There are fewer exits available to overhyped startups these days, and I don’t think it’s just because of a troubled economy.

Bebo may have found its sucker in AOL, but for other players, finding a company that wants to buy the Brooklyn Bridge is harder than many may have anticipated.

Digg is a prominent example of that - investment bank Allen & Co. hasn’t been able to find a buyer for Digg at the rumored $300m asking price.

But Digg isn’t alone.

Plaxo, which has brought the investors who have put in nearly $30m over the years a scant 1.8m uniques per month and $10-$12m in 2007 revenues, retained investment bank Revolution Partners to find a buyer at a $100m price tag.

Despite the constant flow of rumors that it has been acquired, no announcement has been made.

Flixter, a social network for movie buffs, courted IAC but was ultimately rejected. The reason? $200m for a property with declining traffic (according to comScore) just didn’t make sense to Barry Diller.

So what did Flixter do? It took $5m of an $8m Series B funding round. Of course, the extra money alone isn’t going to change the fact that traffic is declining and that, at the end of the day, Flixter is still just a niche social network with a finite market.

Federated Media reportedly turned down a $100m buyout offer and hired investment bank Savvian to raise investment at a much higher valuation ($400m+ according to TechCrunch).

Interestingly, Federated Media’s founder John Battelle is intimately familiar with having big money on the table and watching it disappear.

And now comes word that Web 2.0 chat startup Meebo, which had apparently retained investment bank Montgomery & Co. to explore its options, is going to announce a significant round of funding at a $175 - $200m valuation.

Montgomery & Co. was reportedly not able to find a buyer at the asking price of $250m.

According to TechCrunch:

"A couple of sources have told us that eBay, Fox/MySpace and AOL all took a long look at the company, but ultimately passed based on the price and the fact that the company has done aggregate revenues since launching of only $1 million or so."

The lesson to be learned in all this: valuation kills. The hype associated with many of the first-tier and second-tier startups out there has exceeded their true value.

Unfortunately for their founders and employees, the valuations many have received from their investors have exceeded their true value too, dashing hopes of easy riches.

This creates an unenviable situation and as is being seen, some startups have little choice but to take more money at valuations that raise the bar for future acquisition even higher.

If nobody wants to buy Meebo for $250m now, for instance, what are the odds that somebody is going to want to touch it anytime soon after investors buy in at $175 - $200m.

After all, Meebo's new investors are probably hoping for a return too, even if they turn out to be strategic investors.

Startups like Meebo are essentially forced to pray that they can someday grow into their valuations or that they’ll eventually find that one person with money who wants to buy the Brooklyn Bridge.

Many, if not most, however, will never grow into their valuations or find a fool willing to part with his money.

The truth is that the economy isn’t the only factor in this. Another dynamic is at work too - the number of potential acquirers for many startups is fairly small and most of these potential acquirers aren't entirely stupid.

I believe that the glut of Web 2.0 startups, many of which are chasing the same dreams, possess little to no defensibility and have failed to develop into real businesses, is increasingly being noticed by even the most free-spending companies out there, AOL notwithstanding.

The usual suspects (Google, Microsoft, Big Media, etc.) may be willing to open their wallets, but the fact that many of them have looked closely at the high-flying Web 2.0 properties on the market and decided to pass indicates that, in general, they’re being more selective in who they open their wallets for and how much they are prepared to take out.

These companies are increasingly:

  • Willing to develop their own technology internally.
  • Looking to make strategic investments instead of outright acquisitions.
  • Seeking out promising startups that can be acquired earlier and at reasonable valuations.

Viacom, which has embraced new media, is the perfect example of this. The company reportedly offered $750m to acquire Facebook but after being turned down, CEO Philippe Dauman made it clear that the company would not make acquisitions that couldn't be justified financially.

Instead, he and Sumner Redstone have repeatedly stated that Viacom would look for younger opportunities that made more sense. In addition, they’ve developed in-house.

Comments like those made by Dauman and Redstone, which were aired in 2006, seemed to have gone unnoticed by Silicon Valley as the money continued to flow and valuations continued to rise.

Now, the short-term benefits of cheap money and ridiculous valuations are coming back to haunt startups that are learning hype alone is worth pennies on the dollar.

That is not to say that Digg, Plaxo, Flixter, Federated Media and Meebo won't still get lucky. With the valuations they’ve received from investors and the valuations they need from acquirers, they will need to.

Unfortunately, luck is finite in the world of M&A and investment bankers can't always find it.

Drama 2.0

Published 10 April, 2008 by Drama 2.0

237 more posts from this author

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Comments (3)


Ian Hendry

There is undoubtedly a whole lot of hype around Web 2.0 which has the same smell to me as the Dot Com Boom. No matter whether you consider it a new economy with new rules (sooo 1999), companies have to make money, if only to prove to a bunch of enthusiastic investors that there really is a business there.

It seems that the VC community is happiest to back neat concepts first, sound business models second. That's great to see, but I can't help thinking there are going to be people getting their fingers very badly burned sometime soon.

Ian Hendry

over 10 years ago


Miles Galliford, Director at SubHub Ltd

The biggest challenge that web 2.0 businesses face is the continual market pressure to provide their core services for free. This pressure comes from the major players who provide dozens of free web 2 applications that are cross-subsidised from their core businesses. You just need to look at Google and Yahoo's huge range of free services.

This means that web 2 entrepreneurs can only cash out to the limited number of companies who are prepared to subsidise the losses of the businesses they buy.

There are no other exit options. IPO - no chance.

The result is already becoming clear. The handful of big companies buy the top Web 2 apps and provide them for free. Their independent competitors struggle and will either limp along with ad revenues or go under.

The pressure for everything to be 'free' will end up handing the web over to a few big guys who will dominate and dictate the market.

The only way that 'real' valuations can be placed on web businesses is for them to make real revenues and this is never going to happen in a market where everything is free.

over 10 years ago



Although there is a lot of hype surrounding web 2 sites, i think the hype is well justified.
Never before has any online innovation captured the imagination and usership of as many people in as short a period of time
contrary to previous rumours, web 2 is not just a flash in the pan
However these web 2 sites are springing up everywhere.
It is undrstandable that the big media companies are targetting the web 2 sites that have already established themselves and have a dependable readership

over 10 years ago

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