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Private Equity Investing in Digital Media Expected to Increase in 2011

April 9th, 2011 8:27PM by Brendon Kensel

Digital media companies are reinventing traditional business models and transforming the distribution of media content, services and applications. The global growth of emerging digital media channels and the convergence of media, marketing and technology are challenging traditional business models and compelling companies to explore alternative revenue models. Advertising remains the leading revenue generator for many digital media companies, but these dollars are often being generated in very creative ways. These rapid and dynamic changes in digital media have also impacted private equity firms and how they evaluate new platform and add-on acquisitions.

Private equity groups are expected to boost their level of investment in digital media in 2011 as they work to protect existing investments, unlock new economic opportunities, and open new markets. The top verticals that will likely attract interest are social networking, mobile/location-based services, niche Internet sites, videogames, and online advertising/technologies. According to the PricewaterhouseCoopers/NVCA MoneyTree Report, $11.6 billion flowed into 2,266 Internet-specific companies from 2008 through 2010. In 2010 $3.8 billion was invested in 729 deals. This robust early-stage to late-stage venture investing in digital media over the past three years indicates that there will be an emergence of category leaders operating in new verticals and leveraging disruptive business models.

Digital Media Companies - Recent Funding & Estimated Value” width=

Source: CruchBase, April 2011

This trend has already become apparent with companies such as Facebook, Twitter, LinkedIn, Groupon, LivingSocial and Zynga. Private equity firms will likely actively pursue established late-stage category leaders as they look to establish positions in market-defining companies before IPO’s. As the public equity markets continue to improve and as IPO’s become a viable path to near-term liquidity, private equity investors will be attracted these companies. As an example, in January 2011 Demand Media (NYSE: DMD), run by former MySpace Chairman Richard Rosenblatt, went public and sold 8.9 million shares at $17 each. Since it was founded, Demand Media had raised approximately $375 million in financing from investors that included Oak Investment Partners, Spectrum Equity Investors, Generation Partners, 3i Group and Goldman Sachs. As of April 9, 2011 Demand Media had a market cap of $1.9 billion.

Recent noteworthy investments in digital media companies include:

LivingSocial – In April 2011 the company raised $400 million from Amazon (NASDAQ: AMZN), Lightspeed Ventures, T. Rowe Price, and Institutional Venture Partners which valued the company at approximately $3.5 billion.

Facebook – In January 2011 the company raised $1.5 billion from Goldman Sachs and DST in a deal that valued the company at $50 billion.

Groupon – In January 2011 the company raised $950 million from Andreessen Horowitz, Battery Ventures, DST, Greylock Partners, Kleiner Perkins Caufield & Byers, Maverick Capital, Silver Lake and Technology Crossover Ventures in a deal that valued the company at $4.75 billion.

Twitter – In December 2010 the company raised $200 million from Kleiner Perkins, Benchmark Capital, Union Square Ventures and Spark Capital in a deal that valued the company at $3.7 billion.

Zynga – In June 2010 the company raised $300 million from Softbank Capital and Google (NASDAQ: GOOG) which valued the company at approximately $4.5 billion. As of February 2011 it was rumored that Zynga was raising another $250 million at a valuation of $7 to $10 billion.

How to Raise Venture Capital for a Tech Start-Up

March 2nd, 2010 8:35PM by Brendon Kensel

I recently chaired a venture capital event focused on how to raise VC funding for tech start-up’s that was hosted by Pepperdine’s Graziadio Alumni Network of Orange County. The panelists included: Eghosa Omoigui, Director of Strategic Investments at Intel Capital; Marc Averitt, Managing Director at Okapi Venture Capital; and Stuart MacFarlane, Investment Committee Member at Momentum Venture Management and CEO of iChange.com. The panel was moderated by Alexander Haislip, Senior Editor of Thomson Reuters’ Venture Capital Journal and Private Equity Week.

Entrepreneurs seeking venture capital are facing the most difficult funding climate in over a decade. In 2009 venture capitalists invested $17.7 billion in 2,795 deals, a 37% decrease in dollars and a 30% decrease in deal volume from 2008, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association (NVCA), based on data from Thomson Reuters.

Both Okapi Venture Capital and Momentum Venture Management funded about 30% fewer deals in 2009 vs. 2008. Marc Averitt of Okapi Venture Capital noted that they are, “currently focused on existing portfolio companies, but expect to start looking at new opportunities in 2010.” Stuart MacFarlane of Momentum Venture Management had similar sentiments and indicated that in 2009 all of their funding activity was in support of current portfolio companies. Both Mr. Averitt and Mr. MacFarlane also expressed a keen awareness of the pressure to deliver solid returns to limited partners.

Eghosa Omoigui of Intel Capital indicated that while their investment activity slowed in 2009 they were still very active. According to TechCrunch Dealmaker Rankings, Intel Capital was the fourth most active investor in 2009 investing $429 million in 46 deals. As a strategic investor Intel Capital does not have to live within the same 10-year fund boundaries of traditional venture capital firms. Intel Capital is able to make a broad range of investments and Mr. Omoigui indicated that their oldest portfolio company received funding in 1993, however, this company is preparing to file a S-1 for an IPO.

A video of the event can be found here: http://www.youtube.com/watch?v=MDKxy-lG2CQ

Strategic Buyers will lead M&A Activity in 2010

January 30th, 2010 3:12PM by Brendon Kensel
M&A Activity” width=

Source: Dow Jones VentureSource

The M&A market the past twelve-months has been weak, but strategic buyers will likely lead an increase in deal activity in 2010. Financial buyers have continued to be challenged with the lack of credit availability while many potential strategic buyers are sitting on cash or have some access to existing lines of credit. We saw an increase in M&A activity in Q4 2009, but I expect deal makers to very creative this year to get deals done.

Since the economic crisis began many firms have streamlined operations and increased their cash positions. This improvement in financial health is expected to produce an increase in mergers and acquisitions as firms try to kick-start their growth.

While venture-backed companies may seek an IPO exit in 2010, I expect strategic buyers to emerge as the more likely exit. According to Dow Jones VentureSource there are 25 venture-backed companies currently in IPO registration, but there were 86 M&A transactions in Q4 2009 generating $7.3 billion. Amazon.com’s (NASDAQ: AMZN) $847 million purchase of Zappos.com was the largest deal of Q4 2009.

Mergers and acquisitions are off to a brisk start in Q1 2010 with several transactions in the media and marketing sectors. A few deals follow: Dentsu, Japan’s largest ad agency, acquired Innovation Interactive, the parent of digital ad shop 360i; AOL (NYSE: AOL) acquired StudioNow, an online platform for content creation and distribution, for $36.5 million in cash and stock; and LivePerson acquired web analytics company NuConomy for $3 million.

I contacted Alexander Haislip, senior writer at Thomson Reuters’ Venture Capital Journal and a columnist for Private Equity Hub, to get his point-of-view on the M&A outlook for 2010, particularly in the cleantech sector. “There’s a great opportunity for innovation in the cleantech M&A where startups license their technology to big manufacturers who can put it directly into production,” commented Mr. Haislip. “Project financing for cleantech is way off levels we saw just a few years before and it is harder for ever for entrepreneurs to connect with expansion capital. Investors may find their best hope for at least partial liquidity in 2010 is through licensing. That’ll mean tangoing with the likes of The ABB Group (NYSE: ABB), GE (NYSE: GE), First Solar (NASDAQ: FSLR), and a host of other biggies that have yet to make their intentions known.”

Welcome

November 1st, 2008 12:50PM by Brendon Kensel

Welcome to the Kensel & Co. blog. This blog will provide insights and analysis on mergers and acquisitions, private equity investments, venture capital, business strategy, and emerging trends in the media, marketing and technology industries. The authors bring a wide range of expertise on these subjects and I encourage you to visit this site regularly for recent posts.