Wallen's

DailyMotion is profitable

The new CEO of DailyMotion, #2 to YouTube, announced today (interview in french) a new round of financing of €15m ($22m). This follows two rounds totaling $44m in 2006 and 2007. More interestingly, he announced that DailyMotion was now profitable despite the downturn.

They plan €15m revenues in 2009 for 60m unique visitors, i.e., €0.25 ($0.35) revenue per unique. However, having launched monetization recently, he mentions that less than 10% of videos include advertising. Hence he expects a very strong topline growth going forward with at least 50% in 2010.
All in all, considering the 90% untapped videos, this means that the standard guess estimate of € 1-2 advertising revenues per user for social networks is achievable. That's good news!

They also plan to broaden their thematic channels offering, expand in IPTV and they are pondering whether to move into VOD. This could improve (or not?) their monetization potential.

Overview and tips on due diligence

After my posts on VC funding overall approach and termsheets, I thought I would close up with a post on due diligence. Again instead of repeating what others have said, I have built a map on the topic. Just click on the pearl below and then the play button and the arrows.

A map on termsheets and its negotiation

My last post on "a map of VC funding overall approach and process" focused mainly on the process and how to get going in a funding round. Once you've started pitching to some VCs, eventually you'll receive a termsheet. I tought it would be interesting to do a deep dive on this key milestone of the funding process: the termsheet and its negotiation.

Again instead of writing yet another post on this topic, I've build a map of blog posts that I organized along 2 buckets:

• Key points to keep in mind during the negotiation of the termsheet: overview followed by some specific points
• Termsheet items: overview followed by a deep dive on 3 important ones - liquidation preference, valuation and ratchets

I've also included an "appendix" with all the detailed definitions and some technical stuff... for those that are really motivated or those that want more details on one specific item.

Here is the map on termsheets and its negotiation : just click on the play button and the arrows to go back/forward.

A map of VC funding overall approach and process

There's been a lot of blog posts by VCs and entrepreneurs on how to approach VC funding, what the process looks like, explanation of termsheet items, etc. There are obviously different different views and opinions as well as various advices out there. Instead of writing yet other posts on these topics, I've done a map of blog posts on the topic and included the various perspectives out there.

I've started by a map on the overall approach and process of VC funding and organized it around 4 themes:

• An overview of the overall process
• The first question an entrepreneur should ask himself: how much money to raise and to achieve what ?
• Best practices on pitch documents (executive summary and first presentation)
• Some practical tips (e.g., on the first meeting, VC objections and the overall process)

Here is the map on "VC funding overall approach and process" (just click on the play button and the arrows to go back/forward). I'll build another map on termsheet and due dilligence in the coming days.

PS: If you have other posts to add to this map, don't hesitate to reach out.

2007 Web start-up funding (2/2): Investment size and implied valuation

I said in my last post that I would make a series of 3-4 posts before year end on 2007 Web start-up funding from CrunchBase database. Well... time flies, so that's the second (and last) post of this series. It focuses on Web start-up exclusively on investment size by stage and rough estimates of implied valuation.

Web investment size

Series A, B and C & above represented in 2007 respectively 55%, 31% and 14% in terms of number of investments and 36%, 33% and 31% in dollar terms. In 2007, the median round size was $~4m for series A, $~10m for series B, $~15m for series C & above. These figures are similar to the 2004-2008 figures which is normal given the 2007-2008 bias in CrunchBase. 

There is still a large variance. For example, there is a ratio of 3.2 between first and third quartile  series A ($2.1m vs. $ 6.5) with 10th percentile investment size going up to $10.5m. Series B and C & above have a lower variance (ratio of 2.3 and 2.5 between quartile 1 and 3). Series B remained in the range of $6-15m and series C $10-25m.

  

Implied Web pre-money valuation

By doing some assumptions (series A tend to go for 25-50% of capital, series B for 20-30%, series C & above for 10-20%), we can infer some rough estimates of pre-money valuations that should be directionally correct for 2007. The figures are summarized in the table below.

Series A median pre-money valuation is around $8m and the average around $12m. Series B estimates are around $30-35m and series C & above are around $95-115m. However, these figures are just indications not a recipe to follow. For example, top series A pre-money valuation can be >$~20m (10th percentile).

 

 

It would be interesting to compare these 2007 figures to 2008 ones. I'll try in the coming month to repeat this series for 2008 Web start-up funding.

2007 Web start-up funding: Web VC ranking

In my post « Insights on Web funding from Crunchbase», I mentioned that I would run some numbers for year 2007. With the end of 2008 approaching and before being busy at Le Web ’08 conference of Loic LeMeur, here is the first post of a series of 3-4 on Web start-up funding in 2007 based on CrunchBase funding database. This post will focus on the “2007 Web VC ranking”.

I’ve changed a bit the scope compared to my previous post by including seed & angel rounds. There are of course a few minor caveats to this ranking. First, there maybe a few deals missing in CrunchBase. However, the funding database for 2007 includes ~670 investments in ~630 Web start-ups for a total value of $~6.3 bn (among which $~5.3 in the US). Actually, the total value for the US is similar to the Internet figures of the Money Tree Report from PwC and NVCA. In other words, year 2007 is very well covered in CrunchBase. Second, some deals recorded as 2007 transactions may have occurred end-2006. But this is compensated by the similar effect for end-2007 investments. In any case, these two points should not affect materially the relative position of the various VCs which is the interesting point of the ranking. The latter reflects VC funds involvement in Web start-up funding (flow of investments, not current portfolio), i.e., from a Web entrepreneur perspective "which organization can help me fund my start-up?". It is not a measure of quality or track record. 

Enough talking, here is the 2007 top 30 Web VC ranking: the top 5 places are trusted by Sequoia, Accel, DFJ and First Round Capital with Y Combinator complementing this group (tough not a VC but an incubator). Thirteen funds have invested in 10 or more Web start-ups in 2007 (full ranking and detailed investments by investor are in Excel here: Download 2007 Web VC ranking).

 

Next week, I'll  continue on this series on 2007 Web start-up funding.

PS: thanks again to Nicolas Cynober - Web semantic expert and R&D engineer at pearltrees - for his help to extract CrunchBase funding database.

Web funding norms are a context, not guidance

Following my previous post on VC Web investments insights from CrunchBase, here is a small follow-up to illustrate a recurring subject for entrepreneurs. We are often looking for norms on deal size, valuation, etc. to guide our funding approach. However, norms or medians should not be used as guidance but just considered as a context.

To illustrate my point, the tables below depict the distribution of deal size of Web investments at various stages (A/B/C) over the period 2004-2008 (from CrunchBase database). What comes out is that, while there is a middle ground with most deals, there is also a high proportion of "outliers".

~50% of deals in series A are between $ 2-7m,  in series B between $ 6-13 and in series C between $ 10-25. As a reminder from my previous post, the median were respectively $ 4.8m, $ 9.5m and $ 15m.  However, nearly 15% of series A deal size are above $ 10m, ~12% of series B above $ 20m and 11% of series C above $ 40m. To take some extreme values, the 1st percentile is respectively $55m, $ 80m, $100m for series A, B and C.

Insights on Web funding from Crunchbase

In my CFO & Business Development responsibilities at pearltrees, I'm interested in reliable Web specific funding data but it's hard to find. Usually, Web start-ups are included in broader categories.  Actually, I haven't found any comprehensive funding analysis focusing on Web only. Discussing about this with Nicolas Cynober - a semantic Web expert and R&D engineer at pearltrees - we decided to find a remedy: we extracted the entire CrunchBase database of funding rounds. Zooming on investments in Web start-ups exclusively (since 2004 to end of October 2008, series A to F), we ended-up with a database of 914 start-ups, 1307 investment rounds by 817 investors worth nearly $14bn. While CrunchBase may have some pitfalls (e.g., fewer deals prior to 2006, US bias), it is one of the most comprehensive publicly available database on Web start-ups funding. You'll find below some "Web specific" insights such as the Web VC ranking or overall data on investment stage, deal size and implied valuations (the tables below and detailed investments by VC are in Excel here Download Tables Crunchbase).

VC Web investment ranking

As table 1 below shows, the usual suspects are at the top of the ranking with DFJ, Sequoia and Accel trusting the first 3 places. These 3 funds invested in more than 40 Web start-ups with a total of 127 individual start-ups (w/o double counting for companies with several VCs) representing 14% of all funded companies. They are followed by Benchmark, Index, Intel Capital, First Round Capital and DAG Ventures who each invested in >20 companies. In total, these 8 VCs invested in 215 Web start-ups (24% of total). Another 36 VCs invested in more than 10 Web start-ups. In total, these 44 VCs invested in 490 Web companies (54% of total). Finally, another 770 investors complement the picture with investments in ~760 start-ups (83% of total financed companies - note that companies having several VCs, the percentage sum up to more than 100%).

Web investment stage

As tables 2 and 3 illustrate, series A funding represented on average 57% of investments rounds (39% in terms of amount invested). Series B, C and D & above represented respectively 31%, 9% and 3% (35%, 19% and 7% in terms of amount invested). Overtime, investments tended to move towards later stage rounds reflecting the advancement of the investment cycle. In 2008 (year to date), series A represented only 44% of funding rounds and 27% of dollars invested.

Web round size and implied pre-money valuations

The median round size was $~5m for series A, $9.5m for series B, $15m for series C and $20m for series D & above. There is however a large variance as table 4 illustrates. For example, there is a ratio of nearly 1 to 3 between third and first quartile series A size ($2.5m vs. $7m) or above 4 between 80th percentile and 20th percentile ($2m vs. $ 8.3). Series B tend to be in the range of $6-14m and series C $10-25m.

There is one step between round size and valuation... unfortunately this data is not available. However, by doing some rough assumptions (series A tend to go for 25-50% of capital, series B for 20-30%, series C & above for 10-25%), we can infer some estimates of pre-money valuations that should be directionally correct. Table 5 shows the resulting rough estimates (the implied step-ups tend to be in line with market data): taking the median estimates, series A could typically go for $5-15m, series B $20-40m and series C $45-135m. With this estimation "technique", bigger round size mechanically come up with higher figures. A recent study by SVB argues that larger round size have on average higher valuation levels.  Hence, one could infer that "very hot" Web start-ups may go for >$25m pre-money valuation for series A or >$60m for series B (20th percentile high estimates).

That's it. I'll try to extract some further insights from this database for future posts so keep... posted.

Don Dodge on starting a company during a recession

You've got to love this post from Don Dodge "Start a company in a recession? Absolutely". That's enthusiasm!

I agree with Don on the conclusion but for different reasons. IMHO, the main reasons are that it will be more difficult for competitors to copy you as everybody is focusing on their core activity and VC funding is (a bit?) tougher for new start-ups.

While Don's reasons are valid too, there is however a big "if". He argues that VCs are loaded with cash these days based on discussions with some of them. As I had mentioned in a previous post, US VC fundraising and investment was indeed more or less flat in the first half of 2008 by the credit crunch. However, the "treasury coffer" of US VCs was around USD 7bn end of 2007 vs. USD 21bn end of 2001. Hence, Don's conclusion is correct if institutional investors like pension funds continue to invest in VC funds. It will be interesting to see the figures for Q3 and Q4.

Valuation and the power of framing

There are some discussions going on about the valuation of web start-up funding rounds. Most people predict that it will go down. But should it really be the case?

A web start-up investment has a particular cash flow profile for investors: very negative today and 4-7 years down the road very positive (hopefully). With this particularity in mind, the current crisis should in theory lead at worst to a small decrease in web start-up valuation levels (for a comprehensive site  on valuation go here):

• DCF tells us that there should be only a small decrease in valuation levels today: the cost of capital for the next few years cash flows is increasing but the remaining elements are not affected (e.g., LT cost of capital)

• Multiple approach, if correctly used, should marginally affect today's valuation levels. (however it is not - during a bubble investors overestimate valuation and during a downturn they underestimate it because they use the current market multiples)

• Option valuation implies that today's valuation levels should increase because volatility has gone through the roof (mind you while it is the best methodology in theory to value start-ups, it's nearly impossible to apply in practice)

But what about reality?

VC funding is a market in which each player (VCs and entrepreneurs) has a framing at any particular point in time. In the past few weeks, a majority of VCs have changed dramatically their framing. They are afraid of having difficulties to raise their next fund. This fear is even stronger for poor perfomers. This leads today to an effective decrease in supply of VC capital and of valuations expectations. Let's call this the "fear framing". I am not saying that it is an organized process by VCs ; it's rather an "unconscious" process for the vast majority of them.

While in theory "fair" valuation levels should not be dramatically affected for web start-ups, I am afraid that some entrepreneurs will get caught in this "fear framing" and accept "unjustified" valuations. Others (if they have enough cash to survive) will only accept "fair" valuations.