Like Paul Sweeting, I remember the YouTube acquisition by Google. At the time it seemed like everyone outside Google was aghast at the price tag.
“$1.65 billlion!” they’d shout. “For a company with hardly any revenue!”
Well, there’s been lots of such zero-to-modest revenue and high-multiple acquisitions since then, and every time it seems people apply a revenue-multiple valuation metric and say the company overpaid, without any understanding of context of the acquisition relative to the purchaser or other important metrics.
But here’s the thing: Not every high-multiple acquisition is the same, and, more importantly, monetizing a 100 million users is a helluva lot easier than getting to 100 million users.
And let’s be honest: There are companies out there with a billion dollars in annual revenue that are probably far worse investments than Tumblr at the same price. Why? For any number of reasons, such as the fact they may be terrible businesses, have no or negative growth, have high capital opex, or a combination of all of the above.
And as for Tumblr?
- Tumblr is extremely high-growth
- It’s the new social-curation platform of choice for the millennials (more so than Facebook)
- It runs lean and highly scaled at less than 200 employees
- It has a cutting-edge technology stack, something Yahoo could likely use given some of its aging web products
- It hasn’t really monetized well to this point, mainly because the current CEO has chosen to focus on the previous bullet points
Now, there are multiple things I think that Yahoo can do to monetize that haven’t even really been touched to any significant degree by Tumblr, including premium tiers, a commerce layer, and, of course, advertising. With 108 million users — rarified air in terms of any web property — there’s a lot of potential here, and I don’t think a $1 billion price tag (or just over $10 per account ) was an overpay by any stretch.