San Diego Angel Conference



ACME CORP Diligence MemoDiligence Team: List the team members Date: April 29, 2016THIS DEAL SUMMARY IS NOT AN INVESTMENT RECOMMENDATION BY San Diego Angel Conference I. IT IS ONLY A SUMMARY OF A LIMITED REVIEW PERFORMED BY OUR MEMBERS. YOU MUST MAKE YOUR OWN THOROUGH REVIEW OF ALL INFORMATION INCLUDING THE OPPORTUNITY TO SPEAK WITH REPRESENTATIVES OF THE COMPANY. IT IS YOUR RESPONSIBILITY TO MAKE YOUR OWN INVESTMENT DETERMINATION BASED ON YOUR OWN INDEPENDENT EVALUATION OF THE COMPANY AND ITS PROSPECTS. ALL ANGEL INVESTMENTS ARE HIGHLY SPECULATIVE. TOC \h \z \u \t "Heading 7,1" COMPANY SUMMARY PAGEREF _Toc2407060 \h 1INVESTMENT ASSESSMENT PAGEREF _Toc2407061 \h 2TEAM ASSESSMENT PAGEREF _Toc2407062 \h 3MARKET ASSESSMENT PAGEREF _Toc2407063 \h 5PRODUCT / BUSINESS MODEL ASSESSMENT PAGEREF _Toc2407064 \h 8COMPANY SUMMARYACME CORP is a content prediction platform for editors and content producers. It is meant to predict what stories to cover that will generate the most traffic that best suits the needs of a publication or audience. It does so by using the following: publisher's historical and real-time data on traffic, content, user engagement; external real-time measurement of social momentum; and, preferences specific to each reporter and editor on the platform.are unique and different enough to set them apart from current products. ACME CORP has a strong client and strategic partner with the Daily Beast. According to Mike Dyer, CEO of the Daily Beast, 60% of their editors/reporters are using the platform (which is high usage for a tool in their environment) and the results are positive. Daily Beast is also using the platform in their concept marketing for 150 different brands which has resulted in significant “lift” (as high as 215% but the average is 80%). Daily Beast revenue is up 88% over the last 2 years as a result of successful content marketing and according to Mike, ACME CORP is a core part of the content approach. According to the co-founder & CEO, they currently are in the process of securing deals with other companies on the publishing side. Expansion plans include agencies and other consumer oriented companies. ACME CORPCEO says they have $150K ARR and 50 brands in the pipeline. They have committed capital from one VC firm if they can raise the balance. ACME CORP is looking to raise $750M with an $8M cap. The minimum investment per individual is $50K.ACME CORP is joining a competitive market from both the prediction and content software side. We believe Yao is a strong champion for the company in terms of generating deals and working hard. Mike Dyer from the Daily Beast believes the ACME CORP platform is differentiated and they seem to be committed to it given their early results. The product is not yet ready for resell but the company would benefit from leveraging the Daily Beast’s sales channels. It could ultimately lead to a successful buyout as well. Yao is a relatively “unknown” manager and CEO. A key question is how many other content management firms would buy the solution and specifically how it is differentiated from the many competitors already offering product platforms.INVESTMENT ASSESSMENTInvestment Strengths? Innovative Idea and Addresses a Problem in Journalism: ACME CORP allows editors and content creators to generate relevant content to their target audience through machine learning and data science prediction. Thus tailoring the “pitch to suit the coverage” This will save editors time and allow them to create more traffic to their content sites.? Alternative Revenue Generation: Historically, the publishing industry's revenue stream has been dependent on advertising revenues. ACME CORP offers a “product” revenue stream and we see this as critical driver to the publishing industry’s survival in the face of new technology media companies.? Strategic Relationship: ACME CORP has leveraged a very close relationship with The Daily Beast (IAC) and has secured a one year exclusive agreement, effective Q32016, to use their product. The agreement has a mutual extension clause for another 12 months. The Daily Beast also has exclusive rights to sell Minerva to their clients thus accelerating the company's sales effort and market penetration without having to increase costs by hiring a direct salesforce. ACME CORP benefits from a meaningful revenue sharing agreement on all sales made through the Daily Beast.? Strong and Motivated Management Team: Yao and Jeff have known each other for 10 years and both are very knowledgeable on the industry. They have complementary styles and perspectives and should be able to attract strong talent to develop the product offering. Yao is very well connected in the space and is known as someone who can get things done.? Lead Investor: Credo Ventures, Prague based, has committed $550MM.Investment Risks? Competition and Technology Exists within New Digital Publications: Buzzfeed, Gawker and Huff Post all leverage data science as an edge. They have developed internal teams and thus may not need the products of Predictable.ly. We believe that new digital media companies, Blogs and social sites will evolve with this technology internally. Competitors exist: Blab:Predicts, founded in 2012 has raised $13M and is now being rolled out externally. CISION, whilst slightly different, is creating an end to end solution through acquisitions.? Expensive Product and Sales Concerns: ACME CORP is projecting $60,000/year licensing fee per client and we believe this is too high to penetrate the smaller and mid-size non digital media universe thus limiting sales.? Market Demand and Growth: Given the nature of the technology, the expenses seem too high and thus limiting scalability. The market for person specific predictive software for journalists is getting crowded and cheaper offerings exist.? Lead Investor: Credo Ventures, Prague based, has committed $550MM however, funding is contingent on completing the raise. Whilst listed as a strength, we site this as a risk as the contingent nature of the commitment causes concern. We question why Credo would set such a high valuation and an open timeline to raise the balance.Valuation ACME CORP is looking to raise $750MM in this Seed Round on a proposed pre-money valuation of $8MM. The valuation was determined by the company and their lead investor Credo sighting: i) amount of time to develop ii) existing customers on board, iii) niche within a large marketplace, iv) partnership with the Daily Beast and v) strength of the team. Top-level terms include pro-rata participation rights and a 20% discount to the priced round.If you believe the 2018 revenue forecast of $48MM, then the current $8M valuation seems fair. However, this feels like an aggressive projection and they are only giving away 8.5% of their company in this round and have limited traction. Based on this, we feel their valuation is too high.They are targeting Venture Funds who focus on Seed opportunities, Angel Networks and interestingly, not Family Offices or Strategic/Industry investors. The stated minimum investment is $50,000 (potential for smaller investment)Use of Funds? Compensate existing developers? Expand Executive team, (Chief Data Science and Chief Architect)? Expand sales team over time? Expand product development? Build brand and agency productThe company believes the $750MM will give them 12 months of operating runway and carry them to a Q217 priced round. The team is not sure if this is enough capital to raiseExit Management team expects to sell the company to a strategic buyer at a 4.5x multiple. Likely buyers are their Partners who could be Adobe,, News Corp, Hearst, Viacom, Vayner Media and Infront Media. In our view, the company will look to sell itself shortly after Cassandra is fully developed.TEAM ASSESSMENTACME CORP was co-founded by Yao Huang, CEO, and Jeff Neu, Chief Strategist. Yao and Jeff have known each other for 10 years and co-founded and currently run The Hatchery, a NY-based venture collaboration forum with the goals of building a community of entrepreneurs, emerging companies and investors through its events, advisory services, and incubator. The Hatchery puts on many events a year and Yao is known to be a good executor.Yao Huang is currently CEO and brings 15 years of industry experience. She says she has developed close relationships with key media and publishing executive targets and sites this as a key strategic advantage. She has an aggressive style and delivers a passionate sales pitch. In our initial meeting, she came across as defensive at times, but we liked her bullish enthusiasm. Yao is full time and not yet drawing a salary.Jeff Neu, Chief Strategist, is also the co-founder of Kuzas Neu, a boutique law firm specializing in internet and technology deals. Jeff is also managing partner of The Hatchery with Yao. A lawyer by training, Jeff works part time (10-20 hours/week) at Predictable.ly. We suspect these hours will decrease as they hire more and if his other companies gear up. In the past, Jeff has had a varied career writing code, practicing law, living abroad and jumping around schools during his undergraduate years. Jeff earned his JD from Rutgers. Jeff is not taking a salary. Jeff brings good legal experience to the team but his role moving forward is not a major one, unless his other company (to be named?) shuts down and he comes aboard full time.Dustin Williams, CTO, is the lead architect and product designer for ACME CORP and also self proclaimed serial entrepreneur (last company was CoFoundersLab, an online job matchmaking service for entrepreneurs. Dustin has founded and worked for several start ups (typically a 2-3 year stint) since the mid 90s. He is full time and is paid $100K plus equity.Masoud Makrehchi is head of Data Science based in Toronto. He is based out of the University of Ontario Institute of Technology. He is full time. Masoud has 15+ years data science and predictive modeling experience.Other:? Amy Vernon is a publishing advisor for predictable.ly. Amy brings 25 years of media, publishing, social media expertise. According to linkedin, Amy is a co-founder of the company and works on a lot of other active ventures. She helped initially launch the company and serves in an advisory role only.? Credo Ventures is the lead VC/investor. The VC firm focuses on early stage investments in Central and Eastern Europe as they are based in Prague, CZ. Credo has put in $550K on the condition that ACME CORP can raise remaining $200K. Credo has no set timeline for this but Yao is shopping around to other angel networks and some industry, early stage VC investors. Term sheet from Credo is $8M cap with 20% interest which includes pro rata participation rights, information rights and initial liquidation preference. If this goes through, Credo will own 6.8% of the company. The total amount raised should last one year.? Sales, Developers and Data Analysts: According to Yao, the company is hiring data scientists and engineers. The plan is to bring on 4 salespeople and 8 developers/data analysts in the next year. Some of these hires will be off-shore (Prague-based).Strategic Relationships: The Daily Beast. Barry Diller. The company has purchased ACME Corp first product and 10 agencies have been pre-sold. ACME CORP has a one year, exclusive relationship with The Daily Beast. The Daily Beast has exclusive rights NOT to resell. This relationship auto renews after one year. This one year agreement will start when product is delivered (Q3 estimate).Use of Funds: With this capital, Yao would like to hire more salespeople and expand their executive team and product development. Plans also include building a brand/agency product and further leverage their sales partners. There is a question mark about whether they are raising enough funds given their high burn rate.Working Dynamic: Jeff and Yao seem to have a strong and successful working relationship. We have not met any of the other executives. Not sure how well Yao takes direction or suggestions. She comes across pretty aggressive, however, Jeff adds a bit of polish. We don’t think Jeff has plans to come aboard full time as he is CEO on another Hatchery company (not sure which one).Other investors: According to Yao, they have turned down offers from strategic investors to invest. She would not say which companies, specifically. Mike Dyer from the Daily Beast said he is most interested in evolving the product versus owning it when asked if they felt it was so differentiated that it would give them a competitive advantage to own it. Yao mentioned Marie Green will come on as a board advisor (not public)MARKET ASSESSMENTACME CORP is really two products geared to service two markets, not one. The first is predictive software for journalists and publishers that is specific to the newspaper/editor/writer (Cassandra - in development), and the other is predictive software for branded content marketing (Minerva).The market share for Cassandra is as follows (more detailed analysis below):1. Market Size -- TAM = 8620 total Publishers (U.S. Newspapers and Magazines) - $28B adrevenues 2015 2. TAM potential revenues: 8620 x $60k/year licensing = $517.2MMMinerva is up and running as a service but is not ready to be resold yet. It is targeted to brands and agencies. Branded content marketing is the fastest growing sector in the market, and Minerva is a social listening software that predicts what advertisers should use to match product and content with audience. The market for Minerva as it relates to branded content marketing is up 13% from two years ago, to 23% currently, and is expected to account for 33% two years from now. PQ Media reported that Global Content Marketing would be $50 Billion by 2019 (They have it listed as $145 Billion - not sure why our numbers differ but we saw an abridged version of a larger field study). All the research we conducted concluded that branded content marketing is not just a growing field, it is the ONLY marketing seen as effective in today’s ad world (although a new trend is in crowd-source marketing as an off-shoot of this focus). Here are some of the major players in this market:HubSpot – content marketing Marketo – content marketing Influence & CO. – content writers Contently – content writers NewsCred – content writers Scripted – writes blog posts for you based on your target audience and desired content Skyword – marketing platform with “creative influencers”ACME CORP sees these companies as their potential partners, as they offer a SaaS these other companies do not have, but need, i.e. predictive marketing (Predictive Analytics are found in the finance sector, but have yet to make their way to marketing). Currently, ACME Corp primary Minerva sales are based on their relationship with the Daily Beast - a relationship scheduled to end in one year (2017). Daily Beast will package Minerva and resell it to the 500 brands they have a relationship with. ACME CORP hopes to expand their reach in addition to this relationship. There are other companies that analyze everything that is written on social media and rate it as well, however ACME CORP is banking that their software and “predictive” quality are unique enough to make a difference.For Cassandra, we need to look at the analytics realm for journalists (for accessing and analyzing and rating social media, etc.), and the landscape is crowded. A search revealed that the biggest players are already in on the action:FACEBOOK: Signal, Flowics, Livefyne, ScribbleLive, Wayin, Newswire (a feed of vetted stories), Storyful, CrowdTangle, Trending Now – these are FREE to journalists TWITTER: Curator, Moments – Free to journalists TABOOLA: post-article placement, 750 MM visitors, 300B recommendations CHARTBEAT: real time analytics for websites BUZZSUMO: analyzing page trendsHowever, none of these companies help a journalist know what to write about. In journalism, three problems have emerged:1) are social platforms a reliable source for information for journalists? 2) most analytics are POST-PUBLICATION so do not predict in advance the traction a story will get; and 3) analyzing the analytics (data) is up to the journalist – THEY need to make the prediction as to a story’s “hotness.”This places the onus on the journalist to sift through the noise and find factual information.We did find one company that purports to do this sifting: Signal. It provides a SaaS trending tool for journalists that sources videos, text, photos and data from Facebook and Instagram. They make content that is shared publicly on FB accessible, and then it’s up to the news organizations and the journalists that work there to determine (predict) the newsworthiness and how it fits within the coverage of their news of the day. Although Signal can help surface topics and conversations that are gathering steam on FB, it also requires the journalist to determine what is newsworthy and what is not.In a poll of journalist, 78.8% responded that “tailoring the pitch (of p.r. companies/sources) to suit my beat/coverage” was important for communications professionals to improve upon. An assumption can be made that the same would be true across all information gathering – the pitch should suit the beat/coverage. Here, ACME CORP has strength.ACME Corp Cassandra performs this type of specificity and addresses the desires of the targeted market – this product is specific to the “using” journalist, not generalized.As for true competition, we found what we think is an exact match in Blab:Predicts based in Seattle, Washington. They were founded in 2012, and have had three rounds of funding for a total of $13.M from 3 investors. The last round was a Series B on Dec. 3, 2014 for $8.8M. This is how they describe themselves: “At Blab, our Predictive Social IntelligenceTM platform ingests 100M+ posts a day from 50K+ sources worldwide, including News, Blogs and Social using a combination of IAB Content Categories, Brand Targets and Audience Interests and give our users the ability to predict tomorrow's conversations, today.” we’re not sure how large their market share is - it seems to have been used internally and is just now being rolled out to market.Another company that is not an exact match but is poised to make that pivot is CISION.CISION is big and growing. In the last year it has purchased Visible, Gorkana, Vocus and PRNewswire. This from an analyst:Quote: “Now that Cision has acquired PR Newswire, they are apparently piecing together an end- to-end solution that combines media contact databases, social monitoring/analytics and now press release/newswire distribution. From my perspective, the only tool left to acquire is one that can monitor previous media coverage based on keywords and marry that with media contact information (ahem, IT database, or something similar beyond just the tech media).”Cision customizes its different SaaS platforms depending on the client (Google is one). It has brand analytics and software, a robust social software that looks at market trends, social media traffic, and text analysis all in real time, and it rates all the above. In addition, it has launched HARO (Help A Reporter Out), which matches sources and reporters. Can it be tweaked to predict what should be written based on source analysis and traffic? Possibly. They have not done this yet, and HARO is only usable AFTER the journalist has determined what to write about, but noteworthy that CISION has looked at the journalism world and offered at least one “matching” solution.Based on ACME CORP deck, they are charging $60,000/year licensing. Some players in the arena (I could not find Blab’s rate per annum) are charging much less (based on a Muck Rack article dated July 9, 2014) as follows (all per annum) but I was not sure exactly what the customer got for this fee other than news aggregation:Cision: $5,700 *Vocus: $2,000 Meltwater: $6,000 MyMediaInfo: $4,000 *Gorkana: $10,995 *PRNewswire: $1,000 HubSpot: $2,400 Marketo: $10,740 Eloqua: $24,000 Pardot: $12,000(*Please note – purchased by Cision in 2015)When we asked about the high price of her Saas, Yao stated to us that after discussing the Cassandra product with her various news agencies, they felt that $60K per annum was reasonable. However, their predictions are to go from 5 customers currently, to 60 customers in publishing and 10 brands (2016), to 120 customers in publishing and 80 brands (2017), to 300 customers in publishing and 200 brands (2018). I question whether at the current cost per annum this is a realistic assumption, particularly with respect to the publishers. Our feeling is that they are actually looking to exit fairly soon after Cassandra is fully developed.Conclusion: ACME CORP offers a predictive analytic tool as a SaaS - a tool that is highly useful to the enormous field of PR, branding, and content marketing (Minerva); this is a field that is growing and whose use of predictive software of this type is also growing. Less certain is the market for person- specific predicting software for journalists (Cassandra). At $60K a year, it is expensive. In addition, other companies are in the field (Blab) and others (Cision), are poised to enter that field through their acquisitions. But there is no question that predictive technology is a very hot trend. If they truly have a unique product and can get to scale and market quickly, they should be a solid company with great exit potential.PRODUCT / BUSINESS MODEL ASSESSMENTACME CORP uses predictive analytics to recommend content to editors. Their value proposition is that the product will save time and create more traffic to a site by recommending more relevant and differentiated content. They have one product called Cassandra being sold to publishers and are developing a new product, called Minerva, which uses the same base technology that is targeted to brands. Minerva will be delivered in Q3.Q: Why is Minerva different/better and what justifies the cost of product?ACME CORP helps editors and content creators decide what to write that will generate the most traffic for THEIR audience. The decisions are brand specific. ACME CORP is like having their own data science team analyzing in real time working to drive page views authentically. According to Mike Dyer from the Daily Beast, it allows them to sell confidence to advertisers, not just content and that is differentiating. They can give advertisers the confidence, through the predictive analytics that they will reach the right audiences. The Daily Beast acknowledges that there are a lot of tools available but this is the best tool they have seen for content. Other tools survey interests but this tool develops insights that drive “meaningful performance”. “The insights are actionable” according to Mike Dyer.The system reads all the articles and traffic information from the publication and learns what kind of stories attract their audience. It looks for patterns across many attributes from types of stories, phrases, topics, emotions, locations, clusters, length, longevity, traffic patterns and more. They marry in what’s popular out there signaled by social momentum. They also monitor what their competition is doing and how many of the competitors are covering the same story. Each editor/reporter’s specific preferences are taken into consideration.They predict and recommend what will be popular for each publication based on what the editor is interested in and considers what is already popular out there. The premise is that finding things to write is a lot of work and usually requires looking through a lot of sources - websites, twitter feeds, email, foreign press, press releases, etcACME CORP helps sift through all the options each day to help editors and writers find what they like, things that their audience tends to like to read, and give them a sense of how these stories may do.Business Model Currently the product is being sold to publishing houses by the two founders, leveraging 15 year relationships with key media, advertising, publishers in NYC.They have secured a strategic relationship with The Daily Beast. 60% of the reporters at the Daily Beast are using the tool and they have used the tool with 150 brands. The company has purchased ACME CORP first product and 10 agencies have been pre-sold. ACME CORP has a one year, exclusive relationship with The Daily Beast. The Daily Beast has exclusive rights to resell Minerva to a specific group of clients once the product is ready for resale. This relationship auto renews after one year. This one year agreement will start when product is delivered (Q3 estimate).They have five customers today with $130,000 in revenue. Their 2016 plan calls for 60 publishing customers and 10 brands and $5.1M in contracted revenue. So far they have 10 brands interested and are in discussions with 10 publishers. This projection for 2016 seems aggressive since they are at $130,000 today, is dependent on having Minerva ready to go by the fall and the development of Minerva is contingent on getting this round of funding. The 2017 projection is 120 publishers and 80 brands and $19.2M in contracted revenue. This also seems extremely aggressive.Pricing: The Product will be offered at a flat fee of $2,000/month and $5,000/report. The expectation is that each brand will run 4-6 reports per month. Because advertisers charge their clients for the cost, they do not expect much pushback on pricing.The founders acknowledge that the number of publishers in the U.S. that are large enough to afford the technology is limited and the technology does not translate to other countries.Their growth plan rests on the relationship with Daily Beast and leveraging their sales team of 500 sales people. The Daily Beast sales team has other sales objectives so there is a concern about whether the outsourced sales team has the right skill set to sell predictive analytics and the right incentives. In addition, if the Daily Beast sales team doesn’t deliver or the agreement ends at the end of a year, how will ACME CORP hire, train and deploy a sales team with the cash on hand to hit their aggressive growth targets.It appears that ACME CORP strategy is to get acquired quickly to avoid having to face hiring an extensive sales team. The key question becomes, is the product differentiated and valuable enough to make them an attractive acquisition target?7 ................
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