I share your dislike of pretend businesses. (I call it "playing office dress-up".) But Tumblr had $14 million in revenue last year. I suspect they could be in the black on that, and if not, they're within striking range. So I don't think this is a "mud pie" company.
Further, businesses like Twitter, Facebook, and Tumblr have strong incentives to defer seeking revenue as long as possible. The businesses will only succeed at large scale. Time spend on early revenue is a distraction from what really matters, which is pleasing users. Better to wait until you have a large share of the market. So I think it's dangerous to look at Tumblr's current revenue and assume that a) that says much about their future revenue, or b) the company doesn't have a pretty solid revenue plan that they're waiting to roll out.
Anyone that pays $1.1B for a company with $14M in revenue is either stupid, or they have a plan. You can either assume Marisa Meyer is stupid, and she is going to leave Tumblr alone, then have to take a massive write down in a few years, and get then fired. Or you can assume that she has some sort of vision for how to monetize Tumblr. Any promises made and statements to the press are simply irrelevant.
What is relevant is whether she can get the Tumblr employees on board with her monetization plan. David Karp doesn't seem like the kind of guy that can get on board with someone else's vision. I have a feeling he will be sidelined and then gone at the first available opportunity.
For a big corporation it is not important to succeed in most acquisition. The real risk, is that some startup eats your current business model and you didn't buy it when you could still afford it. If most acquisitions "fail" that is ok, you still sit on a ton of money.
In other words, probability is more or less irrelevant, because if you fail it means a small loss which does not risk the company's future, on the other hand, if you don't acquire, and the small business succeeds big time, then that is a big loss, and may eventually kill you.
I agree with your point, but just one quibble: from what I'm reading, you've made the argument that the probability of yahoo as a whole failing is the probability to watch during a merger.
I don't see from your argument that probability is a bad tool in analyzing this situation.
Yahoo is not acquiring Tumblr in the traditional sense.
Tumblr is the new Yahoo.
What has been Yahoo up until now will begin to play a secondary and support role to Tumblr. So Flickr becomes the preferred photo sharing service for Tumblr.
Unlike the traditional acquisition where the acquired company disappears, this is the case where the acquiring company will disappear.
Yahoo's ability to stay alive as a large profitable business for another 10 years is dependent upon this transformation.
It's only through this lens that any kind of financial analysis makes sense. Any traditional, or sensible financial analysis will come the logical conclusion that this is an utterly foolish move.
But if you're Google in 2002, Pay Per Click Ads is the company bet -- and today's $300B Google is the result.
Meyer is making the equivalent of Google's PPC bet -- however, the goals are not massive profits as Google's were, but Meyer's goal is to return Yahoo to a role of prominence and profitability as a consumer property.
(that being said, my bet is that this turns ends badly for Yahoo and especially the shareholders).
She's making lots of moves that are young and women focused. She is cementing the Yahoo! brand with young entrepreneurs again and most importantly women and younger women.
If you have a brand problem you go younger, later on these people are a massive force if you do it right. It could be argued that Yahoo! is really a ladies platform and that is also what brought Facebook to critical mass (in fact top gamers in the casual space are middle-aged women, they also consume lots of content like Yahoo broadcasts). My wife loves Yahoo. She is buying future.
And yes, Dave here is right, don't think for one second that controlling stake in a company means it won't change, not alot soon, and maybe carefully. But, she has a grasp on the future with this buy. Mayer is the same individual that oversaw product during Blogger, YouTube, etc at Google. Meanwhile at the old Yahoo, Flickr and Delicious were not used correctly.
The only thing I didn't like about Mayer's moves is still the remote worker changes she enforced, I think that is a huge limiting factor for Yahoo talent. Will Tumblr's team be forced to move into the Yahoo! offices? Is a remote office too remote? I think moving operations that work like that would be a mistake.
This sentiment has been surfacing here more and more lately it seems, and frankly, I find it sickening.
Companies make money.
Maybe I'm crazy, but the idea of constantly seeking funding for my company instead of simply asking my customers to pay me just seems absolutely ludicrous.
The reality the tech industry is facing at the moment is this, however -- there are three things people are building these days:
1. Businesses.
2. Products.
3. Features.
You're absolutely right. If your goal is to build a business - you should be focused on making money and keeping the business viable. Long term, businesses can and will be self-sustaining.
Products, however, don't need to be. Lots of people are building products these days and making a boatload of money selling them to businesses. There's nothing wrong with it - it seems, at times, to be a very good way of making money.
What makes you (and me) sick is when people mix up what's what.
So we should amend..."Time spent on early revenue is a distraction"...if your goal is to build a great product.
(Features are what you think they are - just products with too narrow a focus to stand by themselves.)
I agree 100% with this when your user is your customer. And I especially agree there are lot of people who confuse products and businesses.
But there are companies where the user is the product. In that case, early monetization can substantially harm your goal of creating a valuable asset. All of the companies I listed are good examples of that.
Unfortunately, their popularity makes entrepreneurs think their products can also be businesses. The obvious failure is people who just don't think about revenue.
The subtle failure is people who say, "Oh, we'll run ads!" without every understanding what that means. I know people who have built ad-supported businesses, and at this point it's an extremely challenging space.
Agreed. In fact, I don't think there is anything more important to focus on in a startup than "what is the most impactful thing I could do right now, vis-a-vis generating revenue".
Of course, that might lead you to wonder "Then WTF are you doing on here right now?" Well, simply, I'm stuck at my $DAYJOB right now and don't have anything productive to do, but it would be awkward to be working on my project from here. But in terms of time I spend on the startup, I'm trying very hard right now to stop looking so much at "big picture" stuff, narrow the vision, reign in my ambitions (for now) and focus on "what will get us to revenue fastest?"
Maybe I'm crazy, but the idea of constantly seeking funding for my company instead of simply asking my customers to pay me just seems absolutely ludicrous.
It really depends on the kind of business. I agree generally, but these network-effect free-to-use companies are an exception.
If your business model is "sell user eyeballs", then you have to be really large to have a real business. And the eyeball-selling market is pretty well-understood at this point, so it's not like "companies will buy ads against demographic X" is not a hypothesis you need to test by trying it.
But Tumblr had $14 million in revenue last year. I suspect they could be in the black on that, and if not, they're within striking range.
Well they clearly aren't. The company has received $125 million in funding to date, including $85 million about 18 months ago. Their costs are obviously well over $14 million a year.
They could have take the $85 million because the getting was good and they wanted substantial independence for several years. (This happy funding climate won't last forever.) Or they could have taken it with an intention to spend a lot on marketing. Or they could have done it so they had a war chest for small acquisitions, or for major expansion.
Even if their current burn is over $14 million, which I agree is plausible, I still suspect that they could be in the black on that if they wanted. They have significant server operation costs, but I think even that plus a solid staff would fit.
Gives a very rough estimate of about 50k in server costs for 1 billion page views. That would be $12 million a year in server costs alone.
As of May, they had 178 employees. It is going to take a lot more than $2 million to pay those employees, then you have all the on costs, office space, advertising, etc, etc. I'd be very surprised if they weren't losing more than $15 million a year, and going on those quick calculations + knowing how much money they have raised, I think they're at a net loss of about $40 million a year, or more.
I said "its obvious" based on the rumours they are running out of money plus knowledge of when they last raised money. But doing a quick calculation as shown here throws up the same conclusion.
Further, businesses like Twitter, Facebook, and Tumblr have strong incentives to defer seeking revenue as long as possible. The businesses will only succeed at large scale. Time spend on early revenue is a distraction from what really matters, which is pleasing users. Better to wait until you have a large share of the market. So I think it's dangerous to look at Tumblr's current revenue and assume that a) that says much about their future revenue, or b) the company doesn't have a pretty solid revenue plan that they're waiting to roll out.