Ezaro Media

Investment in Spotbros

At the end of 2012 we participated in Spotbros' initial professional seed round alongside some first rate international investors. The company, led by Alejandro López Monge and Fernando Calvo Gaztañaga, has been making tremendous inroads with very limited resources. 

As we can see here, Spotbros has already achieved the 1.000.000 registered users mark. Following their 2.0 app launch a couple of weeks ago, the team is now focusing on facilitating the interaction between users and businesses through Instant Messaging. 

From our point of view, and as they open a new international funding round, Spotbros currently represents one of the most exciting early stage investment opportunities in the Spanish tech space. 

 

Low quality valuation info

With AWAY trading at US$25, Yahoo Finance assigns the company a P/E ratio of c.2.700x.

HomeAway has c.82 million shares outstanding, and in the first half of 2012 the company generated post amortization net income of US$5,3 million.

If we assume the second semester could amount to c.60% of total 2012E profits (a not too aggressive assumption for a company with reasonable revenue growth), the forecast 2012E net income would jump to c.US$13.1 million.

We now calculate the company's market cap (US$25 * 82 million shares outstanding) and divide it by that forecast 2012E net income of US$13.1 million. The sky high multiple drops to a very punchy but much more down to earth current year P/E multiple of 155x. The cash P/E (excluding amortization) would be significantly lower. 

Take home message? Beware of overly simplified publicly available valuation related information. It could be off by a very wide and error inducing margin.

On Facebook's IPO

Dubbing Facebook as the newest soon-to-crash overhyped stock has quickly become pretty much commonplace. The stock slippage below its debut price on its second day of trading certainly has not helped. At US$38 per share analysts have been quoted saying that "the stock is priced for perfection in a manner that implied that risks were negligible". 

Is that the case? Let's look at some facts (December 2011): 

- over 845 million monthly users worldwide (annual growth of 39%)

- 483 million daily active users (annual growth of 48%)

- US$3.7 billion in Revenue in 2011, up from US$2 billion in 2010 (annual growth of 88%)

- US$1 billion in net income in 2011, up from US$606 billion in 2010 (a 40% growth rate)

At the US$38 per share IPO price (top of the revised US$34 - US$38 range), multiples are indeed breathtakingly racy. Most striking is the >200x EV/FCF 2011A. 

Now, is poor after market performance a good indicator of the prospects for a quoted company in the long run? Not if you look at Amazon. Jeff Bezos' company was underwater for the best part of the three months that followed its IPO. And as this very useful NYTimes visualization reminds us, the three year post IPO track record of value creation was nothing short of spectacular.

Yes, there are reasons not to believe, but being No.1 in any markey is a great think. No, it is a fantastic thing! And we are not talking about a random market here. We are talking about one the entire world seems to be validating by the hour. FB has an enormous opportunity monetizing its unique reach, relevance, social context and engagement --it is already arguably the leading online advertising company world-wide--. But also less visible ones, like in transactions and payments enabling technology. If current management do not seize those huge opporunities, a new team will be put in the driver's seat. Most probably the industry's best. 

The company and its advisers may have left little room for short term outperformance, but we are not talking about an easy company to bet against. A guess? When the NYTimes updates its chart three years from today, look for FB at the top end of the chart. 

 

Entrepreneurship in Spain

Sergio Antón has written a brilliant post focusing on six things that need to change in Spain in order to foster entrepreneurship in the country. The article is in Spanish.

Antón, a lawyer with Gómez Acebo & Pombo, highlights the following measures:

1) Pension funds ought to be allowed to invest in venture capital funds, lifting the current 'waterfall commission' restriction.

2) Improve the tax regime applicable to Business Angel, who are currently at a huge fiscal disadvantage to regulated fund.

3) Exploit Venture Debt. This one, we believe, is much more contentious given the current state of development of the Spanish ecosystem.

4) Have a growth-oriented specialist stock market. Madrid's MAB currently just does not do the job, as evidenced by the very poor liquidity levels.

5) Establish a stock option framework that enables the competition for top talent in an international marketplace.

6) Change mentality. Clearly the trickiest but, at the same time, the most important. Teach entrepreneurship related topics in school and your chance of harvesting entrepreneur-ready youngsters will increase enormously.

Will we see changes in this direction in the current legislature? 

 

 

Investment in EnterBío

We met Cosme, Iñigo and Rodrigo almost a year ago. They were beginning the always complex process of raising capital. From day one they gave the impresion of being a quality team surfing a fairly obvious macrotrend: organic produce.  

Since then they have gone through an absolute roller coaster. Ups, down, a lot of interest, a very difficult environment, attractive metrics, big question marks, soft committments received, fresh issues raised... Through it all though, they never gave up and demonstrated true resilience. 

A lot has being said about early-stage investing having all to do with joining dots. allowing for a trajectory to be observed and evaluated. If that is to be accepted, the EnterBío team has shown a lot of determination facing a great limitation of resources over these last few months.

With fresh cash in hand now is the time to demonstrate how the business can be consolidates and grown successfully. Best of luck to them!

 

Groupon's value evolution

The stock market's darling only a few days ago, Groupon is now trading at c.US$17, significantly below its IPO price of US$20.

On its roadshow presentation the company presented LTM revenues of 1.3 billion and said it planned to generate revenues in excess of US$1.5 billion (2011E) and US$4.0 billion (2012E) in the near future. Forecast operating profit visibility messages were much scarce. 

How has the valuation of Groupon evolved since inception? Let's have a quick look:

Date	Round	Cash in (US$ m)	Valuation (US$ m)
Nov-08	Seed / angel	1,0	N/D
Jan-09	Series A	4,8	N/D
Dec-09	Series B	30,0	N/D
Apr-10	Series C	135,0	1.350,0
Jan-11	Series D	950,0	4.750,0
Nov-11	IPO	<  700,0	12.746,0

Who said vertigo? Kudos to all pre IPO investors.

With Amazon and eBay trading at 2.4x and 4.0x LTM revenues, respectively. The banks behind the IPO pointed to other comps in the sector (Twitter, Facebook, Zynga, LinkedIn), valued at multiples well north of that (from 11x to 177x) to make Groupon look relatively cheap.

At the IPO price the company was indeed valued at c.10x LTM revenues (market cap of US$12.7 billion). Minuscule share offerings like this one (5.5% of shares floated) have a way to be particularly volatile, though. This can be great on the upside, like when trading begins at US$28, or 30% higher, valuing the company at US$240 per subscriber or c.US$350,000 per merchant, but it can turn into a vicious downward spiral pretty quickly too. 

No rating underpinned on anything different than earnings and cash flow can be sustainable in the long run.

 

Investment in Familia Fácil

The deal was announced a few weeks back. Ezaro Media participated in a dual role as a financial advisor and minority investor.  

Nieves Fernández, the entrepreneur behind Familia Fácil, is not your ordinary barely-turned-twenty new kid on the block. She has solid management credentials, as well as a good grasp of the sector she is targeting through her experience launching and running a comparable offline business in the past. Over time she has also demonstrated that she knows how to surround herself with a good team of complementary profiles.

From the beginning of 2011, we have had the chance of getting to know her new project in considerable detail,  working alongside her to help her secure an initial professional round of financing. Our belief is that Nieves has a little gem in her hands. Why do we think so? Familia Fácil fulfills a tangible market demand, does not fight an incumbent leader, burns cash at a very reasonable rate, relies on a well established business model and, above all, in eminently scalable.

At Ezaro Media we are sure we will be hearing a lot of good things from Familia Fácil in the near and not so near future. Go, Nieves, go! 

 

Online food ordering is hot!

There has been a lot of recent activity in the online food ordering space in the US. Competitors GrubHub and Seamless are putting their foot down, raising capital and acquiring smaller players. 

Earlier in September Chicago-based GrubHub announced the acquisition of Dotmenu, another US-based online food ordering company which operates the Allmenus and Campusfood sites out of New York. Only a couple of days ago Seamless (the former SeamlessWeb) somehow responded by agreeing to acquire MenuPages from New York magazine publisher New York Media.

It isn't easy to paint a good picture on the valuation reads of these recent deals. Seamless/MenuPages was priced at $15 million and the right reserved by the vendor to sell advertising against MenuPages' content for a year.

In GrubHub/Dotmenu we can't even nail down the exact price paid. The fact that it was announced on the same day GrubHub communicated they had received a furher $50 million equity inyection from its private equity backers has fueled the rumour that pretty much the entire round was used up to fund the acquisition.

The only data points on which a valuation parameters comparison can be drawn is the (rough) value paid per each monthly unique visitor to the acquired groups' sites. The range stands at $10-14. It's not much, but it provides an initial rule-of-thumb approach to this space within the broader international tech/internet sector.

On HomeAway’s IPO

Seeking Alpha has published an article more than bearish on the soon-to-be-launched HomeAway (AWAY) IPO.

These were some of the negative claims on the explicitly titled “Stay away from HomeAway” piece:

1) “Only 19% of the IPO proceeds are allocated to AWAY, so this IPO is essentially an insider bailout.”

Where did they get that from? Of the shares in the offering, 5,931,335 shares are being offered by HomeAway and 2,068,665 shares are being offered by selling stockholders. The base case primary component (funds to the company) will hence represent 74% of the total proceeds. 19% vs. 74%; not close.

2) “Other financial ratios for the 12 months ended March 2011 include: Price to free cash flow, 38x; Price to EBITDA, 64x.”

Comparing profitability and cash flow generation metrics against equity value (market price of all the shares outstanding) is completely wrong. Enterprise Value (the sum of all claims on the profits and cash generated by the Company’s assets) is the appropriate metric, not Price. Let’s assume two businesses with the same equity value (market capitalization) and EBITDA. Their Price to EBITDA ratios will hence be the same. Now, let’s assume one has significant external indebtedness whilst the other one has a generous amount of cash on its Balance Sheet. Are the two businesses equally attractive/unattractive? Most certainly not. A look to Price to EBITDA ratios will offer a pretty useless comparison in a case like this.  Going beyond, any analyst should know that in fast growing business the focus ought to be on short, medium and long term financial projections, and not on historical figures. Dubbing an offering as expensive without considering any forward-looking ratios is just not a good enough job

3) “AWAY defines “free cash flow as our cash provided by operating activities, adjusted for cash interest expense and income, and subtracting capital expenditures”. But AWAY can’t stop capital expenditures, so its definition of free cash flow is not satisfying.”

As one commentator quickly spotted, it is precisely the other way around! Any self-respecting definition of free cash flow must indeed subtract capex from cash flow from operations, just as the company explains in its filings.  

Does this mean HomeAway’s IPO is a bargain? Not by a long way. The stock offering may or may not offer good prospects to potential investors (in its first day it has traded up) , but in order to make that call or simply draw lessons from the deal (e.g. comparability with other corporate situations) it is advisable to get the facts right.

On Open Data (in Spanish)

Published by FronteraD.  On the advancement of the Open Data agenda in Spain.

http://www.fronterad.com/?q=node/3200