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Wednesday, October 16, 2013

Brandtology Deal Thoughts

(Made some amendments to data about Brandtology numbers below after reading FY2012 statements and also included more about people behind it).This is one of the stories which have been quoted quite widely in media and rightly so! Here is what i have gathered.

Eddie Chau and a few other founders which include Kelly Choo and Roger Yuen of Clozette started Brandtology back in 2008 with great foresight that with social media growing, there will be a strong demand for media monitoring of these platforms coupled with analytics tools. From what i can see, they raised about 1.75M in ordinary share capital and built up the business. Then in 2009, they got funded by Walden Seed Fund for 2M for a 25% stake. So just 1 year later, the firm was valued at 8M post money.

Eddie is a seasoned entrepreneur having already built up and sold e-Cop prior to this venture. His other more outward facing cofounder is Kelly Choo who is a frequent startup event speaker. Nice guy whom i met before as co-panelist. Roger Yuen is probably an investor with about 2.5%. I chatted with Roger in his office at Clozette. Nice "qianbei" who has been in tech much longer than me.

Brandtology was sold to Media Monitor a largish private firm based on out Australia for an undisclosed sum in Feb 2011. This is a short 2 year later. From what i can see, it is a partial sale of about 50% for the working shareholders and a complete exit for Walden. That makes sense since revenue for FY ending March 2010 was only 1.4M or so and clearly acquirers were buying a future story and they need the team and not the VCs.  And so that readers do not think this is a skyhigh valuation deal, i believe in 2011, 2012 revenue probably grew dramatically because by FY2012, revenue is at 9.3M or some with 1.3M profit if i can recall what i read accurately. So about 5-7 times sales is not unreasonable.

Shows us that keeping management around and incentives via earnout equivalent structures probably makes a lot of sense and Brandtology current numbers look good. According to their site, they have 200 staff now. Win win all round. Media Monitor (now called iScentia) gets a good growing company whose revenue x8 in 2 short years, Eddie and shareholders got to exit 5-6M in total and still retain half their stakes for upside.

Of course, valuation must have been above 8M for Walden to exit. Sale valuation should be about 12-15M to give a min IRR of 25% for the 2 years. This is pure speculations since we cannot obtain actual sale value publicly. Also, shareholding for the company to me is quite reflective of this kind of deal. Eddie had about 42% stake after Walden came in. I always believe in the CEO/key entrepreneur/owner approach whom the buck stops at. That person needs about min 35% and up. His 2-3 other individual shareholders/founders like Kelly have much smaller stakes (5+%).  Whether that incentivises them is another story but my take is that salaries can always help to mitigate a lower equity stake for the cofounders. But to me 5% is about bare min but we have to pay these co-founders properly or increase their stake with time.

What is interesting in this deal is that Media Monitor too has undergone much change. They themselves have been acquired by a PE fund and integrated together with a bunch of other media assets. It will be interesting to see how the PE guys play this one. IPO? Trade Sale? Time will tell. Hopefully the Brandtology team can participate one more time in that exit given that they kept about 50% stake.From what i can see, as of 2013, they are still holding the stake.

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