Correction or a slump for startup exits? You say tomato…

You say tomay-toe, I say tomah-toe – let’s call the whole thing off!

That’s the short version of what came out of a breakfast seminar for VCs and entrepreneurs in London this morning. (I took so many notes that I’m going to split this post into two parts. Part II is here). The slightly longer version of the above is that one side of the startup investment community thinks we are headed into a ‘market correction’ for the valuations of tech companies. The other side says we are heading off a cliff, and the market for exiting startups will be very bearish and hard for a long time to come.

FirstCapital, which works with startups towards their desired exit, organised the breakfast seminar for entrepreneurs, senior executives from acquirers, and venture capitalists. The subject was M&A activity affecting internet entrepreneurs – an appropriate subject given that many seem to think that many web startups will have to merge or sell this year as funding becomes a tad harder to get for some companies (though not all – as always, the answer is along the lines of ‘how long is a piece of string’).

The speakers were as follows:

Sean Phelan, Founder, Multimap (recently acquired by Microsoft).

Rob Feldmann, Head of M&A, News International.

Sara Clemens, Director, Business Development and Strategy, Microsoft Online Services Group.

In addition First Capital presented some interesting research which I will go into in the second part of this report, which indicated that last year was an unusual year for startup M&A, and largely focused not on web site deals but data deals. More on that later.

On a side note, I need to point out that I was invited as a member of the press to the event a few weeks ago (I went last year in this capacity). But last night Microsoft asked that press not attend, for whatever reason. FirstCapital pointed this out to me but I decided to ignore this and gate-crashed the event anyway. If Microsoft wants to call me about this they can.

Luckily, as it happened I arrived late for Clemens’s presentation, but what I did catch didn’t seem to be that interesting anyway. Most of it seemed to be “M&A 101” – you know, if the company/people is good we buy it, if it’s crap we, er… don’t. Her contribution at Q&A was equally unenlightening, at least from my perspective.

Moving swiftly on, a presentation from Feldmann was highly enlightening.

News Corp plans to be less opportunistic, more focused over the next couple of years. They are keen to increase their reach online and get companies that can help with that,

The Times and Sunday Times have great sites but Feldmann gave the impression that the reach of these print leviathans but doesn’t translate online so the focus is now going into niches which are strengths of the brands and its writers such as food and drink, travel, recruitment, property, and fashion. To that end they’ve already acquired online companies which match these areas, such as Globrix (property) and Brand Alley (fashion).

The Sun and the News of the World plan to concentrate – in an online sense – on Football (hence the deal with Sky for 24/7 football clips), the Bizarre column as an entertainment/celebrity brand and also looking at transactional, shopping plays like bingo and gaming.

News corp acquired some properties which fitted in with its chosen niches like Milkround and brand Alley. Milkround has a simple jobs business model introducing graduates to bluechips. It’s typical of News Corp’s focus in that its they realised they could grow the business and it had “great management”.

The Brand Alley business is an online ecommerce retailer which launches private sales over a three day period, offering big discounts. This links quite nicely with the Sunday times and the womens’ market forcus of properties like the News of the World women’s magazine. News Corp hopes it will be the market leader in the UK and as successful as it has been in France. BrandAlley was launched in France in 2005, is VC-backed backed with VC cash and claims a membership base of 1.3 million and has 200 brands.

News Corp looks for a startup which has had management in place for at least two years. When they acquire a company they don’t want to dis-incentivised managers so they don’t integrate it – (borg-like, my words) – into the wider News Corp companies immediately, only after maybe 2/3 years. Form the entrepreneurs point of view, for the right company, NC tends to offer a significant amount of money up front in order to keep managers in place and keep the acquired startup stable.

Feldmann’s presentation clearly made an impact on some. A VC came up to me during post-event coffee to tell me they’d just sent me an email. It reads:

Surely there’s a story here on that M&A data;
1) The fact that 2007 was actually all about data not web
2) That valuations are plumetting and that newscorp have said they are going to do far fewer deals and only in good quality good fit companies. Maybe not. A. Nuclear winter but nuclear autumn?

I’d largely agree. Prices for the sale or merger of startups over the next couple of years or so are a little like house prices. They are going to come down.

The question is, are we facing a correction or a slump?

Like I said, you say tomato…