Acquia Valuation- Wow

Acquia, a Drupal start-up from Dries Buytaert, the founder of Drupal was funded for with a $7M seed round. Actually there might have been a smaller seed round and Acquia has been in stealth for awhile, but that is unclear.

The more interesting thing is to speculate on Acquia's pre-money valuation. Basically (I think) you have Dries, a CEO and a business plan. Maybe you have Dries, a CEO and the core team already committed (seems like the core team has been on board for many months from their posts on the Acquia blog).

So some quick math. Assuming they want to keep the founders stake around 50% for a series A, that means VC equity + option pool (lets say 30%) = 50%. Therefore $7M is should be ~20% of the post-money valuation. Putting post money at $35M.

Sounds super high, so maybe they kept founders + option pool at the 50% level and sold the VCs 49% (lets estimate 50% for the math). Of course this means that in a B-round founder control goes away, though we have no idea about what they've done with preferred stock. But $7M is a bunch of money (15 people for 2 years using a $200K per head per year back of the envelope), so that B round is probably not much of a concern.

So the math is $7M equals 50% post-money putting post-money valuation at $14M.

Whatever the case, two guys, a business plan and maybe a team, were worth something in the neighborhood of $7M-$28M pre-money. If I were betting in Vegas, $7M or perhaps less.

Still, a few guys + a business plan is worth $7M? Where did all that value come from? It might be the revenue model, but I suspect it really comes from the Drupal community.

This is the far more interesting part of the Acquia story. Drupal has "spun off" (insert more precise term here) a number of consulting forms that have been growing wildly. Valuations of the CivicActions, Advomatics, Trellons, Lullabots, etc. of the Drupal community are probably pretty good-- general rule of thumb for a profitable consulting firm should be $150K revenue per employee per year, but consulting firms have a hard time growing beyond $3-5M in annual revenue. These guys are feeding their families well, but they aren't making what I would consider "real money" off Drupal.

I think the VC's bought into the idea that Acquia's product has already been mostly developed. They have bought into the idea that customer acquisition costs are low because the customers are aggregated and accessible in a single community.

Now lets look at exits. Acquia is to Drupal as RedHat is to Linux. RedHat's exit was via IPO at a valuation around $3B at ~$40M annual revenue with annual revenue growth '95-99 running around 100%. Red Hat's product strategy was pretty retail there and now is far more services/ enterprise related. Not sure how much they raised.

Someone believes there can be a multi billion dollar exit on Acquia, and their press release blurb gives a good story:

The Drupal web platform has been downloaded over 2 million times since its inception, and project growth doubles annually. Drupal is used to deliver a wide variety of Web 2.0 application types including single or multi-user blogs, wikis, community networks, digital media portals, and core web content management.

What if a single company could sell all kinds of web 2.0 applications without having to pay for the software development? Anyone what to bet on how many times Ning was brought up with VCs (with their rumored post money of $214M in their recent $44M funding round) ? But that might confuse the VCs, since Ning's an eyeball and advertising dollar play, it appears.

I am really curious how Acquia projects revenue. It is distributions and services, but are the customers existing Drupal community members (i.e. a little more retail)? Is it the enterprise players that come into the community and drive the revenue at the consulting companies? By making Drupal easier, how do they project community growth and what percentage of that community growth do they project capturing?

Do they have a Ning story and a Red Hat story? Whichever plays best with investors?

Bottom line though, is that huge pre-money valuation is driven by the strength of Drupal and, very likely, the inability of Drupal to grow its consumer user base as fast as the Joomal community (i.e. Acquia can capture customers the Drupal community simply is not pursuing and cannot reach).

If I were pitching the VCs I would lead with the Red Hat story, then pose the question, "What if a single company could capture all the revenue you see in the Joomla community?"

I'd invest in that company.