Internet and New Media Investment Banking: Something Old Meets Something New
If you tweet, they will retweet.
And if the big banks and the old school sectors are no longer “hot,” bankers will start up dozens of smaller boutiques…
…All focused on one of the hottest sectors around: internet and new media.
Sure, we’ve covered the TMT sector before, but this sub-sector deserves special treatment because of the prevalence of boutique internet and new media banks.
If everyone’s starting a boutique focused on this sector, there must be something to it – right?
Our interviewee today came from an undergraduate engineering program, and has covered the sector from both an investment banking and an equity research perspective.
Among other things, he’ll explain:
- Why so many professionals are starting internet / new media boutique banks, what it means, and why you should care.
- How to get into this space, and why you still probably don’t want to create a video resume…
- Key drivers and valuation criteria for internet and new media companies.
- Where to go after you log out, put away your smartphone, tablet, and smartwatch, and get back to reality.
Recruiting Reloaded: How to Get Into Internet / New Media Investment Banking (or not)
Q: How did you get into this coverage area?
A: It was a matter of geography and luck.
My school was close to a major tech center (think: San Francisco or Boston), so there were lots of tech-focused banks and groups in the area, and I had the perfect background for it.
You don’t need an engineering background, of course, but it helps to point to internships or classes that were tech-related in a big picture sense.
So many people are trying to break into technology / startups these days that it’s hard to separate the wheat from the chaff unless you have relevant experience.
Q: Does it help at all to create video resumes, interesting Twitter profiles, or a good LinkedIn profile?
A: Video resumes and Twitter profiles – no.
It’s hard to express why we should hire you in 140 characters or less, and video resumes are always disastrous – just look back on the history of video-based resumes submitted to investment banks.
A good LinkedIn profile can help you a lot, but most students have horrible profiles.
A few tips:
- Yes, you need a professional-looking photo that clearly shows your face. You don’t need to pay $500 for a headshot, but you should be wearing business attire on an easy-to-see background.
- Always create a “clean” LinkedIn URL with your full name.
- Aim for at least 100 connections for “social proof”; add your friends if you don’t have that many business contacts.
- A good functional title and summary are very important because you need to highlight keywords and buzzwords there. If someone searches for “strategic planning” or “investment banking” you need to be certain your profile will show up.
For more tips, see the M&I annotated diagram of a LinkedIn profile (more for current professionals, but you get the idea).
Q: Great – anything else specific to tech / internet / new media that you should know for recruiting?
A: Not really – they still ask similar technical and “fit” questions in interviews, and the networking and recruiting process is still the same.
The main difference is that you need to point to tangible evidence of your interest in technology because of the “tech startup wannabe” crowd.
- Engineering classes or an engineering minor.
- A tech-related group or activity where you held a leadership role.
- A thesis or term paper you completed.
- A tech-related competition such as a “hackathon” or other startup-related event you entered.
Internet and New Media Banking… in 140 Characters… or More
Q: So let’s talk about why there are so many banks and groups focusing on this area now. What’s your view?
A: Well, let’s start with two specific trends before delving into the “why”:
Trend #1: Existing banks are “pivoting” and deciding to focus on internet and new media.
The perfect example of this is Allen & Co., which was founded in 1922, started hosting the high-profile Sun Valley Conference in 1982, and then made a contrarian bet on the tech sector in 2002, right as the dot-com bubble was bursting.
They got the timing right and dove into a promising sector right as everyone else was leaving – which allowed them to build long-term relationships with companies like Facebook, LinkedIn, and Twitter, and ultimately to underwrite those IPOs.
Trend #2: Meanwhile, a number of new boutiques focused on internet and new media have been emerging.
Two examples are Qatalyst Partners and CODE Advisors (see the TechCrunch interview here), both of which are intended to be “next-generation banks” that do more than just the usual sell-side M&A and private placement assignments.
They were both founded by well-known and well-connected tech bankers / executives (Frank Quattrone and Quincy Smith / Fred Davis / Mike Marquez, respectively).
Q: So what’s driving both of those trends?
A: Some of it ties into the shift away from bulge bracket banks toward boutiques, and some of it is tech-specific.
Overall Trends: Post-financial crisis, bulge bracket banks are seen as less appealing because of increased regulation, continued conflicts of interest, and so on.
Many companies have been looking for more “independent” advice, and top bankers have been leaving to start their own firms.
Companies really value advice from a bank that’s ONLY advising on deals and not also cross-selling other services.
Tech Trends: And then within the internet and new media space, companies have been going public later and later.
That’s partially because regulation like Sarbanes-Oxley makes it more expensive to be a public company, and partially because it’s much easier to raise funds as a private company these days.
Bulge bracket banks have not focused on private placements in the past, so boutiques gained an advantage by aiming for deals that are “below the bar” of bigger banks.
These private placements then turn into opportunities to advise on M&A deals and underwrite IPOs for the company in question.
Sometimes, banks do “free work” for a company for many years and build a close relationship that leads to fee opportunities.
A great example is the relationship between Allen & Co. and Facebook:
- 2005: Peter Thiel introduces Allen & Co. to Mark Zuckerberg.
- 2005 – 2011: Allen & Co. informally advised Facebook on many potential deals, financings, acquisitions, and so on.
- 2012: Allen & Co. was an underwriter on the Facebook IPO. Splitting $176 million in fees among 33 banks may not sound that impressive, but…
- 2014: Allen & Co. advised on Facebook’s $19 billion acquisition of WhatsApp, netting a cool $32 million to $41 million in fees. Not a bad way to be “paid back.”
Sometimes, the bank or group in question will become known for a “specialty.”
One example is how Qatalyst Partners became known for winning high premiums for its clients (in excess of 70%, vs. the normal 20-30% seen in standard deals).
Scoping Out the Stack: Sector Drivers and More
Q: Great. So how do you think about the different sectors within internet and new media?
A: Here’s how I divide it up:
Internet: Think of how you connect to the internet in the first place, or companies that provide web-based applications (or smartphone / tablet apps these days):
- Internet Infrastructure
- Internet Search
- Satellite-Based Infrastructure
- Online Enterprise Applications
New Media: Think of “traditional media” as delivering content to the customer.
New media, by contrast, is delivering content to the customer and then having a discussion as a result of that content:
- Content Management & Distribution
- Digital Media
- Online Advertising/Marketing
Q: So let’s talk sector drivers.
A: For the detailed treatment, you need to read Mary Meeker’s annual Internet Trends presentation.
At a high level, you’re looking at consumer involvement and advertising spend.
According to Internet Brands’ SEC filings: “[Internet Brands] optimize[s] revenue yields through selective deployment of various advertising models, including cost per click (CPC), cost per lead (CPL), cost per action (CPA), cost per thousand impressions (CPM) and flat fees.”
With consumer involvement, you’re really looking at readership and associated trends.
Firms in the internet and new media space tend to manage a portfolio of websites that cater to different sectors.
So as you might imagine, a health-oriented website’s success depends on the demand for particular treatments or diets – the more popular a health measure, the more readers will turn to the web for information on it.
Smartphone and tablet growth have also been driving more content consumption as consumers start to read and watch content in different ways.
The growth in total Internet users has slowed greatly, especially in developing markets, so companies have focused on increased user engagement and new channels to drive sales.
Second screens (e.g., watching TV while using your tablet, or using a tablet and smartphone at the same time) have also been driving growth in content consumption.
Data-driven insight has kept firms focused on analytics afloat – as more and more data is captured through point-of-sale, even old-school CPG companies are turning to internet / new media companies to interpret the data and make it actionable.
Valuing Internet and New Media Companies: Welcome to the Bubble?
Q: Thanks for that overview. Is there anything specific you need to know for valuation and the technical side in this sector?
A: Not really – you still see similar metrics and multiples, at least for profitable and/or cash flow-positive companies.
So EV / Revenue, EV / EBITDA, P / E, and so on, all still apply.
You do tend to see “Pro-Forma” or “Non-GAAP” numbers more frequently because many tech companies like to pretend they’re more profitable than they actually are.
Those numbers tend to adjust for items like amortization of intangibles, under the argument that they are “non-recurring” – sometimes that’s reasonable, but for a company that’s always making acquisitions and therefore always amortizing intangibles, it’s harder to buy into.
For companies without profits or cash flows, or with very low profits or cash flows, you see a lot of analysis based on price per user or price per active user:
- Yahoo! / Broadcast.com: $11,000 per user (not a typo – it was 1999)
- Facebook / WhatsApp: $42 per user
- Yahoo! / Tumblr: $33 per user
- Facebook / Instagram: $28 per user
- Google / YouTube: $48 per user
The DCF still applies to mature companies, but these types of “creative” metrics are common for earlier stage ones.
If you want to see a case study example, take a look at this site’s valuation of Uber.
Q: Great. And speaking of that, how can you tell if we’re in a bubble or not?
A: People make that claim all the time, but I think it’s more about individual stocks or sectors being overvalued than anything else.
If all companies in the sector are trading well above historical average P / E or EV / EBITDA multiples for a prolonged period, then sure, we might be in bubble territory.
A: Of course. Please take a look at the following:
Banker Meets Consultant and Wins in a Deathmatch?
Q: Earlier, you said that your work is a combination of a startup and a banking coverage team – is that really true?
A: I meant that there are more qualitative aspects to what I do at a firm like this – for example, we actually spend time analyzing a company’s competitive position and creating slides on it, like a consultant might.
At some firms, going back to that CODE Advisors example earlier, there is more and more emphasis on non-transactional advisory, such as helping a company expand its partnerships or its customer base in a specific region.
So you may start seeing more and more “banking-consulting-business development” hybrid firms in the future.
This element extends to other sectors as well – for example, in homeland security the Secure Strategy Group provides a variety of services to companies.
Q: Speaking of deals and other services, what types of assignments are most common?
A: Lots of equity offerings and M&A, depending on the year.
Clients here tend to be more interested in tapping equity markets; it’s the whole “Do you want to be a part of my growth?” story.
Besides traditional equity financings, private placements can also be very common depending on the bank you’re at.
Debt offerings are still less common, but sometimes you see convertibles and other, more “exotic” deal types (a good example is the Jawbone asset-based loan led by JPM and Wells Fargo).
Logging Out: Where to Go After the Next Internet Bubble Bursts
Q: What do internet and new media investment banking professionals upgrade into after banking becomes obsolete?
These finance roles involve budgeting, resource allocation, and explaining the difference between actual results and the prepared budget.
As with the startup scene, the real draw is the chance to own equity and position the company for an exit.
I have also seen investment banking professionals move into product management, which some argue is the path to becoming a CEO (debatable, since product managers often focus more on the product and less on everything else).
I decided to go into equity research to get to know the companies in my space in more depth; part of it was also to get a better work-life balance.
Q: Any last words? Bonus points if you can do it in fewer than 140 characters.
A: Yes. Don’t stress, get tech experience, learn the sector trends, and join a boutique internet / new media bank!
Q: That’s 111 characters. Impressive.
A: Thanks, it was my pleasure.
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