First it was online vacation rentals, then digital coupons. Now what?
Money managers will be asking that of Austin Ventures after the stock market debut today of RetailMeNot, a provider of online deals that’s valued at more than $1 billion.
Austin Ventures, the lifeblood of the Texas capital’s entrepreneurial scene, was the first investor in RetailMeNot, a company launched four years ago as a local startup with a different name. The firm took a similar approach with vacation rental site HomeAway, which went public in 2011 and is now valued at $2.7 billion.
Both companies employed a “roll-up” strategy, using investor capital to snap up numerous competitors and capture a big share of highly fragmented markets. RetailMeNot has made 10 acquisitions in the coupon space, while HomeAway bought at least 14 companies prior to its IPO, and it isn’t stopping. Earlier this week, HomeAway announced plans to buy majority control of Travelmob to expand in the Asia Pacific region.
Next up for Austin Ventures: SGN. The Los Angeles-based social and mobile gaming company, run by MySpace co-founder and former CEO Chris DeWolfe, has been on a shopping spree since raising more than $25 million from Austin Ventures in March 2010.
DeWolfe’s team first acquired web-gaming platform MindJolt and used that as the company name until buying SGN, a game publisher founded by Shervin Pishevar, along with casual game company Hallpass Media.
SGN is now building technology that lets developers easily deploy their games across Apple, Google, Facebook and Amazon platforms. Last month, DeWolfe’s company bought Mob Science, the maker of Facebook game “Legends: Rise of a Hero.”
When DeWolfe left MySpace in 2009, four years after the social network was bought by News Corp., he started looking at online games and noticed that scores of startups were getting funded. Because their business models were still unproven and there was so much dependence on Facebook, “we thought there would be a huge opportunity to go out and buy multiple companies and bring them all together,” DeWolfe said in an interview.
In looking for the right backer, DeWolfe said he was attracted to Austin Ventures because of its history with roll-ups. The firm has funded eight such companies, including domain manager Donuts. The roll-up strategy makes up about a quarter of Austin Ventures’ portfolio, said Chris Pacitti, a general partner at the firm. Silicon Valley venture firms tend to shy away from that model until companies prove they can make it work.
“We quickly got a deal done with Austin whereby they’d finance the first few acquisitions and as long as we were successful, continue to finance them,” DeWolfe said. “Austin has done this so many times. They’ve been really helpful in understanding all the key issues.”
DeWolfe said the model is working so well for SGN that the company is making money and doesn’t need to raise more. Of the 90 to 100 SGN employees, about half have come through acquisitions, he said.
However, there are risks to the roll-up model. Combining different cultures in various geographies can wreck a young company if not managed correctly. Also, proper incentives need to be established to make sure the talent that’s acquired doesn’t walk out the door. DeWolfe, who is overseeing teams in L.A., San Francisco and San Diego, knows what a bad acquisition looks like. After getting clobbered by Facebook, MySpace was sold off in 2011 for 94 percent less than what News Corp. paid six years earlier.
“You want to find economies of scale, but you don’t want to ruin what made the company successful to begin with,” DeWolfe said.