Art of the Flip

1
Art of the Flip

• Kord Campbellkord_at_zoto.com
• October 19, 2004

2
Index

• Introduction to the Flip
• Acquisition Trends
• Opportunity Identification
• Capital Considerations
• Product Development
• Computing Valuation
• Flipping Out
• Various Examples

3
Introduction to the Flip

• Flip v. 1 to move lightly, 2 to strike quickly,
  3 to react strongly - as with enthusiasm, 4 to
  go crazy
• Alternative to traditional business models
• Identify potential markets
• Discover an added value in an existing offering
• Form a company on the cheap to build a product
• Market new product and its value to select
  companies
• Sell the company and/or product
• Repeat as necessary

4
Big Companies Dont Innovate(contrary to popular
belief)

• Continued competition requires innovation
• In-house innovation RISK
• RD is inherently costly
• Shareholders expect positive returns
• Acquisition of startups speeds time to market
• Startups proof themselves good ideas make it,
  bad ideas fall to the wayside
• Startups provide quality employees w/o hiring
  process
• Distributes outside-the-box type thinking
• Conclusion Larger companies buy successful
  startups.

5
US Transactions Last 10 YearsIn Billions of
6
US Transaction Breakdown 2004Top 15 Categories -
In Billions of
Source Mergerstat.com
7
US Technology TransactionsLast 3 Years in
Millions of
Source Mergerstat.com
8
Tech Transactions

• By the end of September, there will have been
  more than 5,300 tech acquisitions in the US
• The average selling price was 12 million
• 2/3 of the transactions were so small the numbers
  were not disclosed
• Microsoft alone has bought over 46 companies in
  the past 4 years

Source Mergerstat.com and Business 2.0
9
Identifying Opportunity

• Focus on markets within your skill sets
• Know your products and technologies
• Ask what features are missing from existing
  products
• Examine existing product strengths and weaknesses
• Survey users
• Repeat

10
Example Opportunity for Zoto

• 28 million US households with digital cameras
• 13 million US digital cameras sold per year by
  the end of 2007
• Projected 50 growth in total digital photos/year
  for at least the next five years
• 5 decrease a year in online film developing
• lt 5 million in US belong to online photo
  communities
• How do we capture the mainstream digital camera
  users?

11
Example Competitive Landscape
OfotoShutterflySnapfish
PhotoshopAlbum 2.0iPhotoPicasaHello
Zoto
Online photo storage, sharing and printing
Application basedorganizing tools
Online photocommunity withorganization
Photo printing, photo sharing by invitation only,
photo enhancing tools, captions. No
searchingfeatures.
Strong organizational tools, searching and
viewing. Little to no online publishing or
sharing features.
Provide application based organization inside a
web browser with photo comments, blogging, RSS
feeds and syndication, large volume storage,
community-wide sharing

• Key takeaway the online photo community needs
  are waiting to be met.

12
Flip Capitalization

• Forget the venture capital
• Raise money from yourself, friends or family
• Keep your costs low and your budget small
• Use existing technologies to your advantage
• Use free software (or tech) where you can
• Where possible, create small, self-sustaining
  revenue with your product

13
Flip Development

• Write a business plan
• Use your target markets revenue model
• Keep the financial model simple
• Write a marketing plan for selling the company
• List your ideal acquirers
• Create a project plan for 6-12 months dev cycle
• No buyers yet? Keep developing.
• Use gorilla marketing to get the word out
• Contract out any non-core activities
• Do your sanity checks
• Set a drop-dead date

14
Example Grub Inc.

• Market Search Engine
• Product Distributed Crawler
• Capitalized through The Internet Shop (ISP)
• Inside Investment 85,000
• Outside Investment 85,000 (OCAST)
• of developers 2
• Time to flip 2 1/2 years
• Acquisition price 1.2 million

15
Computing Valuations

• Is your product unique? Patentable?
• What have similar products sold for?
• Does the product provide a significant
  competitive edge?
• How much value does it bring to your acquirer?
• Does your product pose an external threat?
• How tightly does your product integrate?
• What is it worth to the right buyer?

16
Example Zoto Valuation

• Valuation Targets
• Companies in need of massive photo hosting
  technology
• Photo hosting companies wanting next generation
  features
• Printing companies looking for added value
• Other digital imaging related companies
• Social networking companies seeking additional
  user data
• Valuation Estimates
• 2-13 million based on potential ad revenue from
  existing social networking photos and traffic

17
Flipping Out

• Set a floor value for your exit
• Consider your risk level
• Remain calm be patient when a deal starts
• Focus on where the value lies for them
• Get more than one buyer to engage you

18
End
Kord Campbellkord_at_zoto.comOctober 19, 2004