Small Sites are Fetching Lofty Prices as Big Media Chases their Young Followers

 

NEW YORK CITY (By Jessi Hempel and Tom Lowry, Business Week) February 21, 2006 — DailyCandy, the popular Web site of fashion, beauty, and lifestyle trends, was founded in 2000 at the height of the last Internet bubble. Now it looks as if DailyCandy Inc. could wind up heralding the arrival of Bubble 2.0. A Wall Street Journal report on Feb. 15 that former AOL Time Warner Inc. executive Robert W. Pittman, whose private investment firm Pilot Group LP is DailyCandy's majority owner, was putting the site on the block fueled speculation that it could garner offers of $100 million or more.

DailyCandy, which breathlessly describes itself as "the ultimate insider guide to what's new, hot, and undiscovered," is the brainchild of Dany Levy, a 33-year-old onetime New York magazine editor. It has 11 daily city editions and a vibrant e-mail newsletter, and its trend-setting editors have steady gigs on the Today show to talk about the next hot sneaker or spa service. DailyCandy's Levy declined to comment; Pittman couldn't be reached.

Buzz machines like DailyCandy have become all the rage among corporate buyers looking to connect with the hordes of young people living and spending online. Because the sites always seem a few paces ahead of the action, venture capitalists are loosening purse strings, while larger outfits are looking to buy up existing sites rather than trying to create their own from scratch.

When someone like News Corp. Chairman Rupert Murdoch sets aside $1 billion for Web buys, it's clear that prices are destined to inflate. In July, Murdoch plunked down $580 million to buy MySpace.com, the social networking leader. Because users of sites such as MySpace are largely under 25, investors and Big Media companies see them as a direct route to a highly coveted but elusive demographic. "The risk, of course, with these sites is if they turn out to be fads" instead of something that's sustainable, says Aryeh Bourkoff, a UBS analyst.

For now, at least, Levy and other Web entrepreneurs are in a seriously enviable spot. Take David Cook and his sister Catherine. A venture capital firm, a tech startup, and a small public company have all made offers for myYearbook.com, the social networking site the siblings started last April. Cook says one suitor is offering big bucks -- into eight figures -- while another promises creative control. The third contender has an office near the Cooks' Skillman (N.J.) home -- a big plus. After all, says 17-year-old David, "we're in high school."

The Cooks got their first investment, $250,000, from their 27-year-old brother Geoff, who'd founded and sold his own Web business. They outsourced design to programmers in India and launched the site on rented servers. At high schools they offered free T-shirts or thongs to students who signed up five friends. After traffic jumped twelvefold in November, myYearbook.com made it onto traffic ranking site Alexa.com's list of movers and shakers, and buyout offers rolled in.

In this market, Web site sellers have a lot of competition. The Cooks' rivals include Jay Gould, 26, who launched two video-sharing sites in the fall of 2004 and sold them in December, 2005. Users of the sites, Musicvideocodes.com and Yashi.com, can search databases of videos and attach them to everything from e-mails to MySpace profiles. Gould outsourced the site design and set up shop in his grandfather's Bayville (N.J.) basement. In December the sites attracted 3.3 million unique views, according to comScore Media Metrix. Gould sold them to New York media company Bolt Inc. that month in a mostly equity deal that makes him a partner in the company.

Two other twentysomething online entrepreneurs, Greg Tseng and Johann Schleier-Smith, also attracted money quickly for their teen portal Tagged.com. But Tseng and Schleier-Smith wanted venture capital for the 35-person company. Their ambitions are nothing if not grand: "We want to build...a Teen Yahoo! or the next MTV," says Tseng. They didn't have to wait long for their growth capital. The site launched in mid-2004 with about $1 million from their savings. Traffic hit 1.6 million unique page views in December. The same month the duo reeled in $7 million from Mayfield Fund of Menlo Park, Calif.

Those thinking of starting similar sites better move fast. Buyers may find that site loyalty can be fleeting. But that isn't likely to discourage the frenzied interest. Meanwhile, a new generation of dot-com millionaires, some not old enough to celebrate at the local bar, is being born.

 

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