iLike – a case study in mistakes and lost potential
I have been following the iLike acquisition story with great interest. If you haven’t heard, MySpace is close to acquiring them for $ 20M. While the thought of Facebook’s archrival acquiring one the most popular most apps on Facebook is amusing, the real story for me is how this company got to raise so much capital given its utter dependency on Facebook as a channel.
iLike raised $ 16.5M from some pretty smart investors including Vinod Khosla. While the company has amassed a huge user base (50M) and is profitable, this all hinges on their access to Facebook’s 200M+ user base.
I have often wondered – as a startup, can you really build a viable business around Facebook? To me, there is a business case for building small, lightly funded apps and companies around the Facebook ecosystem. (Note – FBFund invests a max of $100K in its companies) But I can’t understand how this company could have raised serious capital without a long term contractual relationship with Facebook.
This channel was key to the value potential. This was confirmed by Techcrunch who reported that “the relatively low valuation that iLike commanded in this sale was due less to their performance and more to uncertainty created by Facebook over their future on the Facebook Platform.”
So, I think everyone involved is walking away dissapointed on this:
- The founders will walk away with little or nothing. If there are multiples on the liquidation preferences on the capital they raised, essentially all the proceeds will go to the investors
- The investors will be taking a bath
- Facebook is losing control over a service that about 1 in 4 of their users has installed
The real shame here is that this could have been a big winner. The data iLike has amassed could really be exploited for generating ecommerce sales both of music and other products. If they had built channels with Amazon, MySpace and other big players and not built their business around one strategic relationship, this could have been a big winner.
Let's go back to the time of the investment decision: if you as an entrepreneur told me – 90% + of our business will be on FB, I'd be very nervous and would likely not do the deal. If that was not clear at the time of investment and just happened, well, I'd have to deal with it. Going back to your 1st comment, what I cannot reconcile is that you admit the bulk of iLike's business is on FB, but don't think that was a factor in the price offered by someone who is not FB. I don't see FB leaving iLike as if nothing happened. So the value of the company has to be seriously impacted. I can't comment on Xobni, but in Tungle's case – our value is heavily tied to the fact that we are multi-platform. If we only worked on outlook you wouldn't need us. That's called MS Exchange. Bottom line: iLike for all intents and purposes had a single point of failure in its business model / goto market. You would never tolerate that technically and should not commercially or strategically either.
Mark, I don't quite understand your argument. Let's say you invested in a company that had a diversified channel distribution and user acquisition strategy. When the company goes to market it discovers that despite its attempts to "smooth out" its user growth across its various channels, Facebook ends up representing 90% of its growth. The company is highly successful (users, revenues, profit margins). Does the fact that the company's successful growth is attributable mostly to Facebook mean that you don't invest in future rounds or divest your investment? And to Sylvain's point what about companies like Xobni and Tungle that derive most of their revenue/value today by focusing on a single product like Outlook? What if Microsoft introduces better native search or collaborative calendaring applications? Should these companies be excluded from investment consideration? Frankly, app developers and investors that ignore the robustness and value potential of Facebook and other social networksto drive user growth, revenues and high margins are ignoring today's Web realities.
Cute! It does work when you switch them. Scary.
I think that's a stretch. MS is closed (notwithstanding how open it is technically). So I don't consider Facebook in the same way I do Microsoft. I would obviously invest in a company developing for Facebook. But would not invest in one that is opposed to or otherwise unable to support the other platforms. When it comes to social application, in most cases, Facebook is the market. But, I would still want to see all the major platforms covered.
Just switching the two company names in your reply helps to see how I am thinking… So we agree. You have to go on the platform where the mainstream market is but you can always be choked by the platform provider. I esp. like this "classic" post on platforms and developers: ” target=”_blank”>http://www.scripting.com/davenet/1994/10/29/platf...
I think that's a stretch. MS is closed (notwithstanding how open it is technically). So I don't consider Facebook in the same way I do Microsoft. I would obviously invest in a company developing for Facebook. But would not invest in one that is opposed to or otherwise unable to support the other platforms. When it comes to social application, in most cases, Facebook is the market. But, I would still want to see all the major platforms covered.
Just switching the two company names in your reply helps to see how I am thinking… So we agree. You have to go on the platform where the mainstream market is but you can always be choked by the platform provider. I esp. like this "classic" post on platforms and developers: ” target=”_blank”>http://www.scripting.com/davenet/1994/10/29/platf...
I think that's a stretch Sylvain. FB is closed (notwithstanding how open it is technically). So I don't consider windows in the same way I do FB. I would obviously invest in a company developing for windows. But would not invest in one that is opposed to or otherwise unable to support the other platforms. When it comes to software, in most cases, Windows is the market. But, I would still want to see all the major platforms covered.
Would you have the same opinion about Microsoft? ie. you would never invest in a company that is developping software only for Windows? Just curious, for me (as a developer) the analogy between these two platform providers is striking: they both develop the platform, the tools for the developers and application on that platform and they have a high degree of control on the distribution channel.
Hey Mark. You have certainly added to the discussion. Thank you. I can see from a developer point of view the merits of using such an open API and tapping into such a big base of users. All good. I'm looking at this strictly from the point of view of an investor and in that context I see a big contingency – the fact that my business depends on something controlled by 1 company. I personally would never invest in that.
Mark, I have to say that I'm on the other side of this argument. I don't think it's fair to generalize the iLike outcome nor do I believe that iLike's exit valuation can or should be blamed on their dependence or success on Facebook. But first, a few points of clarification: 1) iLike is not a Facebook only application. It's available as a stand-alone destination site at ” target=”_blank”>http://www.ilike.com, on many other social networks, including Hi5, Bebo, etc., and it's available as an iTunes plug-in sidebar. So, it's incorrect to state that iLike put its eggs all in one basket. If anything, iLike diversified its customer acquisition strategy across social networks, the Web and the main music app in the world (iTunes). 2) Notwithstanding point #1 above, it's clear that like many other apps, iLike found its success primarily on Facebook. If any of the other channels produced the results that Facebook has, would iLike be valued any differently? I don't think so. However, what cannot be disputed is that Facebook offers app developers unparalleled growth potential and access to a massive market of engaged, highly social users. This is why iLike, Zynga and others invest in this platform. It's easy to say that iLike should have invested more in its other distribution channels but the reality is that those channels cannot today produce the results that Facebook can. 3) No other platform on the Web offers developers as much open access as Facebook. As a developer, FB offers you access to their notification systems, messaging systems (including Chat), OpenStream APIs, user data, etc. The opportunity to tap into this massive, open and highly viral platform is what's driving app developer growth and Facebook's growth as well. 4) There is a delicate dance going on between Facebook and app developers. Yes, Facebook can and has changed its Terms of Service, its user interface and its site workflows to the surprise and (in some cases) the disdain of developers. At the same time, as noted in point #3 above, Facebook continues to increase the level of access developers have to core Facebook platform functionality. I think it's also fair to say that Facebook understands that its application developer community is a key contributor to its continued growth. I don't believe Facebook will cut off its nose to spite its face when it comes to its thriving third party application community. 5) As an application developer one needs to constantly ask the question: where do I get the best bang for my $ of invested capital? Increasingly, I believe that answer is deploy and market on Facebook. While I don't agree that Facebook is the Internet, it certainly is representative of the Internet (demographics, geography, interactions, etc.). More importantly, it is far more social and engaging than the Internet (which is key to media and casual game apps) and offers the lowest cost reach and access to 200 million engaged and repeat users on the Internet. 6) Significant exits are happening for Facebook apps. Leaving aside Zynga's potential upcoming IPO, a recent Canadian company, Super Rewards, was recently acquired by AdKnowledge for a rumoured $30-$50 million. What's amazing about this acquisition is that Super Rewards is almost entirely focused on Facebook, it has many competitors, including OfferPal, Rock You and Peanut Labs, and Facebook will soon be introducing its own payment system. Zynga itself has also recently acquired several Facebook apps (YoVille, MyMiniLife) to consolidate into its platform. Bottom line: I don't think that the iLike exit price has much to do with its success on Facebook. I agree with the other comments that it has more to do with the specific economics and dynamics of the online music business.
Mark, I have to say that I'm on the other side of this argument. I don't think it's fair to generalize the iLike outcome nor do I believe that iLike's exit valuation can or should be blamed on their dependence or success on Facebook. But first, a few points of clarification: 1) iLike is not a Facebook only application. It's available as a stand-alone destination site at ” target=”_blank”>http://www.ilike.com, on many other social networks, including Hi5, Bebo, etc., and it's available as an iTunes plug-in sidebar. So, it's incorrect to state that iLike put its eggs all in one basket. If anything, iLike diversified its customer acquisition strategy across social networks, the Web and the main music app in the world (iTunes). 2) Notwithstanding point #1 above, it's clear that like many other apps, iLike found its success primarily on Facebook. If any of the other channels produced the results that Facebook has, would iLike be valued any differently? I don't think so. However, what cannot be disputed is that Facebook offers app developers unparalleled growth potential and access to a massive market of engaged, highly social users. This is why iLike, Zynga and others invest in this platform. It's easy to say that iLike should have invested more in its other distribution channels but the reality is that those channels cannot today produce the results that Facebook can. 3) No other platform on the Web offers developers as much open access as Facebook. As a developer, FB offers you access to their notification systems, messaging systems (including Chat), OpenStream APIs, user data, etc. The opportunity to tap into this massive, open and highly viral platform is what's driving app developer growth and Facebook's growth as well. 4) There is a delicate dance going on between Facebook and app developers. Yes, Facebook can and has changed its Terms of Service, its user interface and its site workflows to the surprise and (in some cases) the disdain of developers. At the same time, as noted in point #3 above, Facebook continues to increase the level of access developers have to core Facebook platform functionality. I think it's also fair to say that Facebook understands that its application developer community is a key contributor to its continued growth. I don't believe Facebook will cut off its nose to spite its face when it comes to its thriving third party application community. 5) As an application developer one needs to constantly ask the question: where do I get the best bang for my $ of invested capital? Increasingly, I believe that answer is deploy and market on Facebook. While I don't agree that Facebook is the Internet, it certainly is representative of the Internet (demographics, geography, interactions, etc.). More importantly, it is far more social and engaging than the Internet (which is key to media and casual game apps) and offers the lowest cost reach and access to 200 million engaged and repeat users on the Internet. 6) Significant exits are happening for Facebook apps. Leaving aside Zynga's potential upcoming IPO, a recent Canadian company, Super Rewards, was recently acquired by AdKnowledge for a rumoured $30-$50 million. What's amazing about this acquisition is that Super Rewards is almost entirely focused on Facebook, it has many competitors, including OfferPal, Rock You and Peanut Labs, and Facebook will soon be introducing its own payment system. Zynga itself has also recently acquired several Facebook apps (YoVille, MyMiniLife) to consolidate into its platform. Bottom line: I don't think that the iLike exit price has much to do with its success on Facebook. I agree with the other comments that it has more to do with the specific economics and dynamics of the online music business.
Jason, I could not disagree more strongly. Hinging an entire business on one single relationship (be it a distribution partner or a customer) is not a smart move. As Mark says, there could be a business case for a small exit, but not for VC backing. Ditto for startups building applications that will run exclusively on Twitter or the iPhone.
Thanks Chris. Definitely a risky strategy. Can be a great one if you haven't raised much capital – take advantage of the opportunity while its there, then move on when it closes. I agree with your side note. Leverage is a much better way of putting it. Thanks!
All your eggs in one basket can be profitable, usually not sustainable, always risky. Depends on the targeted exit intentions, in a sense capitalizing on the opportunity for a window of profit while it lasts (aware of the risks). Many FB apps likely had (have) grand notions that FB would opt to acquire them (that's usually risky too, don't know unless you try though) {likely same with many of those Twitter apps}. Side note: I prefer the term 'leveraged' in place of "exploited" ("The data iLike has amassed could really be exploited for generating ecommerce sales both of music and other products.")
Jason, I am aware of the terms of developing on FB. And FB is not the Internet, its simply AOL 2.0. A walled garden, albeit a huge one. For every rule there are exceptions. Zynga is definitely an exception to the rule that you cannot or should not build a big, funded business on FB. But, other than IPO, what exit opportunities would be open to them if FB did not want to buy them? As an investor, how would you get your money out? FB can change its terms any time it likes. It is pursuing growth now. At some point, given the considerable capital it has raised, it may prioritize profits. At that time, it may launch or buy its own services to enhance revenues over and above advertising.
Mark, It's clear that you don't have a real understanding of the Facebook platform or the relationship between Facebook and application developers. Facebook is an open platform with APIs available to any third party application developer. Recently, FB introduced a "Verified Apps" program that highlighted certain apps, including iLike, for more prominent promotion on the network. However, FB has no formal agreements with any developers, including successful third party companies such as Slide, Rock You or Zynga. Nor would FB ever enter into formal agreements, short of acquisition (e.g., FriendFeed) with any third party developer. So, what could FB do to iLike to make the company more vulnerable? It wouldn't and couldn't pull the service off its network. It wouldn't and couldn't apply different rules or terms and conditions to iLike. Rather, what FB could do is launch its own music service to compete directly with iLike. While this may be a risk, it would require Facebook to build its own music discovery service and offer a compelling and competitive offering to iLike's service. This is easier said than done and given the fact that FB hasn't implemented its own music offering yet (despite constant rumours and speculation), it's clear that: a) this requires significant resources and domain expertise and, b) FB continues to be wary of competing directly with its application developers. Finally, your argument suggests that the value and exit opportunities for all application developers that derive the majority of their users and revenues on Facebook are limited. Yet, Zynga is considered to be a prime candidate for an IPO and Slide and Rock You continue to attract prime venture capital. What folks like you miss is that Facebook is the Internet. This is where your target users are, it's where they consume and share media and where they are willing to spend money. And, as mentioned, it's where companies can grow their user base and revenues with minimal marketing expenditure. I hope no developer that reads your post accepts the fact that the Facebook platform is a threat to their business. Indeed, the reality is quite the opposite.
Clearly we don't have all the facts, but from what I have read, I speculate that iLike saw its relationship with FB getting worse and figured if the longer they waited, the less they would be worth.
Hey Jason, I agree that the onlne music space is challenging, but completely disagree with your disagreement on my position. They built their business around a channel which they did not control and with no formal agreement. That is a huge vulnerability. Techcrunch is one of a few sources that suggests this as a reason for the reduced price. And to Keenan;s question below – why sell now when you're profitable? Simple – iLike saw its relationship with FB getting worse and figured if the longer they waited, the less they would be worth.
Interesting. It is certainly true that music investments in general have not gone well…
Why sell? What was the motive of the founders? Why would the investors break even if there was a future and they were profitable. Why not expand and look for adjacency's? Clearly there is more to this than is public. I'd be curious to hear the board discussions. It clearly wasn't a desirable exit.
Mark, While I agree that diversification is an important part of overall business strategy, I don't agree that iLike's disappointing exit multiple is a result of their dependence on Facebook. Rather, I think it has far more to do with the vagaries, legal uncertainties and razor thin margins in the online music business. iLike was absolutely right to focus primarily on the Facebook platform to build its brand and its user base. Facebook offers the most engaged, social/viral and demographically diverse audience in the world. Moreover, the cost of acquisition in Facebook is a fraction of the COA for stand-alone Web destinations or properties. Facebook users have also proven to be highly monetizable as demonstrated by the plethora of virtual currencies, managed offers and payment systems that drive millions of dollars in sales for companies like Zynga, Slide, OfferPal and others. No, this is not a reflection on the quality or value of the Facebook platform for app developers or companies like iLike. Rather, it's about the crappy economics and constantly shifting dynamics of the online music business. Full stop.
Here is where I read that: ” target=”_blank”>http://www.businessinsider.com/music-startups-wha...
Here is where I read that: ” target=”_blank”>http://www.businessinsider.com/music-startups-wha...
I had not heard that. Crunchbase is reporting $16M. $30M would be just ridiculous
I read somewhere that they in fact raised much more than $16M.. it I recall correctly, it was around $30-35M…