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Startups

Startups: Burrp acquisition by Infomedia18, Low Internet Valuations in India

Talking to Nikhil Pahwa on the phone about financial shenanigans and a recent acquisition of Burrp! (a restaurant review site as I know it) and some subsequent research yielded a tidbit that, it seems, was a useful piece of information. Nikhil wrote about it on MediaNama:

According to a filing with the Securities & Exchange Board of India (SEBI), Infomedia18 had paid a total amount of Rs. 4.255 crores for acquiring Burrp. Previously, the amount paid was undisclosed.

(Thanks Nikhil for crediting me)

Now this seems to be an interesting deal. Earlier reports at MediaNama indicate a murmur that Haresh Chawla, the Infomedia 18 Managing Director, had funded Burrp with a loan or a convertible debt of sorts; technically, is that a related party transaction, if Haresh didn’t own shares? I guess not, because the SEBI filings haven’t mentioned it.

Rajiv Dingra’s take on it at WATBlog analyzes the valuation; at 300K unique visitors a month, the valuation of Rs. 150 per user is a miniscule $3 per unique visitor.

That sounds quite reasonable but it’s unlikely the founders would’ve made much if the Haresh Chawla debt story is true. Still, this acquisition is going to be yet another low valuation overall; You want to see huge successes and massive payoffs but the M&A part of Indian business is yet to scale up.

Examples: HT’s acquisition of Desimartini was announced as “less than $10 million” but it turns out that figure was overstated – don’t know by how much. But a look at the 2007-08 balance sheet of HT Media reveals:

  • Desimartini was acquired by Firefly e-Ventures, a fully owned subsidiary of HT Media
  • Firefly, which was capitalized in the same fin-year, had an equity capital of 10 cr. and another 9.85 cr. loan/payable to HT Media. So 19.85 cr. is about the max they ever had – Firefly’s total assets are shown as 17 cr. at the end of the year.
  • Desimartini will be listed as an asset, most likely at cost.
  • Firefly also owned Shine.com in this period, and that’s likely to have accounted for around half of what’s in there.

So the Desimartini transaction was probably less than 10 cr.

Slightly bigger stories: Jobsahead, a job startup, was acquired by Monster for 40 cr, around $9m at the time. But it had a $5m funding from Chyrscap which would’ve taken at least 1x liquidation preference (meaning they make at least 1x their investment even if company sells for lower valuation) – but the remaining 4 million would have given the founders/angel investors/employees 16-18 cr. to share. Baazee of course was an incredible $50m, which looks like a fabulous return for the founders.

Update: Manish points me to the TravelGuru sale which was at $9-10m, which after a $25m investment from the Sequoia type VCs, would hardly have left much on the table for founders. The other big players in the travel space – Yatra, MakeMyTrip and Cleartrip – have serious funding, and just-as-serious competition in the form of larger overseas players like Travelocity, or from the Airline web sites directly. (I still use MakeMyTrip/ClearTrip to find the airline/price I want, and then hit the airline web site to see if I can get a better deal.)

This is good money in an absolute way but doesn’t make the founders filthy rich (I would say each founder making > 50 cr. is seriously inspiring).

A U.S. example: an acquisition in 1999 – of clearstation.com, a very cool financial site, by E*Trade, was for around $28 million (E*Trade paid with 469K shares, and it was around $60 at the time) Clearstation had 90K registered users – that is $30 per user, though you must remember this was the height of the internet boom.

Still, the difference is incredible. Most Indian web site M&A deals seem to be very low on valuation, and the culture of big payoffs like the US has just not come here. We’re at early internet stages in India right now, but given the relatively low payoffs and the high attrition (lemme throw a guess: 80% or more of web startups fail) the “expectancy” of the web startup isn’t positive. That’s a trading term – basically it means if only 20% of startups succeed then the payoff must be at least 4x of investment, to make up for the losses of the other 80%.

Having said that, it seems like these are great times for online startups – the internet growth is starting to show, and in mobiles, I’m seeing more and more scale. Indian Celebrities are using Twitter. Indians are pretty huge on Facebook now. Maybe this is the right time to start!

Note: One marked difference is in InfoEdge’s valuation – the owner of Naukri.com gets a 35 p/e on the market. Maybe the right thing for startups to do is to hope to get listed instead of this M&A thing.

Note 2: The Indian VC community sits at the top end; at the early stage there are few or no angel investors. Read this discussion at Venturewoods for some interesting insights and an angel funding framework; the idea is that if the angel community develops we’ll see better startups and perhaps more big payoffs.

  • kvv says:

    >Lol.. I suspect (and it really is only a suspicion) that a large fraction of such Indian M&A deals are face saving deals that give an exit option to the startup without the failure stigma. I don't trust the numbers anyway.

    A large fraction of the big valuations in the US are startups where innovation changes the way the web is the used or evolves the web in new/meaningful ways. We are yet to see many such startups in India so we won't see those big valuations either. College grads in the US create facebook and google but one can't say that Indian grads think that big even though arguably there isn't any difference between access/exposure to information.

    Infrastructure sucks in India though – I can't find a reliable web hosting service in India at less that twice the cost in the US.

    There is distinction to be made between startups focusing on web technology itself and services provided on the web. The latter is where most easier opportunities lie for Indian startups but valuations will be low or will be dictated by the service demand and cost. Note that labour is far, far cheaper in India so service costs vary dramatically between US and India. Very different dynamics between the two countries at the moment.

    Web technology startups can demand higher valuations but thats a far tougher game – there are 3 companies that dominate search out of the 100s of search startups in the past – success rate probably way less than 1%.

    In any case, large population and increasing access, improving infra should as usual be very promising for startups.

  • kvv says:

    >Additional point regarding startups that provide services on the web – valuations should probably be compared on a per capita GDP basis between US and India. After all a US startup has higher human capital costs. It would amount to dividing US valuations by 10 when comparing with India – or maybe compare urban GDP and divide by 5 or something.

  • Gaurav says:

    >very interesting stuff, got here from medianama.

    i think it is unfair to compare a startup in India and a start up out of San Jose.

    Burrp was a solid product which was developed to its present evolution. its unfortunate that the intenet scene in India does not yet lend itself to extremely high traffic or indecent ad revenues. keeping those things in perspective its trifle low but not a disaster.

  • Piyush Patel says:

    >You forget to add this week story of
    Google started talk to acquire yelp for more than $500 Million. Kind of potential it has it was to less amount. It destined to suck in @ burrp.in.com

  • Deepak Shenoy says:

    >Manish: Added data about Travelguru, thanks!

    kvv: Indian hosting has been quite expensive I agree – Reliance's colocation plans cost 2x even singapore plans, as do VSNL. Focus on infrastructure is useful, and hopefully will make bandwidth much cheaper too. I think GDP comparison is around 4 (PPP differential between India and US); but valuations should still have some premium for the supposedly larger growth story.

  • Rajiv says:

    >Well, at least we know what the P/E multiple for infoedge is. The fuzzy math of $x/user may have worked in 2000, but valuation has to be about the earnings.

  • Deepak Shenoy says:

    >Gaurav: I quite liked Burrp too 🙂 Timing of the sale was perhaps a problem; but I see better things for such sites in the future.

    Piyush: Let's see when the deal goes through; people usually talk big at dealmaking time but due diligence ends up throwing a spanner in the works.

  • The Green Man says:

    >Good one Deepak..
    what are your thoughts on infomedia 18 stocks? The stock dropped like a stone around the same time, its at a 1 yr low and is going lower than even the uber pessimism of march 09.

    I am a longgg term investor ofcourse..

  • Mr.FinViz says:

    >hey just curious what happened to moneyoga.com?? Sorry if you have posted about it already but last I checked it was very promising.

  • Anonymous says:

    >Hey Deepak,
    Can you write a analysis on infomedia 18 itself?
    The stock closer to its all times lows, I am thinking if the company has a future, the prices should pick up at some point.