Don More, Partner
The Internet is no doubt one of the hottest IT spaces of the moment, with M&A in the sector valuing more than $5.5 billion during the first three quarters of 2010. As the sector continues to morph into a combination of e-commerce, social content and beyond, there seems to be a certain recipe that the most valuable companies all have. In my opinion, there is a three-legged stool to Internet success: (1) Serendipity, (2) Aggregation, and (3) Usability.
Serendipity, a relatively new term in the industry, is basically the idea of showing users what they want even if they don’t ask for it. Google executive Eric Schmidt recently said that the future of the search engine could be a “Serendipity Engine” – in other words, search occurring when you’re not even using the search engine, always running in the background displaying results. As a recent TechCrunch article noted, personalization and serendipity are similar, although “personalization merely acknowledges intimacy, whereas serendipity pretends to have happened on it as if by accident.” Many e-commerce sites have components based on serendipity, such as suggestions for other stories you may like under a news article or other items you may wish to purchaseswhile online shopping. Firms using Online Behavioral Advertising, or targeted ads, have also caught on to the idea of serendipity – for example, when an advertisement appears for the very same item you were shopping for on another website a day or two earlier. The right amount of serendipity can increase site stickiness, as well as potentially increase sales for e-commerce vendors.
Aggregation has become one of the most crucial elements of successful Internet properties. Whether it is goods, people, applications, services or content, users increasingly are looking for a one-stop shop for everything. This is why social services such as Twitter have become so popular – it allows users to communicate with friends, receive news, etc. all in the same place. The success of e-commerce giant Amazon.com is also due to aggregation and other vendors have jumped on the bandwagon, such as former shoe-only site Zappos.com which now offers all types of apparel and accessories to increase competition. Google’s shopping engine also builds off this model.
Usability is also incredibly important when it comes to Internet properties. How easy it is for users to benefit from a site or service makes a dramatic difference when it comes to sticking around on a site and for many, ultimately making a sale. One could argue that with the right amount of serendipity, as well as efficient aggregation, the usability of a site is thus dramatically increased.
Inevitably, high valuations attach to web assets with these characteristics. For example, the rumored acquisition of Groupon by Google for $6 billion (which Groupon walked away from over the weekend) hits all of these points– bombarding subscribers with daily deals, allowing users to simply click through an email and make a purchase, and with its latest Groupon 2.0 announcement, aggregating a number of deals for subscribers to peruse. These three things translate to market momentum which is what drives high multiples. Groupon’s rumored price, for example, is not high multiples-wise if one connects the dots to projected 2011 revenue.
There are many Internet sites available that provide a little bit of each of these three things, and we expect there will be a number of combinations and M&A transactions throughout 2011 as companies try to reach this balance. “Bargains” for venture capital and private equity investors, as well as strategic acquirers, might be investing in or buying companies that have one or two of the three touchstones and just need to fix the third, such as improving the front-end or building a better data store.
Like this:
Like Loading...
Posted by Signal Hill 
