I quite liked the coverage of PaidContent on the Topix.net deal, particularly their final summary: Topix.net The Morning After. The deal itself is interesting, and as such has been largely covered. However I found quite intriguing the way the news rolled through blog posts and news stories, and the level of confusion around what exactly happened and at what valuation.
The deal was initially described as an acquisition by Tony Gentile and the list of posts that commented on it. Straightforward buyout, 3 parties pay a certain amount of cash to acquire 75% of Topix.net's shares, founders keep 25% and reap returns of their three year of efforts living on the "Macaroni and Cheese" diet during which they reportedly did not pay themselves. Great deal, everybody happy for them, they're rich and famous. Super.
At that point, I write a post highlighting the interesting nature of the deal, yet another take-out without VC funding, etc.
Then comes the "original" piece from Bambi Francisco, where she refers to an investment of less than $5M from the three newspapers "and that the capital will be used to build the technology and allow founders to pay themselves a salary". OK, now we're talking about a straightforward investment of less than $5M providing working capital. That means that the Topix.net guys got diluted 75% for less than $5M, on the basis of a low single digit pre-money. Not so cool, but at least they can pay themselves.
In effect, the transaction has not changed, since the equity is likely the same, but the optics are quite different (because of the valuation).
Then comes a post from Susan, where she makes a reference to the same piece from Bambi, but clarifies that the valuation of the company is potentially much higher than Bloglines' (placed by the rumor around $15M). As I pointed to Susan by email that "the maths did not work" - you can't invest less than $5M to buy 75% of a co, and give it a valuation over $15M - and suggested that the deal must have been a partial buyout, combined with a cash investment. I then saw that Bambi had also edited her piece, particularly this paragraph:
Topix.net would not disclose the terms of the deal, only to say that the funding was less than $5 million. Separately, the three newspapers bought 75 percent of the company for a market valuation below $100 million, but north of what venture capitalists valued Friendster, according to someone close to the deal. Friendster was a fast-growing social-networking start-up that received a market valuation of $50-plus million in the fall of 2003.
So we have confirmation that a large part of the consideration went to the shareholders of the company - allowing them to partially cash out, and a small portion went to the bank as operating cashflow. Great deal (somewhat similar to the MySpace financing where the original owner partially cashed out, and the co got some cash). Back to the original feeling of delight for these guys, etc.
However the valuation seems... rich.
Friendster's post-money was reportedly $53M. Typical content/aggregation deals are priced at a multiple of 3 to 4 times revenues, even when there is an advertising component in the revenue mix.
Topix.net being a 9 person company with founders not paying themselves, hints at a revenue figure of a few hundred thousand dollars tops. This AP piece has Rich Skrenta on the record that "Topix.net became profitable this past December and has ``about'' $1 million in annual revenues, mostly from advertising". Even with a Google or Yahoo like multiple (12x and 15x), it is certainly "challenging" to get into the $50 to $100M range.
Though it is becoming a bit more palatable thanks to these updates:
- Tony chimes in with additional information from someone in the know (but not in the deal :-):
It sounds like there are significant, multi-year earn-outs. This makes sense to me, as it allows the newspapers to make a small upfront investment ($5MM split 3 ways), and pay the rest based on performance. It's also nice for the Topix crew, as it gets them working capital now, upside down the line (without an additional exit event) and clarifies upfront what resources the papers will commit to helping Topix succeed.
- Another "someone in the know" volunteered:
KRT-Gannet-Tribune were very interested in Topix algorithm for improving the relevancy of paid search advertising, as much as the Topix aggregation service. It runs on top of Adsense, and reportedly doubles its effectiveness.
Is it important ? Kind of. There are enough whispers of the return of a bubble in the RSS/new media world to try and figure out whether this was a $5M or a $50M deal (see, I am not the only one wondering).
Another lesson: I'd wish RSS aggregators (at least the one I use NewsGator - Greg Reinacker, can you hear me :-) offered the ability to compare different versions of a post, just to see what has been changed - a word swapped for another, half a sentence removed, one word added ("separately" in this case) changes a lot. Likewise it would have been great if Bambi had indicated that she had updated her piece regarding the valuation - and actually the structure of the deal. But I am not blaming her, since I have done the same, reposting with a slightly different spin as more information became available.
In any case, it is still a great deal for Topix founders, and congrats to them.