Valuation Roundtable Part Two transcription

By Fiona Boyd |

This is the transcription of the videopost Valuation Roundtable Part Two featuring financial and business valuation expert, Gary Graco, Partner Nexia ASR, Scott Kilmartin, founder of urban streetwear and green design business, Haul and David Eedle, co-founder Arts Hub, Screen Hub, Collectzing and co-author Niche Content Millionaire.

Fiona: David, you’re such a geek that you follow all of these capital raisings in these tech companies with great fervour. What have you noticed over the last couple of years in terms of capital raisings or exits or IPOs?

David: I think the biggest difference is, and everyone is aware of kind of this difference between where we were in the late 1990s to now, which was, in the late 1990s, you could write a thirty-two page business plan with some fabulously big numbers in it and a hockey stick projection that curved down a little bit and then very very quickly jumped up to the ceiling, and walk into a venture capitalist’s office and the guy would write you a cheque for ten million dollars with only apparently a medium expectation of actually seeing any of that ten million dollars ever again.

But because the venture capitalist was making twenty or thirty of those investments each year, on the assumption that two or three or four would pay off, half a dozen would just simmer along and maybe make a few bucks, and the balance would sink without a trace. Now we’re in a situation where venture capitalists, certainly in a couple of the companies I’m working with, aren’t interested in the business plan at day one, they’re not interested in being at the beginning of the hockey stick, what they’re interested in is a business that’s already started a little bit of hockey stick and just done the little bit of a bump, and they’re now just sitting at the bottom of the hockey stick handle, as it were, and they’re businesses where they can see two things. The first is that, if they don’t put money in, the business will continue to grow – that is, it’s got organic fundamental strengths that will allow it to grow. Maybe it will be very modest. And secondly, by putting a cash injection in, just at the base of that stick, it will start to fly.

I’m working with a business in California at the moment, they’re an Australian firm, they’ve been over there in the States for six years, they’ve had a couple of small rounds of venture capital money that’s just allowed them to move through that hockey stick curve, but now they’re sitting on the cusp of a large investment, because they have wonderful things, like customers, revenue and a marketplace that’s much bigger than the number of customers they have at the moment. So they had a demonstrable product, they’ve proven it in a relative…across a relatively small marketplace, and they have a very large marketplace that they’re able to directly access. And so the venture capital funds will get interested in that, because they can see how they’re going to get their ten times, or fifteen times, or eight times investment multiple back in a foreseeable future. But this is a business that didn’t walk in with a business plan with no money, no nothing, just a bright idea…they’ve had to go through that sort of hard yards part. But, they’re actually going to – probably – see a fantastic outcome at the end of it all. Because they’ve got the fundamentals there.

Fiona: Gary, I’m just wondering, in terms of a business like that, what sort of a model would you use to value it? And you work with businesses to get them ready for sale and exit…the second part of my question is, what do you have to do to get them there? Is that critical, in terms of getting that great business valuation that you want?

How do you put a value on a new economy business?

Gary: Look, in answer to your first question, there are, I guess a number of ways…in these sorts of businesses you’re either traditionally going to look at what else is happening in the market and try and relate that back to the particular business you’re looking at, it might come back to tied revenues or whatever. The other methodology that we adopt is called discounted cashflow, is really that process of trying to project revenues out and apply all sorts of risk factors and saying, well, in today’s dollars, what’s that worth in terms of investment? And again, it’s a theoretical exercise. In terms of getting your business ready for sale, in that space, you know, what David was pointing to about having actually established your business model, is critical, you know, there is really no longer seed funding around, it’s growth funding, and so what you’ve got to be able to demonstrate is that we have the business model, that business model has a core profitability, yes we might be losing money but that’s really still about development, out of our business activity we’re generating funds, and this is how we actually want to spend that money to generate the growth, and that’s what’s the opportunity it’s going to give to you.

David: It’s actually interesting – the venture capitalists – are still relatively sanguine about that burn rate. As long as they can see, as you say, that that’s actually a part of the development process and that it’s not just spending money for the sake of spending money, but that there’s actually a purpose and that, for example, the gap is closing, or has the potential to close reasonably quickly.

Gary: So for someone, it’s critical that they develop their business model early – albeit it may not have all the bells and whistles, but, demonstrating it’s got the ability to generate revenue and actually make money out of that business model – then start to focus on their business plan as well – and how can we actually develop this? What happens when we put the bells and whistles on, what’s the incremental profit that we’ll get out of it.

Fiona: One business that David and I wrote about in our book Niche Content Millionaire, because we were focusing on niche content, we see lots of opportunity in that space, was findababysitter.com.au, and that was recently sold to Fairfax Digital – no one will confirm the number, but the number three million dollars Australian, is being touted. They had seventeen thousand paying subscribers when they sold – I mean, to all three of you, did they get a good number or would you haggle more? What would you say, Gary?

Gary: Look, I don’t know much about the business, but in terms of the subscription model, that becomes quite an easy exercise in terms of the valuation, because it does demonstrate – the subscription model will be demonstrating a certain level of cash flow out of it, so what you would look at is how quickly would they have been able to grow a subscription model and what’s the capacity to grow that further beyond? And you’re probably looking at a two to three year timeframe on that, because once you start going out beyond that it’s just guesswork. So, yeah, if that sort of translates down to a return on someone’s investment of 25% then the buyer’s probably got a good deal, the seller probably could have hung out a bit more, I think something like that there is probably, again, elements of this blue sky sitting there, in terms of, well, we can turn this side into an advertising model, or put a lot of other bolt ons on it, or alternatively Fairfax see that there’s some way they can add value to it through their publication and other areas…

Fiona: In fact Fairfax said that they want to integrate it into a product they already have, called Essential Baby, so they’re seeing, I guess, some way of building the product and getting a wider audience.

Gary: Yeah, and it may well be for them, the three million is a cheap spend to get more out of what they’ve already invested perhaps millions of dollars into, you know, we’ve seen that with other businesses that we’ve sold, is that, because it becomes a bolt on product, it’s a very short payback on investment.

Fiona: Scott, what would you have done, do you think, if you had seventeen thousand paid subscribers who were all paying about two hundred dollars a year.

Scott: I’d love it if it actually meant, paid subscribers meant money coming in…it’s interesting because, myself, I’m not really in the online business, although we sell online, I’ve got a business which is basically manufacturing…we put things in a box and we send the box to someone, we either send it to Joe Consumer, or we send it to a store which sells it to Joe. It’s an interesting one because, I don’t know enough about the babysitting business to know what each of those subscribers is worth, in terms of what they’re paying a month and in terms of what their ultimate worth was. Obviously Fairfax have seen a fair bit of crossover between them and between Essential Baby, I don’t think that they would be seventeen thousand new customers they’d be adding to the Essential Baby format – or forum – because there’d be lots of links there. But I would suggest that that would seem like a pretty good number if I was an entrepreneur – again, not knowing any of the back story, not knowing how much investment they had, what their situation was at the time – but that seems like a pretty good win, depending on, I would guess – Fairfax would have bought the whole thing, maybe they’d have stayed on and run it for a while.

Fiona: From 2005 to 2009, from zero to three million, that’s a pretty good outcome for two people.

Scott: Great timeframe. So, yeah, that’d be a great interview, it’d be great to know the backstory from both parties, so, you know…

Fiona: …we’re hoping Delia will join us in the new year, to talk more about the actual sale.

Photo: Flickr danielbroche

Gary Graco, Scott Kilmartin and David Eedle join Fiona Boyd again soon in Roundtable Valuation Part Three. For the first in this series, click here.

Niche Content Millionaire is a downloadable eBook that tells you the true story how we made millions from subscription content and membership websites.

Buy Niche Content Millionaire Now