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.
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