Evalulate Oceanhouse Media’s exit options at year end 2013 and estimate the value of Oceanhouse Media at year end using the VC Method of valuation and
(ii) comparable firm transaction.
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Case study is as follows:
As 2013 drew to an end, Michel Kripalani took stock of his journey with Oceanhouse Media, the digital applications company he had founded in 2009. Several
of Oceanhouse Media’s venture–capital funded competitors had either been acquired at discounted valuations or were restructured within the last 12
months. He wondered if this was an opportune time to consider an appropriate exit strategy for his five–year–old venture. While he had not considered a
sale of Oceanhouse Media, he was now open to the possibility of a sale if the “right” offer materialized, determined by Oceanhouse Media’s estimated worth
at year–end 2013. Kripalani saw 2013 as a year of consolidation in the digital apps market; the market was becoming increasingly saturated, highly
concentrated, with increasing competitive pressures that were driving app prices toward zero.
Oceanhouse Media’s 2013 revenue growth had slowed considerably relative to the torrid growth rate of 2009–2012; while company revenue grew at a
compound annual growth rate exceeding 200% from 2009–2012, it grew only 5% in 2013. As he focused on Oceanhouse Media’s growth path post–2013,
Kripalani articulated his perspective on external financing: “We are bootstrapped, have not taken capital, do not intend to.” He also noted that while venture
capitalists earlier “had been knocking on our doors,” he had been reluctant to take on VC money because of what he perceived to be the high cost of VC
investment in the firm.
Oceanhouse Media was a publisher of digital books and digital apps for iOS and Android devices. Oceanhouse Media and its competitors were part of the
nascent digital apps industry dating to 2007 when the Apple iPhone was introduced in the market. Consequently, Oceanhouse Media and its competitors all
started as privately held companies with sparse historical financial information. Oceanhouse Media’s balance sheet, however, was known to be debt–free,
and with the exception of computer equipment and peripherals the business had few tangible assets (Table 1).
Oceanhouse Media Competitors
In conversations with Michel Kripalani, he had identified five privately held VC– backed firms with products in the children’s mobile apps market segment that
were viewed as strong competitors to Oceanhouse Media’s children’s apps. Their business models had evolved with revenues generated from both free and
paid apps. These firms were all founded post–2008; and, as very early stage start–ups did not have a history of revenues or earnings. However, all of these
firms had received VC investments and were expected to have significant future growth prospects.
Callaway Digital Arts
Callaway Digital Arts (CDA), founded by industry veteran Nicholas Callaway, was a privately held, mobile application development company. In November
2010 venture capital (VC) firm Kleiner, Perkins, Caufield, and Byers (KPCB), and two angel investors, Ram Shriram and Mark Pincus, collectively invested $6
million in an A round. Ram Shriram, based in Silicon Valley, California, had invested in Google, Zazzle, StumbleUpon, and Pinkberry. Mark Pincus, based in San
Francisco, California, had invested in Facebook, Grockit, and Buddy Media. CDA was reported to have received a five–year $12 million grant from the
Department of Education to create a series of game–based mobile applications to build reading and math skills for children ages two through eight. The
company catered to children and families. CDA formed partnerships with children’s content creators that featured notable characters in children’s apps. The
company used Sesame Street characters and Miss Spider in their apps, including The Great Cookie Thief and Miss Spider’s Tea Party. CDA had offices in
New York City and San Francisco. In May 2012, the company relocated all of its operations to San Francisco, and Nicholas Callaway stepped down from his
role of chief creative officer at CDA (Reid, 2012).
CDA Business Model
Callaway Digital Arts sold all of its apps on the Apple App Store to generate revenues. The company offered 14 different apps priced from $1.99 to $4.99.
Most of CDA’s costs were incurred when it created and developed apps. CDA’s goal was to be profitable by 2013. In 2011, it reported revenues of $6.4 million
with 40 employees at the firm.
Duck Duck Moose, LLC
Duck Duck Moose, LLC, headquartered in San Francisco, was a privately held company that offered apps in: Educational Games, Educational Media and
Online Curricula, and Mobile Applications segments. In September 2012, it received $7 million in an A round investment from Sequoia Capital, Lightspeed
Venture Partners, and participation from Stanford University. The additional funding would be used to grow its product line with more Android apps and to
develop a custom analytics and parent–reporting feature that monitored and reported to parents about their child’s progress (Perez, 2012). In 2 years, he
helped grow Edusoft revenues 20–fold, which led to its purchase by Houghton Mifflin Corp.
Duck Duck Moose Business Model
The company worked closely with educators and children as it tested its apps, the focus of which ranged from creative play to learning numbers and letters.
Almost all the apps (iOS and Android) sold for $1.99 apiece, with just a few iPhone versions at $0.99, and none offered in–app purchases (which according
to the company diminished the learning experience for younger children who tended to tap all over the screen)based on a freemium model, with the app or game available for free but extra features provided for a fee. In Outdoor Baby, one of its popular games, for
example, users could play for free and buy virtual goods, such as tents and flashlights, for real money. TabTale derived much of the approximately $20 million
of its annual revenue from such fees, according to industry sources.
Zuuka, founded in 2009, was a privately held publisher of mobile children’s content. It provided content owners a distribution channel for delivery on a global
scale. In 2011 Zuuka reported revenues of $480,000 and had six employees at the firm. Zuuka had offices in Santa Barbara, California, Frankfurt, Germany
and Los Angeles, California. In August 2011, Frankfurt, Germany–based investment bank, CFP Beratungs, GMBH invested about $2 million in an A round. In
March 2014, Zuuka was acquired by Cupcake Digital, a New York–based developer of a large portfolio of brand–name children’s mobile applications (Perez,
2014). Cupcake Digital offered a number of mobile apps and games, that featured characters from Kung Fu Panda, Jim Henson’s Fraggle Rock, Strawberry
Shortcake, VeggieTales, Yo Gabba Gabba!, Animal Planet, Wow Wow Wubbzy, and The Smurfs, for example. Combined, the acquisition would enable Cupcake
Digital to offer a library of over 250 titles and a reach of over 8.5 million downloads.
Zuuka Business Model
Zuuka held a number of licenses to notable characters and stories from children’s content owners and created multimedia stories. iStorytime apps were
priced from free to around $4.99 per app. The company’s costs comprised licensing costs, operating costs of managing the iStorytime platform, and
maintaining relationships with partners. Zuuka’s iStoryTime app was expected to expand its e–book library significantly in the future with access to Cupcake
Digital’s licensing portfolio and relationships.
Financing Considerations for Oceanhouse Media
Oceanhouse Media was structured as an S–Corporation and while several of its competitors had received VC funding, and Kripalani was approached in the
past by VCs interested in investing in the company, he was concerned about the impact VC investments would have on founders’ ownership interests, the
company’s future growth path, and its exit options.
Other mobile game start–ups that had recently gone public included Zynga (operating online social games) with 2013 revenues of $873 million and a market
capitalization in September 2014 of $2.8 billion; King Digital Entertainment, LLC, creator of the popular Candy Crush Saga mobile game with 2013 revenue of
$1.88 billion and a market capitalization in September 2014 of $4.2 billion (Table 6).
The issues of VC financing for, and possible sale of, Oceanhouse Media were both related to its estimated valuation at year–end 2013 (Table 7).
As he looked back on Oceanhouse Media’s five–year journey at year–end 2013, Michel Kripalani noted that Oceanhouse Media had been profitable, cash flow
positive, and self–funded in a growing but increasingly competitive digital applications market wherein mere survival for the typical app developer had been a
Kripalani was also keenly aware that several of Oceanhouse Media’s competitors had been acquired or restructured within the last 12 months.