Evalulate Oceanhouse Media’s exit options at year end 2013 and estimate the value of Oceanhouse Media at year end using the VC Method of valuation and (ii) comparable firm transaction.
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Case study is as follows:
As 2013 drew to an end, Michel Kripalani took stock of his journey with Oceanhouse Media, the digital applications company he had founded in 2009. Several of Oceanhouse Media’s venture–capital funded competitors had either been acquired at discounted valuations or were restructured within the last 12 months. He wondered if this was an opportune time to consider an appropriate exit strategy for his five–year–old venture. While he had not considered a sale of Oceanhouse Media, he was now open to the possibility of a sale if the “right” offer materialized, determined by Oceanhouse Media’s estimated worth at year–end 2013. Kripalani saw 2013 as a year of consolidation in the digital apps market; the market was becoming increasingly saturated, highly concentrated, with increasing competitive pressures that were driving app prices toward zero.
Oceanhouse Media’s 2013 revenue growth had slowed considerably relative to the torrid growth rate of 2009–2012; while company revenue grew at a compound annual growth rate exceeding 200% from 2009–2012, it grew only 5% in 2013. As he focused on Oceanhouse Media’s growth path post–2013, Kripalani articulated his perspective on external financing: “We are bootstrapped, have not taken capital, do not intend to.” He also noted that while venture capitalists earlier “had been knocking on our doors,” he had been reluctant to take on VC money because of what he perceived to be the high cost of VC investment in the firm.
Oceanhouse Media was a publisher of digital books and digital apps for iOS and Android devices. Oceanhouse Media and its competitors were part of the nascent digital apps industry dating to 2007 when the Apple iPhone was introduced in the market. Consequently, Oceanhouse Media and its competitors all started as privately held companies with sparse historical financial information. Oceanhouse Media’s balance sheet, however, was known to be debt–free, and with the exception of computer equipment and peripherals the business had few tangible assets (Table 1).
Oceanhouse Media Competitors
In conversations with Michel Kripalani, he had identified five privately held VC– backed firms with products in the children’s mobile apps market segment that were viewed as strong competitors to Oceanhouse Media’s children’s apps. Their business models had evolved with revenues generated from both free and paid apps. These firms were all founded post–2008; and, as very early stage start–ups did not have a history of revenues or earnings. However, all of these firms had received VC investments and were expected to have significant future growth prospects.
Callaway Digital Arts
Callaway Digital Arts (CDA), founded by industry veteran Nicholas Callaway, was a privately held, mobile application development company. In November 2010 venture capital (VC) firm Kleiner, Perkins, Caufield, and Byers (KPCB), and two angel investors, Ram Shriram and Mark Pincus, collectively invested $6 million in an A round. Ram Shriram, based in Silicon Valley, California, had invested in Google, Zazzle, StumbleUpon, and Pinkberry. Mark Pincus, based in San Francisco, California, had invested in Facebook, Grockit, and Buddy Media. CDA was reported to have received a five–year $12 million grant from the Department of Education to create a series of game–based mobile applications to build reading and math skills for children ages two through eight. The company catered to children and families. CDA formed partnerships with children’s content creators that featured notable characters in children’s apps. The company used Sesame Street characters and Miss Spider in their apps, including The Great Cookie Thief and Miss Spider’s Tea Party. CDA had offices in New York City and San Francisco. In May 2012, the company relocated all of its operations to San Francisco, and Nicholas Callaway stepped down from his role of chief creative officer at CDA (Reid, 2012).
CDA Business Model
Callaway Digital Arts sold all of its apps on the Apple App Store to generate revenues. The company offered 14 different apps priced from $1.99 to $4.99. Most of CDA’s costs were incurred when it created and developed apps. CDA’s goal was to be profitable by 2013. In 2011, it reported revenues of $6.4 million with 40 employees at the firm.
Duck Duck Moose, LLC
Duck Duck Moose, LLC, headquartered in San Francisco, was a privately held company that offered apps in: Educational Games, Educational Media and Online Curricula, and Mobile Applications segments. In September 2012, it received $7 million in an A round investment from Sequoia Capital, Lightspeed Venture Partners, and participation from Stanford University. The additional funding would be used to grow its product line with more Android apps and to develop a custom analytics and parent–reporting feature that monitored and reported to parents about their child’s progress (Perez, 2012). In 2 years, he helped grow Edusoft revenues 20–fold, which led to its purchase by Houghton Mifflin Corp.
Duck Duck Moose Business Model
The company worked closely with educators and children as it tested its apps, the focus of which ranged from creative play to learning numbers and letters. Almost all the apps (iOS and Android) sold for $1.99 apiece, with just a few iPhone versions at $0.99, and none offered in–app purchases (which according to the company diminished the learning experience for younger children who tended to tap all over the screen).
Ruckus Media Group
Ruckus Media Group, headquartered in Wilton, Connecticut, was a privately held, venture capital–backed social media company that created interactive applications for mobile devices. The apps were designed to entertain and educate children and were recognized with over 30 parenting and app awards for its digital storybooks. In March 2011, it received $3.5 million in an A round investment from Alsop Louie Partners, and an unspecified investor. In a press release dated May 23, 2013, the company reported that it had received a grant from the U.S. National Science Foundation (NSF) to build Read Together While Apart ™ (RTWA) Technology, a collaboration infrastructure that ran on networked mobile and nonmobile devices and enabled a parent and child to read Ruckus’ eBooks together and to play interactive games in the eBook even when the parent and the child were not in the same location.
In November 2013, KiwiTech, a Washington, DC–based mobile technology company, acquired a 75% interest in the company for an undisclosed amount. Ruckus founder, Rick Richter, would leave the company following the completion of the deal. The VC firm Alsop Louie Partners retained a minority stake in the company. The change in ownership resulted in the closing of Ruckus’ office in Wilton, CT. Jason Root, previously Ruckus’ chief content officer, became the CEO of Ruckus Media Group and reported to Rakesh Gupta, KiwiTech CEO (Publishers Weekly, 2013).
Ruckus Media Business Model
The company’s apps were priced from $0.99 to $3.99 in the Apple App Store. The company always offered one free title which was regularly switched out to offer other titles of free content. The company was expected to enhance its product offerings across all major mobile devices by expanding distribution from Apple’s iTunes to Google’s Android Market, Research In Motion’s Blackberry App World, Amazon’s App Store and the Barnes and Noble Nook.
TabTale
Founded in 2010, TabTale offered a growing catalogue of classic children’s stories, creative mobile games, and innovative learning experiences—many ranked as the top apps for children on the iPhone, iPad, and Droid phones. The company raised $12 million in Series B funding in October 2013 from Qualcomm, Inc., Magma Venture Partners, Vintage Investment Partners, and some existing investors for a total of $13.5 million since it was founded. These funds were used to seek expansion opportunities around the globe. TabTale acquired Israel–based Kids Games Club, maker of apps like “Paint Sparkles,” in a deal valued between $3 million–$4 million (Lunden, 2013). In May 2014, TabTale acquired Coco Play Limited, a Hong Kong– and China–based developer of educational apps and games for kids. Coco Play’s portfolio of 3D children’s games included some of the top free apps for kids in several East Asian countries, such as Coco Princess, the number one free kids’ app in China. Coco Play’s two million users would join the 25 million users of TabTale apps. Over 350 million downloads of TabTale products had occurred over the last 3 years, among them some of the most popular kids’ educational apps in the Apple App Store and Google Play. The company had over 180 employees in its offices in Israel, the United States, Macedonia, Ukraine, and Bulgaria. These employees would be joined by several dozen Coco Play employees.
TabTale Business Model
All of TabTale’s apps were built on top of a shared back–end allowing it to develop many apps without wasting time coding and recoding core assets. This platform strategy enabled a rapid flow of new apps and updated back catalogue to build rapport with its customers. Nearly all of TabTale’s downloads were based on a freemium model, with the app or game available for free but extra features provided for a fee. In Outdoor Baby, one of its popular games, for example, users could play for free and buy virtual goods, such as tents and flashlights, for real money. TabTale derived much of the approximately $20 million of its annual revenue from such fees, according to industry sources.
Zuuka
Zuuka, founded in 2009, was a privately held publisher of mobile children’s content. It provided content owners a distribution channel for delivery on a global scale. In 2011 Zuuka reported revenues of $480,000 and had six employees at the firm. Zuuka had offices in Santa Barbara, California, Frankfurt, Germany and Los Angeles, California. In August 2011, Frankfurt, Germany–based investment bank, CFP Beratungs, GMBH invested about $2 million in an A round. In March 2014, Zuuka was acquired by Cupcake Digital, a New York–based developer of a large portfolio of brand–name children’s mobile applications (Perez, 2014). Cupcake Digital offered a number of mobile apps and games, that featured characters from Kung Fu Panda, Jim Henson’s Fraggle Rock, Strawberry Shortcake, VeggieTales, Yo Gabba Gabba!, Animal Planet, Wow Wow Wubbzy, and The Smurfs, for example. Combined, the acquisition would enable Cupcake Digital to offer a library of over 250 titles and a reach of over 8.5 million downloads.
Zuuka Business Model
Zuuka held a number of licenses to notable characters and stories from children’s content owners and created multimedia stories. iStorytime apps were priced from free to around $4.99 per app. The company’s costs comprised licensing costs, operating costs of managing the iStorytime platform, and maintaining relationships with partners. Zuuka’s iStoryTime app was expected to expand its e–book library significantly in the future with access to Cupcake Digital’s licensing portfolio and relationships.
Financing Considerations for Oceanhouse Media
Oceanhouse Media was structured as an S–Corporation and while several of its competitors had received VC funding, and Kripalani was approached in the past by VCs interested in investing in the company, he was concerned about the impact VC investments would have on founders’ ownership interests, the company’s future growth path, and its exit options.
Other mobile game start–ups that had recently gone public included Zynga (operating online social games) with 2013 revenues of $873 million and a market capitalization in September 2014 of $2.8 billion; King Digital Entertainment, LLC, creator of the popular Candy Crush Saga mobile game with 2013 revenue of $1.88 billion and a market capitalization in September 2014 of $4.2 billion (Table 6).
The issues of VC financing for, and possible sale of, Oceanhouse Media were both related to its estimated valuation at year–end 2013 (Table 7).
Conclusions
As he looked back on Oceanhouse Media’s five–year journey at year–end 2013, Michel Kripalani noted that Oceanhouse Media had been profitable, cash flow positive, and self–funded in a growing but increasingly competitive digital applications market wherein mere survival for the typical app developer had been a continuing challenge.
Kripalani was also keenly aware that several of Oceanhouse Media’s competitors had been acquired or restructured within the last 12 months. The economic environment for start–ups had improved considerably by year–end 2013; the NASDAQ Composite Index stood at 4156 at year–end 2013 compared to its value of 1632 on January 2, 2009 (the year Oceanhouse Media was founded); while only 41 IPOs were completed in 2009, the number of completed IPOs in 2013 had accelerated to 157. Thus, faced with increasing competition, especially in the children’s digital applications market segment (comprising about half of Oceanhouse Media revenues) and a robust start–up market, Kripalani thought that a careful review of Oceanhouse Media’s exit strategy was also warranted at year–end 2013.
