So many eyeballs, so little growth. Or so Yahoo’s recent performance under Marissa Mayer could be summarized. Joining Yahoo as its head in 2012, Mayer quickly made a splash with a rapid series of acquisitions, from the billion dollar purchase of Tumblr to the $30 million acquisition of Summly.
The performance of that strategy has been lackluster. While Yahoo has acquired nearly 50 companies during Mayer’s tenure, its financial results have done little to persuade investors that the company has found a path to growth.
That has raised questions about the viability of the app studio model. Unlike platform product companies like Facebook, app studios rely on monetizing a portfolio of products. Among mobile app companies, this business structure is most common in the games industry, and indeed, there are certain parallels to Hollywood movie studios with their focus on entertainment franchises.
There is one startup, though, that is proving that an app studio model can exist outside of pure entertainment, and incredibly, is devouring startups at an average rate of almost 5 per month.
Yello Mobile, a Korean startup founded in 2012, has now acquired a total of 74 apps for its portfolio, 61 of which were acquired just in the last year. And the company shows no sign of slowing down, pushing to conduct about the same number of transactions in 2015 as it did last year.
The company is taking advantage of a unique moment in the market in its home base of Seoul and throughout Asia. Mobile usage has skyrocketed throughout the region, none more so than in South Korea, where smartphone penetration is nearing 75% of the population, and the country is already transitioning its wireless infrastructure to 5G technologies.
The rapid adoption of mobile in the country has not been matched by its leading technology and service providers. That means there are huge gaps between the needs of users and the offerings of incumbent companies. Lee Sang-hyuck, the CEO of Yello Mobile says that “There are many niche markets beyond gaming and messaging that are underserved and underdeveloped in Asia. We are targeting those aggressively, to support the stars in each vertical and also help develop those opportunities.”
The company targets startups that are 2–3 years old, and thus have proven market traction, but are perhaps struggling to grow. Yello’s key skill is taking these existing properties and growing them even more rapidly. For example, Coocha collects data on various ecommerce merchants and presents this information to users in its app. It had 850,000 monthly active users when the company was acquired by Yello in May 2013, and now has almost 3 million users. Perhaps more importantly, its sales revenues have gone from $160,000 to $810,000 according to the company.
While there is some diversity in the revenue models of the apps, advertising remains core to most, and the company has prioritized building that capability through its acquisitions. Yello owns the second largest mobile ad network in Korea, a startup known as Cauly or Future Stream Networks, which is currently used by 12,000 apps. Yello acquired the company for $27 million earlier in 2014, and already has already grown its profits from $100,000 per month to $1.2 million.
As it builds up its portfolio of properties, it is able to find operational synergies like its advertising network, but also cross-promote brands across its apps. As its studio model continues to grow, its marketing and distribution costs continue to fall, heightening the potential value of each acquisition.
That unmet consumer demand is only half of this window of opportunity. The other side is the incredibly small mergers and acquisitions market in South Korea and much of Asia. Despite the formation of thousands of startups in Korea in just the last few years, there remains a pitifully small number of transactions conducted every year. MergerMarket estimates that the number of deals done per quarter in Korea to be under 80.
There are largely two reasons for this. Large conglomerates like Samsung are mostly uninterested in buying technology they didn’t develop. In fact, Samsung has made few acquisitions in its history, with the notable exception of last summer’s purchase of SmartThings. Additionally, Korean capital markets are not as well developed to finance these sorts of transactions like in the U.S., making it difficult to bring these transactions to a close.
That means that Yello can buy apps at a significant markdown, particularly compared to the value of similar performing apps in the United States. The average valuation for a startup at acquisition by Yello has been $3.6 million. Across the 61 startups it purchased in 2014, the company spent just $111 million total.
Perhaps even more shocking though is the returns for the investors on these apps. The low expected valuations for exits in the Korean M&A market also influences the valuations of venture capital rounds. Korean startup founders find it challenging to raise capital at even ten times the price of capital in Silicon Valley. Yello told me that investors received an average return of 2x across the exits to the company.
Yello’s strategy, besides being profitable, is also remarkably important for the growth of the local startup ecosystem. While a 2x return to investors is not going to return a venture fund, such exits significantly change the risk structure for venture capitalists in an environment where bankruptcies can be devastating. By building a pipeline for startups to actually get to an exit, a positive cycle for venture activity can finally begin in Korea.
While incredible consumer demand for mobile apps and cheap M&A has made Yello’s model quite valuable, all of that app eating certainly requires venture capital. The company has already received about $161 million in venture capital, most recently a $100 million infusion in a round led by Formation8. That round valued the company at $1 billion, a number that could jump higher in the next few weeks. Yello’s CEO is targeting an IPO on NASDAQ in 2016, potentially offering investors another vehicle by which to get exposure to the massive tech growth in Asia.
And then suddenly, we head back to the story of that other app studio with a five-letter word starting with Y. For Yello, its pitch to investors has to get past Yahoo’s dismal experience, and it needs to emphasize not only the synergy across its properties, but the truly unique moment that it is taking advantage of within the Asian ecosystem.
If its massive diet for startups can lead to a durable portfolio, Yello may have accomplished what Yahoo so far couldn’t: building a high-growth mobile media business.
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