From the monthly archives:

April 2010

SocialBeat’s Dean Takahashi reports that Digital Sky Technologies (DST) has agreed to pay AOL $187.5 million for ICQ, the largest instant messaging service in Russia, and a number of other markets.  According to Time Warner, ICQ has over 100 million accounts registered, and more than 32 million unique visitors per month, which was started in 1996 by Israeli firm Mirabilis, which AOL acquired for $407 million back in 1998.

While DST for a long time has been an owner in Eastern block countries of significant social media assets, more recently they have become known as a secondary investor in companies like Facebook, Zynga, Groupon and Tencent.  Yuri Milner, CEO of DST, said “the acquisition of ICQ is a strategic enhancement of our business in Russia and Eastern Europe.”

So does this acquisition of ICQ position them as a competitor, or better yet – frenemy, to their existing or future social media investments?  Although DST has been an owner operator largely in the Eastern block countries, and it now appears they have more global aspirations, so it will be interesting to see how the market reacts to DST in future investment opportunities.

In a BusinessWeek interview in February 2010, Yuri Milner says “I am making big investments… You just have to be personally involved.”  He goes on to say, “I’d like to see DST as a significant global investment company in the Internet arena.”

As we understand it, DST hasn’t taken board seats in their late stage deals at companies such as Facebook and Zynga, but its hard to believe that their hundreds of millions of dollars of investment hasn’t yielded them with a wealth of confidential information that Facebook, Zynga and others wouldn’t want their competitor to get a hold of.  And now DST could just be that competitor?

Sure, Facebook and others probably aren’t worried about ICQ as a competitor, but DST has certainly proven that they have access to nearly unlimited capital and they’re willing to pay a premium or above, so what’s next on their acquisition horizon and how much are they willing to pay?  Were they paying premiums in these companies for a strategic reason we didn’t quite see at the time?  Is this something their current or future portfolio companies should be worried about?  Did Mark Zuckerberg miss the writing on the wall?  Tell us what you think.


The Go Daddy Group has been selling domain names and website hosting services for over ten years, with some very impressive growth metrics.  In 2008, Go Daddy’s 2,000+ employees managed over six million customers and 34 million domain names with $497.9 million in revenue.

Go Daddy’s founder and CEO, Bob Parsons, launched the company in 1997, three years after selling his first business, a software company, to Intuit for $64 million.  Parsons is the “sole owner”, and controls the business, and when the will ultimately decide to go public.

In 2005, Parsons came up with an idea to feature a “good-looking gal in a tight T-Shirt, with the Go Daddy name across her breasts”, as he puts it.  The concept was to do a parody of the Janet Jackson wardrobe malfunction from the previous Super Bowl halftime concert.  The ad campaign proved to be a huge success for Go Daddy, as the media exposure calling the campaign inappropriate drove more traffic to their site, and ultimately shot their market share up from 16 percent to 25 percent practically overnight.

In 2003 Go Daddy’s revenue was $39.3 million, 2004 was $73 million, 2005 was $139.8 million, 2006 was $240.9 million, 2007 was $349.6 million and 2008 revenue topped $497.9 million.

In 2006 Go Daddy had plans to raise $200 million through an IPO, but ultimately decided not to attempt the IPO, citing difficult market conditions.  In Parsons own words, “we don’t have to go public“.  As Parsons says, “The Go Daddy Group, Inc. has one investor: Me.”

So with no institutional investors pushing to exit their positions at Go Daddy, and Parsons having already made his retirement cash, is there an IPO in the making for Go Daddy any time soon? Its hard to say, but as Parsons would say, he’ll stay “Master of His Own Domain”… for now.


There has been a lot of debate over a section of the financial reform bill proposed by Senator Chris Dodd, (aka the Dodd Bill), which has a few provisions that could significantly impact angel investing, and ultimately the secondary markets in a very negative way.  Although this has been widely covered, and while it appears as though most of the worst parts will be eliminated, we felt we should discuss how it may ultimately affect the secondary markets.

Currently, most technology startups raise their initial funding from angel investors, which by law must be accredited investors.  An “accredited investor” is currently defined as anyone with a net worth of over $1MM or net income of over $200,000 a year.  The “Dodd Bill” proposes to increase these to $2.3MM net worth and $450,000 annual income, and then index those numbers to inflation.

The second thing the Dodd Bill proposes is to eliminate the existing federal pre-emption over state regulation of “accredited offerings.”  This means that venture and angel financings would be regulated state by state, creating a ton of rules and regulations that each financing would need to be subject to.  Each financing would require startups to register with the SEC, which could take up to 120 days to review the filing.  This may in itself kill most angel investments, since angels like to react quickly to the market, and most technology investments are clearly time sensitive.

Last year, 259,480 angel investors invested $17.6 billion in 57,225 entrepreneurial ventures.   There are over 240 million Americans that reported earnings in 2009, with 2.5 million earning over $200,000.  That means only 1% of the U.S. population currently qualifies as an eligible “accredited investor”.  The problem with the Dodd Bill is that it could dramatically reduce the total number of eligible angel investors, which is what has everyone in an uproar.

The negative impact will be severe.  First, fewer angels will make capital more expensive, fewer startups will be funded, and innovation will be stunted.  However, in the short term, this may actually create an even higher demand for shares on the late stage growth startups like Zynga, Facebook, Twitter and more within the secondary markets among the remaining eligible angel investors.

The secondary market will also suffer as there will be fewer “winners” to invest in.

Government is never in equilibrium, and tends to extremes.  We were basically on a 30 year de-regulation binge, that with 20/20 hindsight, went to far, and destroyed a lot of wealth.  It appears we may now experience the blowback, the new extreme will be too much regulation that will likely destroy even more wealth than the de-regulation binge.

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Check out David Kirkpatrick, author of “The Facebook Effect“, in a video interview by Kara Swisher of All Things Digital, describing Mark Zuckerberg’s vision from the start of Facebook, “which is to become infrastructure for identity on the Internet.”  He goes on to explain that “Google is the consummately brilliant data centric Internet company that couldn’t be better than it is at that.  Facebook views the world through a different lens, which is sociality, which is the interaction between people and what can technology do to make that more effective, enjoyful, etc.”

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The last week has seen Zynga’s growth slow from last weeks torrid pace.  In total, Zynga MAU growth dropped to an annualized rate of 22% last week, from over 100% the prior week, the slowest growth rate since the week ending March 27th.

All of Zynga’s growth came from the remarkable rise of Treasure Isle, which grew by over 45% in just one week, to 21.1mm MAUs, blowing by long time stalwarts like Zynga’s Fishville and Crowdstar’s Happy Aquarium, to become the 5th most popular game on the Facebook platform. While we are stupefied by Treasure Isle’s rapid ascension in to the pantheon of widely played Facebook games, we continue to note concern over the weekly drop in MAUs in every other major Zynga game.  It took the miraculous growth of Treasure Isle to offset the continued drop in Farmville (-900k), Caefeworld (-1mm), Mafia Wars (-1.1mm), Fishville (-900k), and the more modest drop offs in Petville and Texas Hold Em.

Of note is the modest drop off (-0.3%) in total MAU’s for the Top 10 Facebook game developers, the first drop since we started covering Zynga.  While Zynga, EA (+1.2mm MAUs) and Playdom (+1,1mm MAUs) all grew the base of MAUs, it was not enough to offset large drops by Mindjolt (-2.8mm) and Crowdstar (-1.5mm), as well as smaller drops by PopCap Games, CountryLife, SlashKey and MeteorGames.

While we find the weekly data very interesting, we don’t extrapolate the data to divine any great insights.  We remain in the embryonic stage of the biggest transformation in gaming in a generation, and use the weekly gyrations as context in which to understand the bigger picture.

Lastly, we believe last weeks announcements at F8 about the Open Graph place Facebook’s world conquering ambitions in plain view for everyone to see.  While these ambitions have been apparent to anyone who closely follows the company, the rest of the world is now attuned, and many are scared for competitive reasons or due to privacy concerns, .  While the power that will reside with Facebook scares many, including us,  SecondShares believes the deeper adoption of the social web is a massive positive for the social gaming community, including Zynga.

At the very least, things are never dull.

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Last week Bloomberg reported that LinkedIn and Zynga may begin placing limits on employee sales of their company shares.  In fact, we’ve heard from investors that new Series A documents will begin implementing similar limitations from the start of their portfolio companies, making it harder for employees to liquidate their stock options that they helped create shareholder value within.

Management at LinkedIn and other hot pre-IPO social media startups hope that by adding limits on employee sales of their shares they can keep employees focused on their business rather than their share price.  However, the reality is that these employees are largely 20-something year olds earning small salaries but may be sitting on shares worth many multiples of their salary, which they are largely responsible for the value creation of those shares.

So, should the companies be adding limitations on their employees ability to sell the shares that they have helped create shareholder value in? This is a challenging question because generally there is a great disparity between the personal financial alignment of management, the investors and the employees working for these companies.  While management and their investors want to keep employees focused on their core business versus the share price, their motives are financially driven to increase the share price for a future exit of the company that they control.  The employees seeking to sell their shares within the secondary market are simply seeking to optimize their wealth position so they can remain more focused on the core business versus their personal financial situation.  Clearly both parties are acting in their own best interest, so how can they align these interests?

The IPO process has slowed and there are fewer exits due to many factors, including Sarbanes Oxley compliance and higher required revenue run rates, particularly for small cap companies.  For many venture backed companies, an acquisition remains a compelling exit strategy.  However, the secondary market has emerged as a new form of an exit for investors, founders and employees, and placing limitations on their employees ability to utilize this form of an exit could be driving misalignment sending the wrong message.

One of the most compelling reasons employees pursue a career in the technology startup industry is the ability to create wealth through their stock options.  A lot of employees will trade a higher paying salary in another industry for a lower paying salary plus stock options at a technology startup for the upside potential of that stock. Depending on how these companies and their investors draft the limitations on the sale of their shares, it may have a negative impact on the talent the technology startup community has been able to recruit.  Or worse, it may engender a lot of ill will.

Companies generally don’t tell their investors when they can sell their shares, in fact, its the VCs who are largely driving the growth in secondary market transactions.  Increasingly, you’ll find enlightened companies will leverage stock options, not restrict them to dramatically improve alignment.   One company we know well, is in the midst of a large raise, in which $5 million is being used to buy back shares from their employees.  However, rather than just purchasing the shares from the employees in a cash transaction, the money will be escrowed for four years, and paid out monthly, if the employee remains with the company.  Also, given the dramatic increase in the employee’s monthly income, the employee must agree to no raises over the four year period.  What’s the net impact?  A happier, more productive employee base, higher retention for the company, and lower costs – and of course, the employees are focused on the business, not the share price.  This appears to be a better path than companies like Zynga & LinkedIn blocking their employees from selling their shares.  But these are early days in the developemnt of the secondary market.  They’ll learn.


Demand Media Hires Goldman, Bolsters Board – IPO Coming?

April 20, 2010

Share Demand Media has been killing it for four years now. The snapshot from Alexa below show’s‘s inexorable rise from Alexa global ranking below 800 to an Alexa ranking of 144 over the last two years. In the U.S., ehow is the 44th most trafficked site according to Alexa.   Demand has driven this remarkable [...]

Read the full article → Raises $20 Million Debt Round With 2009 Revenue At $182 Million

April 20, 2010

Share If this were 1999, certainly sounds like a company that should eventually be headed to the deadpool, but its 2010 and people are actually buying products online, and is selling a LOT of diapers. In fact, according to CEO Marc Lore, “this year we will sell a half a billion diapers”, [...]

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Why You Should Become A SecondShares Facebook Fan

April 20, 2010

Share There is an exploding marketplace for the shares of the privately held companies driving the social media revolution.  The shares of companies like Facebook and Twitter and LinkedIn are trading tens of millions of dollars a month, and the volume is growing rapidly.  It’s not just social media, CleanTech innovators like eSolar and Tesla [...]

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Zynga’s A Treasure, MAU Growth Accelerates

April 19, 2010

Share We couldn’t be more pleased with the thousands of articles written around the globe in response to our Zynga report two weeks ago which estimated that Zynga would trade at a market cap of $5 billion if it were public.   While a some bloggers agreed with our fundamental analysis, we note that many more [...]

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