Another Former $2-Billion Startup Gets Rolled Up

Investors who bought the hype are left holding the bag.

Ad-buying software company Rocket Fuel – “a predictive marketing platform,” it calls itself – announced on Tuesday that it was acquired for $2.60 a share. Including the assumption of debt, it makes for a deal value of $145 million. Down from $2 billion at its peak one month after the IPO.

The Silicon Valley startup went public in September 2013 at $29 a share. Its shares soared 93% on their first day, closing at $56.10. A month later, shares hit $66.43, which gave the company its peak market value of about $2 billion.

This was the period when “ad tech” was the latest Silicon Valley fad that sucked billions of dollars out of investors’ pockets – much like “fin tech” these days. Not much later, reality began to set in and shares headed south. The company lost money relentlessly. In 2015, the layoffs started. The whole sector crashed to reality. Today, after the buyout offer, its shares trade at $2.64, or 91% below the IPO price, and 96% below their peak.

Rocket Fuel is being acquired by Sizmek Inc., a previously public company once known as Digital Generation that itself was acquired in August last year by private equity firm Vector Capital for $122 million. Over the past two years, Sizmek has been busy acquiring ad tech firms, and now with Vector Capital’s backing, it adds another one. This is turning into a rollup.

Sizmek’s deal with Rocket Fuel includes a 30-day “go-shop” period that allows Rocket Fuel to go try and hammer out a better deal with other potential acquirers. This provision might have helped shares rise above the $2.60 acquisition price.

Combined, the two companies want to form a larger ad exchange. There are countless ad exchanges and thousands of ad networks. By far the biggest one is Google Adsense. Facebook, which occupies a different space in digital advertising, is the other powerhouse. Everyone else in this digital ad space is just dabbling at the margins.

Spending on internet advertising has been surging for years, including by 22% in 2016, but only two companies – Google and Facebook – get the spoils, hogging three-quarters of the additional money spent in the US on digital advertising. The remaining companies are fighting over the crumbs the two giants leave behind.

And Rocket Fuel is not a growth company either. In 2016, its revenues edged down 1% to $456 million, generating a loss of $65.7 million.

It’s perfectly admirable – and immensely difficult – to go out and start something new on a wing and a prayer and get something going and build it up, with the support of investors that are pouring money into the enterprise, knowing that this is risky and that it may fail. It’s normal that young companies are running into trouble and having difficulties making it work. It’s always a struggle to build something. Some of these companies work out and others don’t. And that’s great.

What’s less admirable is the financial hype, put together in a thick and sticky-sweet amalgam by Silicon Valley and Wall Street and propagated ceaselessly by the fawning media. It’s a manipulative process from day one. A few people behind closed doors decide the “valuation” of a VC-funded startup company. This “valuation,” which is confidential, is then purposefully leaked to the financial media, and if this “valuation” hits the $1-billion mark, it is hyped everywhere – even if the company only has a handful of employees and no idea how it will ever turn a profit or sometimes even get revenues.

Then the hype process goes on with the intent to build enough interest so that the company can be sold for billions of dollars – thus allowing early investors a profitable exit. During that time, there is no emphasis on creating a sustainable profitable business model. It’s all about some special metrics to impress future buyers.

The hope is two-fold: Either that a publicly-traded corporate buyer will emerge to pay billions of shareholder money for very little; or that institutional investors managing other people’s money will be lured by Wall Street’s sticky-sweet hype into buying the shares in an IPO and hoping that the public – dreaming of “the next Facebook” – will drive the already inflated share price higher so that early investors can get out at peak valuations.

As with Rocket Fuel and many other startups, it’s a perfect wealth transfer scheme from late-comers to early investors. These schemes only work when markets are exuberant, as they have been for years, and when any talk of even basic “fundamentals,” such as cash burn and profits, is pooh-poohed. Even then they’re not that easy to pull off and require a lot of horsepower on Wall Street.

A problematic side effect is that this process crushes any emphasis on building real businesses that can thrive and stand on their own feet, generating rather than burning cash, and rewarding investors with a successful and sustainable business model.

This is the worst PE-fund collapse ever.  Read…  $2-Billion Private Equity Fund Collapses to almost Zero

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  68 comments for “Another Former $2-Billion Startup Gets Rolled Up

  1. TheDona says:

    P&G and Unilever (2 of the world’s biggest advertisers) are pulling back on their digital add spend. P&G’s ad spend dropped 41% year-over-year, while Unilever’s dropped 59%.

    Mark Prichard of P&G has been very vocal this last year about the lack of transparency with digital ad metrics. He was the first to call out the Emperor’s New Clothes. Expect more to follow suit (great pun, eh?)

    • Petunia says:

      Other than when introducing new products, I don’t see any reason for these brands to advertise. I’m a typical shopper and in the supermarket I buy what I like, or what’s on sale. I’ll try new things when they are cheaper or I’m not happy with what I normally get. So, advertising is a total waste to me, unless they are advertising a sale.

      • TheDona says:

        Petunia, I agree. Here is a good one for ya….back when I did get on FB 5+ years ago…there was a HS classmate who died and for about 2 years she “liked” Clorox after her death (page kept up as a memoriam). I wrote FB perhaps 10 times asking how can a Dead Woman “Like” Clorox??? I mentioned this to a male friend and then he noticed some of his guy friends “liked” Philadelphia Cream cheese and other such nonsense which when asked said “Uh no I did not do that.”

        As far as advertising sales….it would be great if they said sales price is actually more in line with our product shrink.

    • Rates says:

      Tell that to GOOG and FB.

    • Blissfully Ignorant says:

      As someone who has worked in the advertising industry as offline media transitioned to online, I find the expectations of some advertisers rather ironic.

      They used to spend billions on print, TV, billboards, BTL with limited visibility into who was served those impressions, let alone who engaged with the particular piece of communication. Digital at least gives you several layers of visibility into your audience and audience behavior.

      That does not diminish that click fraud is a big problem. What is a bigger problem is the virtual monopoly of Google, Facebook and Microsoft (now with LinkedIn under their belt). Ad cost per clicks are rising and will rise, so will CPM (Cost Per Thousand/Mille) to feed the hungry Wall Street beast seeking perpetual growth.

      P&G and Unilever both sell crappy products, and want perpetual growth, when their audinece is shrinking, and with diminishing real income, most folks have precious little to spare on non-essential items. Good luck trying to wring some more shekels from the cold dead hands of the forgotten.

      • Meme Imfurst says:

        Some ‘advertisers’ like banks pay $5.00 per click. Wells was one, don’t know if they still do. The never ending war to be the only one left standing, shows how serious some companies take this…that is as long as the stock holders pay that cost without rage, or knowledge of the expense. Get out the robots, there is work to be done !

  2. Kent says:

    I don’t know if it is early investors ripping off late investors as much as sophisticated speculators ripping off the less sophisticated speculators.

    • cdr says:

      Kent, it’s history repeating itself for the xxxth time. I’m re-reading this book – Devil Take the Hindmost: A History of Financial Speculation.

      It’s not even what’s old is new again. More like “I’m Back!”. People want to believe and get angry when facts get in the way. Kind of like water finds a way. Greed and gullibility are married for eternity.

      What’s new today is the scope. A hedge fund is run of the mill. Today we see an entire continent (Eurozone), or two (add China). The US Stock market is penny change in comparison to them when rate rise.

  3. Truth Always says:

    Is their a way to find out:
    1) Who the first investors were?
    2) What did they invest?
    3) Who were later investors?
    4) What did they invest?

    Beyond being academic, it would help to identify who to invest with or who not to ? (Of course, if early investors were self funded VC, you cannot invest but at the very least; it may help avoid later investors)

    PS: Thank you Wolf for being objective about this kind of news, which is hard to discern elsewhere.

    And to fellow Wolfers – nice to have civil discussions on this forum

  4. mvojy says:

    I’m going to develop an app that laughs at you every time you suggest investing in a no-name tech stock that has a crazy valuation. I will make millions.

    • alex in san jose says:

      mvojy – Make that app fart instead of laugh and you’ll make billions.

      • Guido says:

        Or better yet, you and I become venture capitalists and we each start a company. Then you invest 100M$, which I’ll immediately invest it back into your company. We don’t need 100M; we just write an iou. We both add 100M$ to our assets, which will make both of us have a value of 100M. But, I will let you invest the 100M at a valuation on 1B, so that you own 10% of my company. You do the same and I will own 10% of your company.

        Then we go to CNBC and get them to hype our companies, never divulging that we both own shares of each other’s firms. We then go IPO and raise 1B each by selling 10% of the companies at a valuation of 10B. You sell out your share of my company in the ipo, make 1B, out back 50M into company, appoint a CEO and walk away. Make sure you send something to people in DC so that they don’t make an example of you.

        Now you really are a venture capitalist. Congratulations!

  5. HudsonJr says:

    The start-up world is so slimy. I think back to Zynga who was insanely being valued in the same video game ball park of Activision and Electronic Arts. That valuation was seemingly only based on:

    – Small quantities of private shares being sold on the secondary market
    – Size of their user base
    – The company being “profitable”

    The valley rags were all over the hype train going along with whatever ridiculous valuation was floated by no-name websites. However, the small quantities of stock on a gray market didn’t mean much. Their user base plateaued with them needing to buy companies to keep it growing. And lastly the “profitability” was largely a function of how they amortized virtual good sales, and at times the amortization just happened to be changed in a way that made them profitable.

    It felt like everyone knew it was smoke and mirrors, but there was such a drive for someone to get an IPO out the door that everyone held their nose and marched on.

    Now their market cap sits at maybe 7 to 10% of what the industry leaders are.

  6. TheDona says:

    Fun times for new IPO, Blue Apron:

    Perhaps the no profit model is getting tiresome. LOL

    • IdahoPotato says:

      Bobby Flay didn’t get the memo.

      At least he sells something tangible.

      • TheDona says:

        Idaho: OMG that is hilarious and news to me. Thanks.

        As a follow up regarding regulations to this folly: While the Regulation A+ is good for young companies seeking to avoid the compliance and paperwork costs associated with a traditional IPO, the process can pose higher risks for investors, analysts say. According to WR Hambrecht + Co, an advisory firm in San Francisco, companies under Regulation A+ don’t have to present audited financial statements, prompting investors to conduct due diligence on their own, especially if the public offering is not backed by a major bank.

        Hubris alert….would be listed as FLAY.

        Guess his divorce cost him a lot more than we were led to believe.

    • Duke DeGuise says:

      Forgive the bad pun, but Blue Apron is the most delicious of these self-perpetuating (until they suddenly no longer are) delusions.

      It’s WebVan and all over again. Good times.

      • Duke DeGuise says:

        Make that WebVan and, with a pretentious foodie overlay for people who don’t cook, but are expected to salivate when the buzzword bells (“seasonal,” “sustainable,” and so forth) ring.

        And don’t get me started on the waste…

  7. Thunderstruck says:

    “it’s a perfect wealth transfer scheme from late-comers to early investors.”

    Isn’t that sometimes called a Ponzi Scheme?

    • Guido says:


      But not all Ponzi schemes are same. If the one pulling it off is being selfish, s/he will be thrown to wolves and their creation left to die. The founder can even go to jail.

      If the scheme spreads the wealth around, paeans will be written about the guy perpetrating the scheme. Rocketfuel spread the wealth around. Ponzi did not. In the case of Ponzi, you know whom to blame. In Rocketfuel type start ups, they rotate people around so that there is not legal liability for anybody. Kinda like how Ben and (in near future ) Yellen retire(d) so that the blame can’t be pinned on them.

      I suspect Snapchat will go the way of any Ponzi scheme as the founder did not want to grease the wheels of those who manage pension funds — he didn’t even pretend to give them a say as was done in the case of Google and FB with tiered stocks.

      • Thunderstruck says:

        “If the scheme spreads the wealth around, paeans will be written about the guy perpetrating the scheme.”

        Oh, OK…. I get it – it’s the “Bernie Madoff” scheme where the money was spread far and well enough around that everyone was happy – until there wasn’t enough money to make everyone happy. Then, they realized that Bernie had “Made Off” with their “investment”.

        BTW, that was meant to be a rhetorical question.

  8. Kent says:

    Based on the ads I’m seeing on this website, Wolfstreet has me pegged as a 30 something female. I’m going to have to reflect on the other websites I visit.

    • TheDona says:

      Kent quit looking at the lingerie websites.

    • robt says:

      It seems I’m Russian and I’m looking for a Russian bride.

      • alex in san jose says:

        It wants me to be careful buying silver, do something with Air China, something something else in Spanish (the internet fairly often thinks I speak Spanish) and fairly often recently it thinks I’m interested in some kind of heavy mechanical equipment that you’d use in a warehouse.

        If I take *one* look at Tektronix oscilloscopes, maybe to do some price research, I’ll get ‘scope ads following me everywhere.

      • duck says:

        Sorry Wolf, but I get 0 ads on your site.
        same with most of the other sites.
        Add-ons any one?

  9. Rates says:

    Capitalism at work. No bailout necessary. I have been reading this book called New York 2140 about the city after global warming has taken root.

    Take heart people, according to that book, it’s the year when Goldman Sachs is finally taken over by the government. That’s what’s been missing, a global catastrophe to make capitalism work the way it should!!!

    No mention of FAANGs though.

  10. OutLookingIn says:

    “It’s always a struggle to build something”.

    Building? Think about what is being manufactured.
    Advertising. An ephemeral endeavor at best, that belongs with the FIRE economy, along with the FANG market.
    At least when a “true” manufacturer goes down, there is plant and equipment that remain. These end user tech firms leave behind nothing but a paper trail, that is worth nothing to anyone. Let alone the hapless “investor” who was led down the proverbial garden path, by their own hubris.

    • Thunderstruck says:

      “These end user tech firms leave behind nothing but a paper trail, that is worth nothing to anyone.”

      Well, to be fair, there are all of those “apps” stored somewhere in “the cloud” oh, and the data. Never forget the collected data. I thnik that it’s also somewhere on a cloud (server).

      • Meme Imfurst says:

        “These end user tech firms leave behind nothing but a paper trail, that is worth nothing to anyone.”

        RCA….the stock history books are littered with ‘once was”


    • Jerry says:

      I remember after the dot com boom, it was reported people were pulling the copper and fibre optics from out of the walls.

  11. Petunia says:

    You are right about it being a rollup. They are either buying the competition or the talent. Most people outside of SV don’t realize that the value of the startup is usually in one or two people. The rest is window dressing for the final investors.

  12. kyle myers says:

    The ad tech industry is painting a different picture of this acquisition. Here’s a version of the story told from the ad tech’s POV:

    Rocket Fuel is just one of thousands of companies in the MarTech-AdTech field. Here’s a link to the current MarTech/Adtech Lumascape .

    In 2011, there were approximately 150 MarTech/AdTech companies. Fast forward to 2017, and there are 5,000 MarTech/AdTech companies. How sustainable is this category growth and are these companies generating any revenue or just over-hyped valuations?

    • Petunia says:

      If I was buying advertising for a large company I would pay them on a hedge fund model 2/20. I would give them 2% up front and 20% of the increase in profits over the course of the campaign. Let the ad companies show they can make me money before I pay them. They would get to share in their exceptional advertising abilities.

  13. Lotz says:

    I had to look twice because I held a smaller size of this security for a few months. That was over 2 yrs back and wondered what happened but never bothered to look.

    Memory lane…….thanks Wolf and fin-tech is right in line.

  14. JR says:

    See Galloway’s vids for tons of wisdom on Consumer Packaged Goods (CPG) marketing and ad spend. He notes that an ad career is great, but only if you get hired by Google or Facebook. Everybody else is fighting over a decreasing share of the spend. Brands are also in trouble as Amazon is pushing their store brand for audio searches. Reference: L2INC on youtube…

  15. lizardbrain says:

    When tough times hit the first expense that gets cut from corporate budgets is advertising (not including contractors). FB went public in 2012 and their revenue hype has been peachy since then. Will be interesting to see what happens when their main source of revenue starts to disappear during the next downturn. The precise targeting aspect of their advertising is effective but not cheap – and companies will start to question their ROI.

  16. mean chicken says:

    Silicon Valley has strayed far from what made it great.

    • polecat says:

      I say turn it back into pruneplum orchards … at least They produce something tangible !

  17. william says: will IPO next week. On to the next!

  18. interesting says:

    who gets the $145 million?

    so what if the founders each gets only a $5 million pay out, they were flying high for 4 years, probably already made millions in salary and then get to walk away with a cool couple of million for playing the start up game.

    sounds like a pretty good deal to me, not bad work, if you can get it.

    • Wolf Richter says:

      I’m pretty sure the founders and early investors sold a good part of their shares at high valuations years ago. That’s what an IPO and the following years are for… to let investors “exit.” Founders that really believe in their companies might only sell a small portion of their stake, but they still sell … to buy that big house in Silicon Valley, etc… and to diversify. It’s usually recommended that they do.

      • JB says:

        that’s the answer i was looking for . in the case of blue apron did the investor’s/vc funds take a hit . Also in these ipo’s do they float stock shares above what is already on the companies books ? I guess i am looking at the mechanics behind the process . oh isn’t there a waiting period that the initial investors have to adhere to before they sell their shares ? thanks

  19. JK (the other John) says:

    Wolf, please stop misusing the word “investor”. Those folks left the market years ago.

  20. Lee says:

    No different than the “Director Lifestyle Companies” here in Australia where people running the companies flog endless number of shares to pay their salaries, benefits, and other perks while peddling hype and hope.

    Most often found in the mining and oil sectors.

    One company that had 6 employees was paying the company secretary something like A$130,000 a year in salary plus other benefits and of course those famous stock options as well.

    Repeat hundreds of times.

    IMO biggest con game stock market in the world – Australia.

  21. nick kelly says:

    That energy fund going to zero, now this. Suddenly there are a lot of dead canaries in the coal mine.

    • Sporkfed says:

      Harder to roll over loans when rates are rising so companies are struggling. That means you need new investors to keep the party going . Those seem to be getting thin on the ground.

  22. PrototypeGirl1 says:

    I had a great advertising experience today, I popped into an elevator at a high rise condo building, there was a guy in there I said man its hot! Yes it is he said looks like you’ve been working nodding towards my bag of tricks, vacuum, and steamer. Yep the heat is terrible, but dirt is good I reply, he said do you have a card we own 20 condos here and my wife is looking for a new cleaner. You betcha! Now that’s advertising.

  23. ML says:

    Advertising is helpful to we customers because it enables us to realise what a crap product the advertiser is wanting to sell. Were it not for advertising there is the risk that we should fall for the hype!

  24. walter map says:

    Since certain IPOs seem prone to failure, it would seem the obvious investing strategy would be to identify them early on and short them. But it does not seem this strategy is pursued to a degree which would reduce the gross overvaluations we so frequently see.


    • Petunia says:

      I believe that when shares are first allocated by the firms involved in the IPO they do so on the condition they are not shorted or loaned out to be shorted. So technically at the beginning there are no shares available for shorting. This used to be the case but I don’t know if it still goes on.

      This is done so that their good customers get to make some money fast, until the “investors” show up.

  25. Gershon says:

    Meanwhile, the Fed’s “No Billionaire Left Behind” monetary policies are enriching the already super-wealthy at the expense of everyone else.

    Stop the oligarchy’s financial warfare against the 99% – end the Fed!

  26. ML says:

    There is a lot about IPO psychology that gets lost on some investors.

    The system may be different in USA I don’t know much about USA stock market so please enlighten me.

    In UK (london stock exchange) there are two sorts of buying/selling price mechanisms: order-driven and market makers. Prices that are order driven fluctuate with demand and supply so are a more reliable indicator of investor thinking.

    Market makers are intermediaries that set the prices. As I understand, when a market maker wants to deter buyers because the mm wants to buy more for itself the mm will increase the price and when it wants to attract because it wants to shift its own it lowers the price. That simple approach fuels the psychology. When the price is marked up, investors interpret the rise as indicative of demand for stock so they buy. The mm wanting to deter buyers responds by increasing the price some more, which in turn attracts more demand and so on.

    The price having been inflated to an unsustainable level, the mm reduces the price which makes investors think that it is time to sell so to deter sellers the mm reduces the price some more which in turn makes more investors sell.

    With an IPO whose prospects are only as good as its last 2-3 years accounts or the creative accounting for a new idea, the original stockholders generally make more money by giving the impression of being long-term holders. That instills confidence for new investors to pay more than the issue price which can also reflect stock shortage.

    The Apple share price is a good example of the diiference between price and value. Any shortage of stock vs greater demand is bound to increase the price. But it more interesting that commentators prefer to explain the fluctuations in Apple’s stock price in terms of the company’s prospects than the more obvious and more likely reason that price is a reflection of demand for stock exceeding supply, or vice versa.

    For genuine sa

  27. tom says:

    Paying for digital ads makes sense if you can measure the ad results. Clicks without sales makes the advertiser think their marketing is the problem. What if it’s all a scam. We know that there are Chinese ‘click factories’ paid to automate ad clicks from various ip locations. I suspect this is a common practice. The even bigger problem is near 50% of web viewers use an ad blocker in their browser. Internet ads are likely very over priced.

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