I was over on Mixed Martial Arts and saw the best google ad in a long time:

It'd take a long time to make a million bucks at $20K/month! 

But, for some reason, it seemed very apropos given that the topic was Entrecard taking $112K on a pre-money valuation of $998K. It wasn't the odd numbers that caught my attention because that sort of thing is always negotiated and you get some strange round-offs.

It was the odd deal.

First, What is Entrecard?

It takes a bit of time to tease out what is going on since there are no fees, etc. It turns out that their business plan is to get footprint (they are on 6,500+ blogs) through cooperative advertising.

Imagine if instead of getting paid when someone clicked an adsense link on your blog you got a google credit to buy a keyword. Also then you'd have to imagine that you could click on the ads on your site and get paid for that too, but put that aside for a moment.

Short Term Revenue

To bring in short term cash:

Once per day we will allow a larger company to drop their card into the inbox across the entire network. This will not appear on your website anywhere, but rather only in your inbox when you log into entrecard. You will also receive 5 bonus credits for visiting these sponsors. We will also allow for sponsorship opportunities for our system emails and all of our RSS feeds.

Longer Term Revenue

Once the network is very very large:

When the [Entrecard] economy is in great shape, we will roll out a credit exchange for bloggers to sell their credits to advertisers, and we will take a commission.

So you can sell advertising slots (and thus traffic) like, well, like you do today for lots of other people.

A Revenue Model

Since Entrecard has 6,500 blogs in their network and can place an ad a day on each of them, that means they can serve up 2.3M ad/days/year. If every ad/day gets 10 views and they get a CPM of a quarter that is $6K/year in revenue across your revenue.

Which is not bad to start off with, because if you can scale up your blog network to fifteen or twenty million you have some serious dough rolling in.

I'm not dissing 6,500 blogs, but there are probably a million or more created every single day and these guys are getting naught point diddly percent of them. I looked through their "featured" page and didn't see any biggies.

I reckon that this model is pretty much stuck to the bottom end of the market. This is not stupid because that is the biggest part of the market, and if you can serve it right and with low costs, then you can get very very big - see WalMart.

And this "traffic for an ad-a-day" model really works in the bottom end of the market where people live on their sitemeter stats and are excited when they break a 100 for a week in a row.

Why do I say low volume blogs only? Because a big traffic blog doesn't want marginal traffic from other blogs, it wants placed ads (at best) or expensive adsense ads (at least).

Also, as a side note, this is why google bought blogger and why it has always amazed me that adsense isn't a default on all blogs. (Yes, I understand why, but they barely push it.)

You can also see that they aren't exactly ramping crazy revenue or traffic - look at the valuation.

Clearly these guys are not getting valuation based on hype. Facebook is losing money hand over fist and is "worth" billions pre-money to Microsoft (who are not stupid).

So they are getting their valuation based on revenue.

As a side note: this is why I would NEVER have released the details of this deal. Your competitors and the general public can find out a lot from a little.

Valuation Information

Ignore the $112K number because it's really three numbers: $34K in three tranches. So the revenue valuation ends up with the end-of-period revenue of the company - or in a year. Differently put, Andrew Te paid $112K for 15% of a company based on it's valuation at the end of a year.

Nice trick, and that tells us that the Entrecard guys really needed that money.

I know $34K can sound like a lot of money, and if you've hooked yourself up into Amazon's Web Services (like I said you shouldn't), then you've got to write that check every month. I know they're there because their model spreadsheet showed hundreds of thousands of bloggers signing on every month and they (thought they) needed the capacity - and I might have done the same.

For example, if your last 12 months revenue was $50K, then the investor will say: "Five times trailing is a pre-money of $250K."

But if the last month was $8K and this month was $10K, then you'd say "At a growth rate of $2K/month over the next 12 months our revenue will be $252K so our five times leading valuation is $1.26M!"

And if you're hot hot hot then you say, "Our growth rate is 25%/month so our yearly revenue will be $670K and our five times leading valuation is $3.3M."

So, yeah, if you're trying to figure out how strong someone is you can kind of look at their valuation and see what they managed to pull off.

The Devil Is In The Details

One of the things you often see with tranche based investment is some really tough conditions for the seller. Looking at the valuation options you can see that the Entrecard guys fell towards the bottom.

How can I say that? Well, remember that they're really only getting $34K, which is what percent of $250K? Right.

If they use the money to keep paying Amazon and to, say, quadruple their blog base, then, hey-ho, they get the next $34K. And so on.

And if they miss their numbers, I am betting that there is some ugly change of control stuff in there.

Conclusion

Look, I'm not saying they shouldn't have taken the money, and I'm not dissing their business plan. I hope to never be in the position of having to take VC money again, and if I do, I hope it's a big big pile for a teeny tiny piece of the pie.