News broke over the weekend that online backup service Mozy, which placed a close second in our top online backup solutions list in July, has been acquired by EMC Corporation for an estimated $76 million. EMC is a 20+ year old public storage company with a $40 billion market cap which was among the most hard-hit in the dotcom boom and bust.
Mozy’s backup technology goes two ways: Mozy Home for the consumer and Mozy Pro as a more enterprise and advanced solution. The underlying idea behind Mozy is to have users download and run its software which collectively uploads backups to Mozy’s servers in the background. The backups can then be restored at any time in case of a crash or in need of accessibility.
Mozy raised a $1.9 million capital round in 2005 with participants Wasatch Ventures, Tim Draper, and Drew Major. If the rumored price is correct, that’s a near 40x return — impressive on Mozy’s part but far away from a close-to-reality valuation. Here’s why (long analytical tangent coming up — get your coffee ready ).
If you compare the size of this acquisition to recent activity in the space like the Yahoo!-Zimbra deal, there are two obvious takeaways. The good: there’s a demand for niche-targeted sites when it comes to the right buyer and an appropriate acquisition. The bad: there’s a valuation bubble that is getting bigger and bigger.
What the Internet has seen in recent is years, most notably in the dotcom period, are a great number of irrelevant acquisitions, mergers and buyouts for the sake of nothing but hype itself. There are numerous that come to mind but the AOL-Time Warner deal is one that clearly bulges the rest (Yahoo!/Broadcast.com and Comdex/Softbank are close runner-ups).
These type of deals sound appropriate and fit perfectly into an underlying mission at the time, but what pans out is nothing but “what the heck were they thinking?.” In addition, they are rarely good, mutual matches for each other and almost all of the time are irrelevant, unneeded deals that the buyer could have done better without. Fast-forward five years, and one of the parties almost always ends up in a ditch, too.
The other point — just incase you missed it — is that there is a serious valuation bubble that seems to be getting bigger and bigger with hype. Mozy isn’t worth $76 million, and as a conceptual idea most probably wasn’t intended to be.
Investors are always meant to have a great understanding of the true potential of something in dollar figures, and unless you’re a crazy crackpot from 2005, you would have known an idea which involves a group of customers (in the tens-of-thousands at the very most) downloading your software and having it send pieces of data from their system to a remote system ‘just incase’ serves a niche market. The best exit for an idea like this would be something in the lower double-digit millions, and I think Mozy’s smart investors were aware of it too.
So why the $76 million valuation on a niche concept like Mozy’s, one which can’t really be accounted for — unlike some smart others in the past — by terming it market leader or pointing to its serious customer backing or its numerous sound partnerships that the acquirer will be able to leverage or to its patent-pending super awesome technology that’s a must-have?
In my opinion, there are four simple reasons: (a) So Google, which was rumored to be in talks with Mozy a while back, couldn’t make them rethink the offer and lead online backup to Mecca (after all, ‘storage’ is EMC’s domain and Google’s known for creating new spaces with its buyouts — Picasa, Google Earth, YouTube), (b) Because it’s very easy to do so being a multibillion dollar company when you have the money lying around and this is the kind of hype that got yourself to where you are, (c) Because the folks at Mozy are very smart and were able to use Google’s acquisition talks and Mozy’s million dollar investment round as a talking point, and (d) Valuations are getting inflated in today’s market by the vast hype that surrounds it, and Mozy is anything but an example of reality.