Singapore’s Gushcloud gets acquired. Is it really a win for the company?

It’s a pattern I see all the time.

Startup gets acquired. Startup sends out press release trumpeting the news. Journalists like myself lap it up. Cue congratulatory messages for the founders on Facebook.

Surely it’s a win for the entrepreneurs and employees alike, right? Not always. So we turn to the Gushcloud acquisition news – covered extensively though uncritically by Channel NewsAsia, The Straits Times, and many other outlets.

How much is Gushcloud valued?

The news reports gave no specifics about the value of the deal, except to say it was worth multi-millions of dollars.

This is incredibly vague – it could mean two million to $999 million. You can’t blame Gushcloud though, as such deals are typically bound by strict confidentiality agreements. But Gushcloud founder Vincent Ha told me over email that the sum is beyond S$10 million (US$7.5 million). Still vague, but probably decent.

It made close to S$1 million (US$750,000) in 2013, and that’s a rough indicator of valuation, subject to how much it grew the following year. Since Gushcloud’s business model isn’t exactly scalable – it’s basically a media company with an influencer marketing arm – the revenue multiple won’t be too high.

Net profit might be a factor. The acquirer might look at the net loss or minuscule profit and dampen the valuation. Gushcloud’s future plans matter too. Is it selling itself as a traditional business with slow or steady growth, or does it have plans to rapidly scale its business with technology? Depending on how it wants to evolve, the acquirer might value the company based on some mix of financials and future potential. An approach towards the latter could fetch a much higher valuation.

Are the founders and employees millionaires now?

When you read that a startup gets acquired by millions, the automatic assumption is that the deal is all cash. In other words, suppose a company gets acquired for $10 million, all that money goes to the investors, founders, and employees’ bank accounts. Cha-ching!

That would be naive. Often unsaid is how much the startup stands to gain in cash or shares. So, out of that $10 million, $8 million might consist of shares in the acquirer, in this case Korean social digital media agency Yello Digital Marketing (YDM).

Of course, Ha won’t say whether he’s gonna be laughing all the way to the bank as a millionaire. “Afraid I can’t go into specifics” was all he’d offer. Yet from what I heard, many of Yello’s acquisitions particularly in Indonesia were mostly stock, and that could be the reason why it’s able to acquire so many companies.

A lot more goes on behind the scenes in an acquisition. F&H Fund Management – which seed funded Gushcloud – may choose to cash out or hold shares in YDM.