During the dot-com crash, IAC built a internet media conglomerate by rolling/buying up the leading web properties for each major categories it could get its hands on. As the web long tail grew and as more traffic funnels to niche sites (away from leading web properties) a second generation of internet conglomerates has been building (or rolling up) up properties in the background with significantly more scale and reach.

One of these companies has been CarsDirect (a dot-com era hold over) who re-invented its business model and became Internet Brands. On Friday, the company filed to go public (S-1 here) with annual run rate of about $80M a year. The company spend about $106M acquiring 45 websites between 2004 and 2007. (Not a bad return considering the valuation is probably around $400M).

This is the first high profile IPO for the domain name industry lead by a leading investment bank. Previously, acquisitions (Marchex) and pink sheet transactions where the main exit strategies for this companies, but now the IPO door might have been opened. Unlike, IAC, a quick look at the s-1 and you’ll quickly realize that the company is very much in the domain name business first and web development business second.

In fact, one of th risk factors cited by the underwriter is domain squatting:

In addition, certain of our domain names for our automotive enthusiast websites include trademarks or trade names of automotive manufacturers, with which we currently have no formal licensing arrangements. For example, we received a letter from an automotive manufacturer informing us of its need to police the use of its trademark and its willingness to enter into a royalty-free, limited-duration license which would cover our ongoing use of the mark in certain of our automotive enthusiast website domain names. We are currently in discussions with the auto manufacturer regarding the terms of the license. Though this particular license may ultimately be on favorable terms to the Company, we cannot guarantee that we will be able to continue to use trademarks owned by others in our domain names on favorable terms. The receipt of a notice alleging infringement may require, in some situations, that a costly opinion of counsel be obtained to prevent a successful claim of intentional infringement.

I expect the transaction to have major impact on the domain and niche website industry.

-It will give additional liquidity and exit strategy for smaller roll ups as Internet Brands intends to use the money it raised in the IPO for additional acquisitions.

-Currently publicaly traded domain related companies such as Communicate.com (CMNN.ob) and Marchex (MCHX) might see a multiple expansion due to investor’s increasing familiarity with the industry through the Internet Brand roadshow.

-The trickle down effect might also increase valuation of individual web properties current being traded at a significant discount to “venture startups” and publically traded internet companies (ofcourse dirven by illiquidity and scale discount)

-Additional roll ups will either appear or those already in operations will quickly file to go public in response.

-The domain name industry might also get out from under the stigma which it currently gets from traditional sillicon valley types.

-I’m waiting on a crazy roll ups of Yahoo!Store merchants to go public within the next 2 years.

-Lastly, the most valuable property for these guys might be vBulletin forum software (I always wondered if they were owned by a major company) which probably powers over 60% of forums on the web today.

More analysis from Domain Name Wire and Frank Schilling.

Great story on the founding (and funding) of Ooma. The truth is that every startup has their version of this story . . . love gain, lost, and sometime returned. The startup life is never simple . . . reading between the lines of this story you can gather the disappointment, betrayal, even now-faded anger for everyone involved. Sometimes its easy to jump to conclusion on who’s right and who’s wrong . . . but unless you’ve ever tried to start a company youself, you’ll never understand that there is no sides, no morality, no truths . . .

The herculean act of starting company is a miracle in of itself; enjoy it, revel in the experience, appreciate the people that once (and maybe still) believed in the impossibility with you. And finally learn to let “it” go . . . all the drama, conflicts, and rumors.

Thats the best advice I wished I had received almost 10 years ago. . .

Being too good looking means that no one will take you seriously plus everyone will only either want to be your friend or sleep with you. . . life will be so hard cause some regular looking people that you might like will automatically not approach you cause you are too hot . . . . So goes Jeremy Liew’s argument against entrepreneurs raising cash at too high of an valuation

Jeremy spent yesterday trying to convince the world of “Asymmetric risk and the dangers of too high a valuation”. I have to take a step back to say that Jeremy has one of the most practical and useful blogs out there for entrepreneurs, but this time I would have to disagree.

On the other hand, if she raises at a valuation that is too high, she runs the risk of a future “down round“, or even worse, being unable to raise more money at all. Valuation is always based on some combination of past performance and future potential. When valuations creep up and are based more on future potential than past performance, more pressure is put on the company to hit its potential and justify its valuation. If things don’t go to plan, when the company next needs to raise money it may not be able to justify its past valuation at all.

There is such a things as too much of a good thing. Raising too much money means that entrepreneurs might have a huge liquidation preference to deal with and the investors will have an incentive to push the entrepreneur towards taking bigger and bigger risks in order to justify the return on the huge investment. This, however, has nothing to do with “too high of a valuation.”

Down rounds happen when the companies’ current value (when the entrepreneur is looking for financing) is lower than the last time he/she raised money. Usually this happens for a few reasons

1) multiples compression of the entire industry - such as a NASDAQ crash
2) business prospects turned south for the company (revenue flat or even worse, decreases)
3) Series R+1 investor values the company at a valuation lower than Series R investor (a rare idocyncratic issue thats not really systematic)

Jeremy is talking about (3) but the solution for entrepreneurs caught in this situation is NOT to seek a lower valuation to protect one self but actually raise more money with the higher valuation.

The solution in this case, where the entrepreneur raised $1.5m at a $30m valuation, the entrepreneur should have raised around $10M instead. Thus he/she would have enough cash to run and grow the business for a while (atleast 18-24 month) to hit the next milestone (adoption, new features, revenue etc) so that the company can “catch up” and pass the original $30M valuation (or post money $40M) which is admitedly a little high for the stage. Granted, sources that can put together that amount will most likely be VC’s who would not have put the valuation at $30M so the valuation will naturally compress a little bit but atleast not because the entrepreneur decides to throw money away.

Maybe the better advice (which Jeremy might actually mean to say) is that entrepreneurs should not jump at an investor simply because of superior valuation, there are other financial terms within the investment that might be equally or more important (liquidation preference for one, implied exit multiple for another).

My general theory on raising captial goes something like this. . .

1) go for highest valuation
2) but dont be afraid of dilution, raise a much as you can
3) keep liquidation preference at no more than 1.5x - reduce round size if you have to to get this number down
4) make sure you are raising enough money to hit the next financialy projectable milestone in your projections + 6 month

if you do all 4, the final result would be that dilution would naturally be reasonable while maximizing the success rate of the company (ie there is already so much operating risk, you want to take the financial risks to zero as much as possible as long as your founders equity is protected). Also there are other sneaky terms you have to be careful about but thats outside the scope of this post

PayPal officially launches on facebook!

Because a huge percentage of freshman gets their first bank account and first credit card in college, there is huge potential for financial institutions to leverage facebook as more than a advertising channel but also a point of integration. Paypal (amazing how fast they got this out given what I know of their dev process) surprisingly jumped in first before the likes of obopay and kushcash. Of course the app is a little low on utility but I’m sure a Paypal PM somewhere is using it to learn more about user behavior and other potential applications (wesabe clone?).

Its amazing the stuff you can find online if you just look around. Last week I was (for whatever reason) on the Khosla Ventures website and reading David Widen’s profile. One of the links I discovered on the page is a presentation regarding a market entry strategy framework called “Rifle”

The framework is somewhat similar to something I’ve seen from Bain but simpler in its data resource requirements. The framework answer the question of which segment within a market to enter, what accounts to target, and HOW to win those targeted account. It works in the following steps

1) Find the right segment within a market via a combination of easy of entry attributes (competition, product, channel, etc) and market size

2) Rank companies within attractive segments via the another set of attributes which predicts likelihood to win a deal and deal size

3) Understand each target companies ecosystem of partners and leverage existing products and existing assets

As interesting as these slides are, they lack a lot of detail on the latter part of the framework (#2, #3) . . . it looks like some slides were taken out OR supplementary material (spreadsheet? presentation notes?) missing. Would have been really helpful to a lot of entrepreneurs if these details were available somewhere.

Anyways, the website is somewhat half done (I think) so I hope David put up a more complete version soon . . . if you are going to share your secret sauce, might as well do it all the way instead of being a tease

Analysts in the advertising industry have been debating for ages why it was critical for Google to build out its non–search properties. One of the most commonly stated reason has been that these additional products can help Google improve its search engine AND its advertising network (both via personalization) by creating a deeper and more consistent behavioral profile of its users (via a login + cookie rather than cookie alone back in the age of Google search)

Well, 3+ years later, Google is seen marching towards that vision pretty unapologetically and brilliantly.

In the mean time, Yahoo sat on its ass and squandered the goldmine of data that it has gathered from its users since 1996. For whatever reason (panama? privacy concerns?), Yahoo not only did not build out its off site ad network, it also failed to leverage those user data to do a better job for its internal display ad targeting. Obviously, simply using SmartAd within Yahoo is a no brainer, the real power would only come after Yahoo has successfully build out its network and Yahoo could track user behavior across the web.

Man, what a waste.

(BTW, the real-time generation of display ad copy and design for targeting purposes is actually pretty cool)