One of the year’s most talked-about deals so far was this week’s announcement that Seattle-based Urbanspoon, the online restaurant guide and iPhone application, has been bought by Internet giant IAC. Financial terms were not disclosed, but reactions I’ve heard from local entrepreneurs and investors have ranged anywhere from “this is great for Urbanspoon and the startup community” to “this deal makes no sense.”
So I pinged Warren Gouk, managing director at Seattle’s Cascadia Capital, to get his outside thoughts on the acquisition and what it means for the prospects of consumer Internet startups. Gouk has expertise in Internet strategy and mergers, and just yesterday published an extensive report on the state of new media and online marketing. I asked him how the Urbanspoon deal fits into the overall landscape of startup and investment strategies, and whether we should expect to see other exits like it anytime soon.
“It’s all good news,” Gouk says in an e-mail message. “The Urbanspoon traction proves that good companies are being acquired in the current market conditions and that consumer Internet companies can get acquired without venture capital money. There is a growing movement among entrepreneurs in the Internet space to pursue capital-efficient business models that lead to smaller exits (e.g., sub $25 million priced deals), which can yield much more promising returns for the entrepreneurs than $100 million exits that require significant levels of capital. However, entrepreneurs chasing these type of capital-efficient strategies need to realize that there can be limitations [on] how big they can grow their companies, and will likely be forced to sell at earlier points in their companies’ life-cycle.”
“Urbanspoon is a good example illustrating how the business model for traditional media, advertising and publishing companies is being reinvented by consumer Internet companies,” Gouk continues. “Urbanspoon’s approach to quickly aggregating restaurant content (user-generated content + business information) in each city created a scalable next-generation online directory listing for restaurants. These type of plays represent a double-dip value proposition: 1. vertically targeted audience in local markets; and 2. vertically targeted audience focused on eating out. IAC obviously saw the strategic fit tapping into the local and vertical market strategy that they have been pursuing for years.”
As for what the deal says about ad-based business models, Gouk suggests Urbanspoon might be somewhat of a special case. “Urbanspoon represents a more diverse, multi-dimensional ad-based model, by focusing on display, paid listings and other directory related marketing/advertising opportunities. Given that Urbanspoon has developed a very targeted audience, e.g., geo-targeting and food/restaurant focused, they should be able to achieve superior results and in turn drive higher than average ad rates or listing fees.”
Still, he says, the acquisition may be indicative of a broader trend in big-company strategy and mobile distribution models. “Good strategic deals that can be leveraged by larger companies will continue to happen. IAC has lots of experience and resources to help expand and grow Urbanspoon more aggressively. Urbanspoon also represents an additional and relatively untapped distribution model via the iPhone and other mobile devices that was likely very attractive to IAC. We would expect to see many more consumer Internet companies follow in the footsteps of Urbanspoon.”
