot better than getting nothing which is where Rockmelt was heading. The corporate development team at Yahoo gets the inside track on up-and-coming startups to feed their quest for acquiring more talent in Mayer’s grand vision to remake Yahoo.
I mentioned in a tweet that the $70 million for Rockmelt was ransom money. This all does sound pathological, but in a sense it is not too removed from how many business relationships work. It is one of the oldest business strategies in the book, the old quid pro quo, or you do something for me and I do something for you. And that is ultimately the game that corporate development is in. They will pay more today for the opportunity to get a special deal tomorrow.
19 Notes/ Hide
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- techdrumbeats said: It’s nice to read about this acquisition from Yahoo’s perspective. Great Post!
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Interesting.
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