StumbleUpon, A Case Study In The Efficient Allocation Of Resources

So StumbleUpon, a social bookmarking site that lets users browse and discover new websites by clicking a button, was a subsidiary of eBay for just less than two years. The acquisition made the startup’s founders extremely wealthy, given that they raised just $1.5 million in venture capital, and sold for $75 million.

You’d think that the founders (Garrett Camp, Geoff Smith and Justin LeFrance) would be quite content to go into semi-hibernation at eBay and contemplate their vacation homes for years to come. But like so many already-wealthy entrepreneurs, some fire kept driving at them to keep themselves challenged. It may be the deep rooted insecurity that leads most entrepreneurs to try to build companies in the first place – getting bought doesn’t necessarily give them the self confidence they thought it would. Or it may be a simpler explanation – the certain knowledge that StumbleUpon hasn’t yet become whatever it is eventually destined to be.

So when the opportunity came for the founders to buy the company back from eBay and start over, they took it. The struggling eBay had been looking to sell off StumbleUpon for months, even hiring investment bank Deutsche Bank to help them get back their $75 million, but there were no takers. That left the door open for the founders to buy it back themselves.

What’s next for StumbleUpon? Presumably Ebay got some cash in the deal from the injection of capital from the founders, Sherpalo Ventures, Accel Partners, and August Capital. Some of that new cash must also be used to capitalize the newly independent company. StumbleUpon has a revenue model that forces ads on users every few pages they view at a flat rate of $0.05 per ad, and since they have 100% click-throughs on the forced feeding of these ads, there is presumably some very real revenue flowing to the company. StumbleUpon doesn’t cost much to run. Remember that they only raised $1.5 million before the original sale, so keeping the lights on shouldn’t be a problem, even if growth continues to stagnate (in fact, Comscore shows StumbleUpon with the same number of unique monthly visitors today, 1.5 million, that they had two years ago).

Growth will almost certainly kick in again now that the team has a renewed incentive to better the product and compete. StumbleUpon had terrific growth prior to the eBay sale (see chart); my guess is they’ll get healthy again soon.

What I love about the spin off is that the company is now able to allocate resources properly, without having to deal with the bureaucracy of a huge public company parent to slow things down and drain off people and cash. There have been other examples of sales followed by buybacks in the past. My favorite is Webshots, which was sold to Excite for $82.5 million in 1999, bought back by the founders for $2.5 million in 2001, and then resold to CNET for $71 million in 2004 (CNET later sold it to American Greetings for $45 million in 2007). Listen to the first few minutes of this podcast with Narendra Rocherolle, one of the founders, for that story.

It would have been different if eBay had integrated StumbleUpon into its core business somewhere along the way, or synergies between the products allowed StumbleUpon to shine in a way that it never could as an independent company (like YouTube has at Google). But none of that happened. So by far the best thing was for the company to once again fight it out as a small, nimble startup. Resources have been allocated efficiently, and the startup ecosystem is healthier for it.