Up In the Air--Is there a balance between Entrepreneurship and Life activities?

I have always been an Entrepreneur. Can't help building the better mousetrap. Can't help seeing when there is a problem that could be solved if only seemingly minor tweaks could be made.  But at my age, I do not want to live in an apartment and work out of it too with my two college friends so that I can make rent payments while looking for VC money (ala airbnb.com).

I applaud the chutzpah of the three founders of airbnb who, in 3-4 short years, started their venture and have recently raised $112M from VCs (famed Marc Andreesen is one of them). In fact, the recent Series C round of investment had a valuation of $1B. This means that the $112M they received gave those investors just 12% ownership in the company. Wow. And that is after seed funding of $600k a few years ago and $7.2M last year. Things are getting spendy. Granted, airbnb has a customer base now and a great story. They also have a great PR machine that tells of treehouses and castles for rent and Obama-O's they sold to survive. But with about 50,000 customers/places for rent (as of Feb. 22, 2011 interview), and them taking 10% of rental deals off the top to broker the transaction, we can estimate their cash flow to be as follows:

• Average rental: $100/night
• Average rental period: 4 nights
• Total rental: $400
• % of listings that rent: 50%
• # of rentals each listing gets per year: 6

$400 x 6 = $2,400 --> Total income received by renter per listing

50,000 x 50% = 25,000 --> Total # of listings that receive rentals

25,000 x $2,400 = $60,000,000 --> Total Income of all rentals

$60M x 10% = $6Million --> (my) estimated Revenue for airbnb for this year

That means that aibnb received a 167x Revenue multiple for their valuation. Nice! Not sure who else has gotten those kinds of multiples from investors but whoever their I-Banker is, my hat is off to them!

To do some sensitivity analysis, since after all I am using educated guesses here, let's say they have twice as many customers, or 100,000. That still gives them an 83x Revenue multiple. Whoa. Still a fantastic deal for them.

But the point of my story is/was, where is the work/life balance? In many stories that I read about airbnb, the work-around-the-clock tirelessness of the founders is repeated over and over. I know that investors invest in teams and not ideas, but I would hope that there is some balance between what airbnb guys do and the rest of their lives. I know they're young but they won't be forever. It's really a good idea to establish balance earlier than later. Being rewarded with $112M is not very good incentive to change one's behavior, but eventually burn-out will prevail if they don't get the balance right.

In the meanwhile, I wish them the best.  It's said they are moving into a big, new Potrero Hill (San Francisco) office. Hope they spend the $150M slowly and wisely. Those bucks were hard-earned (read: blood, sweat and tears). The next round may come or may not be needed at all. Just hope the balance occurs along the way.

Flip Out!?

OK, am I the last to know? Two weeks ago, we just gave our employee a Flip Video for his birthday because he wanted one, and he's a videographer, and a young guy who likes cool and convenient gadgets. It was even branded with Tina Malia's image. He was psyched!

So then I am out yesterday and I hear that Cisco killed the Flip Video. WHAT?! So, I did a bit of on-line research and found out that it was announced almost two weeks ago. Where have I been? So that got me to wondering...

Why did Cisco kill the Flip Video? I mean, I read their Press Release and the company's spin but...

Let's review. Cisco paid $590M for Flip Video TWO years ago. Last year, Flip Video was the top-selling video camera in the US with 26 percent of the market. (Aside-- when I worked at Sony, they used to say that if they had 20 percent of any market they were super accomplished.) All of those sales for Flip only amounted to 2.5 million units sold. I repeat "only" and it's only because the other thing that Cisco is much more known for is their routers and switches. There are none of those in a Flip Video camera. Oh, and let's note that sales were up 15% from the prior year- Wow- and in a recession. But I'm still confused. Why did they kill the company after paying millions a minute ago? And do they do this often? Take a success and buy it to bury it? Oh, and not only did Cisco kill the business, they didn't sell it to someone else and try to get some of their money back. Now I'm really confused. There's got to be more than meets the eye to this, don't you think?

One theory, unspoken by Cisco, of course, is that this inexpensive option for insta-video competed with their very expensive teleconferencing business. The one comparable hurdle is that Flip has no networking capabilities but that doesn't seem like it would have been a big problem for Cisco to solve if they had wanted to. Cisco has several billions of dollars invested in the teleconferencing business on both the higher and the lower end but all B-to-B not B-to-C. On the lower end, they paid $3.2 billion for Webex at a time that Webex had sales of only $380 million, or a multiple of 10x gross revenues! So why would they keep a product for sale (Flip) that sells for $100 that even has the potential for undercutting their larger priced sale? Now THAT sounds like a strategy. Buy, try, re-think and flush. Buh-bye Flip. RIP.

Feels good to help the small guy (& gal) price their business

Great news: Just heard from a client that they sold their pool maintenance and repair business and the Valuation work I did for them made a big difference!

They owned the business for eight years and made a good living from it along the way. But the really good news to me was that after I did a Valuation for them, they used the price we came up with and found a willing Buyer to pay them that price. They earned over 63% from the price they paid for the business. We can do a simple calculation to see that they earned almost 8% simple interest on their investment per year on the Asset called "the pool service business". And let's not forget that the general economy had gone through a major recession in the same period of time.

In fact, real US GDP (in constant 2000 dollars) as reported by the US Dept. of Commerce was:

Q1 2002: $11.47B

Q4 2010: $13.38B

An increase of $1.91B or 17% growth in real GDP from 2002-2010 (or 2.13% simple interest/yr.)

It would have been so easy as the Seller to just fall into the general sentiment of the times saying, "These are tough economic times", and "We'd just better get what we can and get out!". That would have been a great disservice because in fact it was a very healthy business and they deserved to be compensated by the prospective Buyer for the opportunity they set up for that next person to make money. I think of it as selling a money printing press; all the next person has to do is show up and press "Start" and it makes money for them.

So while the economy flailed a bit, the pool repair business increased in value over 63% in the same period. And, the owners got paid to work in the business along the way. So, what can we draw from this info?

1. The owners bought an undervalued business. (Maybe)

2. The owners increased the value of the business by adding customers and services. (True)

3. The owners were very smart to get a proper Valuation for their business so that they were informed Sellers when they went to market it through a Business Broker. (Absolutely true! And the owners agree.)

As an aside, Business Brokers, while they do provide a good platform for buyers and sellers of small to medium-sized businesses, not all of them offer complete Valuation services. Rather, they often use quickie multiples of Gross or Net Income (3x) across the board when pricing businesses for sale. This might under- or over-value many businesses, often leaving money on the table at selling and negotiation time.

True valuations take time, energy and must include good financial records. If the historical financial and accounting records (Profit & Loss Statements and Balance Sheets) are not in good order (and this is often the case for small and medium-sized businesses) the first job is to clean them up. Only with clean financial statements can the Valuation work be done well. So, a business owner who wants a Valuation done must be ready to potentially pay for two jobs:

1. Financial clean-up; and

2. Valuation.

In the end though it is well worth the expense. The total cost of the clean up and Valuation for this business? $3,000. Money they easily made up in the proper pricing of the business at sale time.