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Where's the money going?
The report says that "in 2008, there were 18 strategic acquisitions involving a change of control and 13 capital raises for the out-of-home sector of media. Out-of-home media (OOH), which is comprised of digital signage, billboards, alternative outdoor, street furniture, transit and place-based media, had $556 million of reported M&A transaction value in 2008." As we can see from the above graphic, that means that a little over 60% of the activity by dollar volume is in our own digital corner of the woods. Although the amount spent in 2008 is actually down from 2007 (primarily due to fewer strategic acquisitions), the fact that such a large percentage of the deals are in the digital space indicates that this continues to be an area of great interest for firms looking to invest in some kind of media. While traditional media returns have plummeted in recent years, and even the once-mighty Internet has slipped up for a quarter or two now, out-of-home continues to produce strong revenue results -- and digital adds the prospect of multiplying those revenues.
How can you get some VC money of your very own?
As much as I normally like to paraphrase these reports, this is one situation where I can't add anything of note, so here's the direct quote:
Expect more venture capital to trickle into the digital out-of-home sector, but access to capital will not come easy. There will absolutely not be any "build it and they will come" networks financed in 2009. Institutional investors will not only want to see proof of concept (revenue), but will want to see recurring revenue streams from entrenched advertisers before investing. Digital networks targeting specific demographic groups or lifestyle activities, such as grocery stores, specialty doctor's offices, bars, golf, ski and health spas or gyms with endemic advertising bases will attract capital first. (Major emphasis added -- can you tell I think this is important?)Have you ever noticed that VCs are really only interested in giving you money once you don't need it anymore? True story: back in 2001, we were having a very, very hard time raising an initial round here at WireSpring. Then September 11th happened, essentially wiping out the few hot leads we had. Times were lean. Fast forward to today when we're comfortable, growing and have cash in the bank, and we get cold calls from the money guys every week. In many ways, the target group for venture capital is self-selecting, which is unfortunate for both investor and investee.
The bottom line is that having a VC ask a new company with significant start-up costs to show real revenue is hard. Asking them for a recurring revenue stream from entrenched advertisers is practically impossible. I don't think it's unreasonable to say that this requirement will immediately knock out 90% of those companies thinking about raising cash. Now, is that unfair? No, of course not. That's capitalism. But if you thought it was hard raising money in 2008 or before, the folks at Peachtree indicate that you might want to revise your expectations downward this year. Ouch.
So, what's your company really worth?
Ah, this is the million dollar question. Or, potentially the multi-million dollar question, and as it always is with these kinds of questions, I simply can't give you a hard-and-fast answer. But what I can give you is some data. For example, we know that on average, the big out-of-home players (Lamar, Clear Channel, National Cinemedia, Focus Media and Alloy) have market capitalizations that are 2.1x revenues (or 5.9x EBITDA). But even within this small group of companies there are huge variations -- Alloy is trading at 0.2x revenues, while Lamar and National Cinemedia are trading at 3.4x and 3.3x revenues, respectively.
Now let's suppose the hypothetical network that we talked about in the 2008 edition of our budget for digital signage hardware and software wants to raise some cash or sell the company. (To view the data for other years, check out our historical digital signage cost estimates and price guidelines.) As a quick refresher, this company spends about $574 per screen per month to operate their 100-venue network, bringing their total annual expenses to $689K. Meanwhile, their sales team has been effective at selling eight paid ads on each screen every month, earning the firm the $130 that we've found to be a reasonable average price guess in past articles. Thus, their annual revenue is $1.25M, and their pre-tax profit is about $561k. Using the figures above and assuming a valuation range of 2.1-3.4x revenues, this firm would have a valuation of somewhere between $2.6M and $4.3M. Here's the catch, though: that 100-venue network can probably handle many more than eight paid ads per month. At twice that number, the company would be making twice as much revenue without much increase in costs, yielding a valuation of $10M or more. (That's based on the 5.9x EBITDA multiple, but the valuation should be even higher since our annual expenses already include the depreciation of the hardware, which would have to be added back to give us EBITDA.) This is both the biggest problem and the biggest opportunity that digital signage networks come across when raising venture capital. Stick with today's revenue numbers and you're probably selling yourself short. Try shooting for the moon by pitching a 100% subscription rate, and you'll get laughed out the door.
At the very least, these numbers offer a starting point for determining your own valuation. But ultimately, the value of your company is just the price that you can get somebody else to pay for it, so your success will vary with your negotiating skills, too. 2009 is going to be a very tough year for raising money, even in our relatively successful field. If you think you'll need to, my advice is to start early, do your research, and obviously, get that revenue in place before sending out those business plans! Trust me, the nice folks who do the printing and binding at Kinko's will still be there when you're ready.
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