December 9, 2013

Earlier this month we wrote about Jajah, the Silicon Valley-based VoIP provider purchased by (Spanish telco) Telefonica and shuttered almost four years to the day after the deal was announced. Many acquisitions and investments in Silicon Valley go wrong – the collective view of what goes on is very much clouded by survivor bias and the news stories that accompany the successful, multi-billion dollar flotation of a once-obscure start-up – and the evidence would appear to argue that acquisitions and investments by foreign firms tend to perform worse than the average.

Another recent article (published in the most recent version of “Cheverny Strategic Perspectives”) examined news that web-storage provider DropBox Inc. was raising $250 million (on a doubling of its valuation to over $8 billion). DropBox uses Amazon’s AWS cloud storage platform to provide its clients with easy storage: it is essentially a middleman providing security, added services and account management between the infrastructure (Amazon) and a client. DropBox began as a free application aimed at consumers but subsequently moved to expand into the business market. It is undoubtedly a high-performing company, but it is arguable that, by depending on infrastructure it neither controls nor operates, it does exhibit some potential business risks. Moreover its sustainable competitive advantage resides more in mass and first mover advantage than any uniquely defined technology edge. (Note that this is an observation rather than a prediction and that critical mass could well prove to be the way that this business bullet-proofs itself.)

Now we have news that confusingly named Box Inc. – a rival rather than a relation to DropBox Inc. – is looking to raise $100 million on a valuation of $2 billion (apparently 20x current year sales and roughly 40x 2012 revenues). The roster of investors in this round is largely foreign: Macnica, Mitsui and Itochu Technology Ventures of Japan, Telstra (the Australian telco) and the aforementioned Telefonica. Telefonica is going to – as was the case with Jajah – help link Box to its network of 300 million customers in Europe and Latin America.

These new investors are joining a shareholder register that includes some very savvy Silicon Valley money, including Draper Fisher Jurveston and, all of which likely invested at much lower valuations.

Foreign investors coming on board at 20x sales may well be demonstrating great savvy. Another interpretation is that they are latecomers providing the valuation froth in a market that, however real, may be running somewhat ahead of itself.

Other relevant data points include a $9 billion valuation for data-mining expert Palantir (a company with a name from J.R.R. Tolkien’s “Lord of the Rings” and a client base that includes various U.S. government spying and law enforcement agencies) and $3.8 billion valuation for Pinterest (the online bulletin board with 25 million users). The rich valuations are spreading abroad: Stockholm-based music streaming service (also with almost 25 million users) Spotify also commanded a $4 billion valuation.