Imagine a company backed by Fred Wilson, one of the top venture capitalists on the Internet. The company is largely reliant on user-generated content and has had difficulties generating revenue in line with its stratospheric valuation. All of a sudden, Yahoo appears and offers a billion-dollar-plus valuation to acquire the company.
This scenario may be the one many people are considering asYahoo is spending $1.1 billion on acquiring Tumblr. But if you were to rewind to an earlier time, let’s say 1999, you’d find that the scenario is exactly the same as it was for Geocities, a company Yahoo acquired for $3.57 billion in stock.
The Geocities story can be seen as a lens through which to consider a Yahoo/Tumblr merger because it followed a similar blueprint to the story currently developing.
Fred Wilson’s VC firm, Flatiron Partners, had funded the Beverly Hills-based company and had seen its investment grow as the company became a dominant traffic player on the web (eventually becoming one of the top 5 most trafficked sites). Today, Fred Wilson, now heading Union Square Ventures, is one of the financial backers of Tumblr, a company he invested in early, seeing it grow to become one of the top 25 sites on the internet and one of the fastest-growing ones on mobile devices.
Back in 1999, Geocities had trouble monetizing its audience, slapping low-priced ads all over the site in a desperate attempt to monetize as much of its traffic as it could. Today, Tumblr is just starting to monetize its traffic, with mainstream advertisers still worried about the user-generated content next to which they might appear. To its credit, though, Tumblr has taken a slow and concerted approach to introducing advertising on its properties, carefully tuning their effort to improve response rates.
Back in 1999, Geocities had raised large pools of money from many of the top investors in the industry and had managed to go public, eventually rising to a $2.5 billion valuation. While Tumblr has not gone public, its most recent financial round is rumored to have been in the $800 million range, making it one of the largest private properties in consumer Internet technology right now.
When Yahoo came to acquire Geocities, it offered a $3 billion premium over the company’s share price. The offering, however, was an all-stock deal. Rumors flying around the Tumblr deal are that it would be an all-cash deal in the $1 to $1.1 billion range, or roughly a fourth of Yahoo’s available cash on hand. This is quite a different approach as investors would literally be able to cash-out.
So this is where we stand today, but what happens when the acquisition closes?
Back in 1999, Yahoo’s acquisition of Geocities created a user outcry as the company tried to enforce new copyright rules on the site. This was followed by a large amount of user defection to other services. While the service still remained popular, it slowly dwindled over the next decade, eventually leading Yahoo to close the service down in 2009. While it had been popular as a place to set up personal web pages, it was overcome by services like blogs, Facebook, Twitter, and…Tumblr.
A challenge for Yahoo will be in dealing with some of the less advertising-friendly content on Tumblr’s sites. The blog provider has a large community made up of porn sites, which may not fit with the family-friendly image Yahoo has painted to advertisers.
At the time of the Yahoo acquisition, Geocities had focused on monetization and let scale grow on its own, making a few mistakes along the way in terms of figuring out monetization at scale. Fred Wilson believes that this is a key difference between the two properties he invested in, viewing Tumblr’s careful focus on building scale before figuring out monetization as a wiser approach. Last year, Tumblr offered a model that provided native advertising on its service, a very different approach from the generic banner ads Geocities had. While Yahoo has worked within the constraints of existing ad formats, the company will need to adapt its messaging and approach to include such native ad formats into its selling kits.
Meanwhile, for Tumblr, the offer may come at an ideal time. The company has recently dealt with some management problems and high level defections; And as a member of the high-valuation, low-revenue club (membership also includes FourSquare and Pinterest), Tumblr needs to either grow up or be acquired. It’s not generating enough revenue to go public. Google would not be interested in it as it already owns a blogging service and Twitter already acquired Posterous. That leaves Facebook, which would find in Tumblr a way to connect with teens, but the company has already made a billion dollar bet, Instagram, recently.
So, unlike 1999, when Yahoo didn’t necessarily need to do a deal like Geocities, 2013 seems to present itself as a time when a Yahoo/Tumblr tie-up would make sense. All that needs to be argued over is price, and at $1 billion dollar, Yahoo and Tumblr may be looking at the Facebook/Instagram blueprint and hoping for the same magic.