What tech stocks tell us about startups

At DAN Fund we monitor a number of publicly traded tech companies, specifically those internet companies similar to what we invest in.  While comparing public companies to stratups isn’t perfect, it’s the most honest comparison we can make (M&A multiples are notoriously inaccurate and biased).  Below are the major tech stocks we follows as well as observations that apply to any stage tech company, startups included. 

 

                             
    TTM TTM  TTM  Capital Enterprise Market         REV PER Q1 2016 Q1 2016
Name Ticker Revenue EBITDA FCF Surplus Value Cap Debt Cash EV Calc   $ of D+E EBITDA/REV Rev Multiple
Social                            
Facebook FB $19,770 $9,440 $9,880 $34,886 $306,540 $325,170 $0 $20,620 $304,550   $0.57 48% 15.40x
Linkedin LNKD $3,210 $266 $894 $4,589 $23,460 $25,410 $1,140 $3,160 $23,390   $0.56 8% 7.29x
Twitter TWTR $2,380 -$67 $454 $6,507 $9,390 $11,240 $2 $3,580 $7,662   $0.37 -3% 3.22x
                             
Median   $3,210 $266 $894 $6,507 $23,460 $25,410 $2 $3,580 $23,390   $0.56 8% 7.29x
                             
Marketplaces                            
Just-Eat JSTLF $351 $83 $105 -- $4,187 $4,460 $0 $273 $4,187   --- 24% 11.94x
Zillow Z $703 -$10 $40 $2,985 $5,910 $6,120 $230 $514 $5,836   $0.22 -1% 8.30x
Priceline PCLN $9,530 $3,650 $3,240 $5,274 $69,710 $67,510 $6,420 $3,380 $70,550   $0.81 38% 7.40x
TripAdvisor TRIP $1,480 $233 $403 $758 $8,820 $9,430 $111 $692 $8,849   $1.70 16% 5.98x
GrubHub GRUB $386 $89 $33 $768 $2,200 $2,530 $0 $324 $2,206   $0.50 23% 5.72x
Sabre SABR $3,110 $706 $552 $2,038 $10,570 $7,370 $3,310 $112 $10,568   $0.58 23% 3.40x
eBay EBAY $8,670 $2,980 $3,520 $14,627 $29,400 $27,960 $9,004 $8,000 $28,964   $0.37 34% 3.34x
Shutterstock SSTK $444 $60 $87 $222 $1,300 $1,610 $0 $276 $1,335   $2.00 13% 3.00x
Etsy ETSY $297 $22 $22 $411 $825 $1,080 $13 $270 $823   $0.70 7% 2.77x
Lending Club LC $501 $25 $78 $1,151 $1,310 $1,840 $15 $584 $1,271   $0.43 5% 2.54x
Expedia EXPE $7,200 $800 $1,420 $8,788 $17,150 $16,070 $3,240 $2,090 $17,220   $0.60 11% 2.39x
Care.com CRCM $146 -$3 $5 $283 $228 $279 $0 $52 $227   $0.52 -2% 1.55x
IAC IAC $3,280 $383 $377 $11,841 $4,740 $4,460 $1,730 $1,430 $4,760   $0.24 12% 1.45x
Angie's List ANGI $344 $16 $15 $278 $443 $439 $58 $59 $437   $1.03 5% 1.27x
                             
Median   $602 $86 $96 $1,151 $4,464 $4,460 $84 $419 $4,474   $0.58 13% 3.17x
                             
Information                            
Yelp YELP $590 -$9 $56 $793 $1,810 $2,170 $0 $375 $1,795   $0.74 -1% 3.04x
TrueCar TRUE $263 -$38 -$9 $515 $543 $619 $27 $106 $540   $0.49 -14% 2.05x
                             
Median   $426 -$23 $23 $654 $1,177 $1,394 $14 $241 $1,167   $0.61 -8% 2.55x
                             
Content Delivery                            
Yahoo! YHOO $4,830 $2,890 $943 $8,888 $30,770 $35,490 $1,250 $5,980 $30,760   $0.48 60% 6.37x
Netflix NFLX $7,160 $320 -$851 $0 $39,270 $38,550 $2,370 $2,070 $38,850   3.02 4% 5.43x
Google GOOGL $78,000 $25,510 $26,960 $33,694 $420,610 $487,780 $7,280 $73,450 $421,610   1.90 33% 5.41x
WebMD WBMD $652 $153 $109 $9,259 $2,330 $2,210 $691 $593 $2,308   $0.07 24% 3.54x
Pandora P $1,230 -$112 -$82 $1,153 $2,580 $2,690 $239 $349 $2,580   $0.88 -9% 2.10x
                             
Median   $4,830 $320 $109 $8,888 $30,770 $35,490 $1,250 $2,070 $30,760   $0.88 24% 5.41x
                             
Gaming                            
Activision Blizzard ATVI $4,840 $1,590 $1,290 $10,343 $31,510 $28,290 $5,840 $2,870 $31,260   $0.30 33% 6.46x
Electronic Arts EA $4,400 $1,080 $1,220 $1,349 $20,090 $22,540 $1,150 $3,830 $19,860   $1.76 25% 4.51x
Zynga ZNGA $768 -$26 -$1 $0 $1,400 $2,220 $0 $857 $1,363   --- -3% 1.77x
Take-Two Interactive TTWO $1,410 $89 $261 $1,089 $2,220 $3,150 $498 $1,270 $2,378   $0.89 6% 1.69x
                             
Median   $2,905 $585 $741 $1,219 $11,155 $12,845 $824 $2,070 $11,119   $0.89 15% 3.14x

 

-The startups that command the strongest revenue multiples on median are those that have a Social aspect (7.29x), followed by Content Delivery (5.41x), and Marketplaces (3.17x).  To the extent it makes sense to build your startups around any of these themes, doing so will help justify a premium multiple when raising capital. 

 

-Startups in the Valley that have an affinity for making a bonfire with their cash aren’t going to like hearing this: in every category, internet businesses with the highest margins command the highest multiples (besides Zillow and Netflix, which are growing exceptionally fast).  Facebook enjoys a 48% EBITDA/Revenue margin, the top 7 Marketplaces have a margin of 22% while the bottom 7 have a margin of 7%, the top 3 Content Delivery companies have a margin of 32% while the remainder average 7%, and the top 2 Gaming business average 29% while the bottom 2 average 1%.   Businesses should remain cognizant of the effect that margins have on multiples and carefully weigh the risk-reward of increasing expenses for the sake of growth.   Outside the Valley, cash efficiency matters. 

 

-On median, every category generates cash.  All of these companies are built on business models that are economical: they’re not overpaying to acquire and service the customer.  Median annual cash flow from operations is $894mm in Social, $96mm in Marketplaces, $23mm in Information, $109mm in Content Delivery, and $741mm in Gaming. 

 

Feel free to share your observations in the comments section.  

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