Rovio IPO: A stark lesson in timing

Talk to any good venture capitalist or expert in company investments, and they'll likely list many of the same factors as being vital for a successful "exit" - the point when a fledgling company brings home the bacon for its investors either through a stock market flotation or a high-value sale to a larger player. They'll talk about how valuations work, about learning to assess risk profiles, about the different ways of valuing a company's IP, its talent and its potential; but they'll all, at some point, definitely talk about timing.

Lots of factors are important, but without the right timing, they don't count for much. That goes doubly in a rapid-moving sector like videogames, where the best technology or IP can fall flat if it misses the trend it ought rightly to have led.

It's hard not to look at Rovio's plans for its IPO, revealed this week, and think about the importance of timing. The company's intentions are modest; it will float around €30m ($36m) worth of new shares on the Helsinki branch of the NASDAQ. The total valuation this would give the company isn't clear, but it's obviously a long way from the kind of numbers touted around Rovio as little as five years ago.

"The company has not learned how to be anything other than The Angry Birds Company... rather, it has learned how to be better at being The Angry Birds Company, executing effectively on its sole successful IP"

Back in 2011, Zynga offered to buy the firm for $2.3 billion; a year later, numbers as high as $9 billion were being touted for an IPO expected to be happening within a matter of months, perhaps a year at most. The minimal offering now being planned, little more than a toe in the waters of the stock market, shows just how much has changed for Rovio.

It's worth pointing out, of course, that the fact that this IPO is happening at all is a sign that the company is actually doing pretty well at the moment. The Angry Birds movie acquitted itself solidly at the global box office - enough to put a sequel on the slate for 2019 - and in turn drove solid growth in sales of Angry Birds merchandise and revenues for the Angry Birds games. The company has not, in other words, learned how to be anything other than The Angry Birds Company (though it's hoping for success with its new, commendably featherless, multiplayer title Battle Bay) - rather, it has learned how to be better at being The Angry Birds Company, executing effectively on its sole successful IP across a range of media and merchandise.

A modest IPO with an initial offering of shares in the tens of millions is about right for the company described above; a firm with a single strong IP that it's learned to exploit effectively across movies, mobile games and merchandise. The company is doing well with what it has. But still; with better timing, this is a company that would have earned billions for its investors and founders. Was that just passing madness? Were those 2011 and 2012 valuations just terrible business sense on the part of those so keen to part with their cash for a slice of Rovio back then?

To some degree, certainly, there was an element of a bubble involved in those valuations - and the simple narrative, that Rovio looked like the next big thing until it turned out that it didn't know how to bottle the lightning that struck Angry Birds, holds a degree of truth. Alongside that, though, it's worth thinking a little bit about the nature of value. As hinted at in the opening paragraph, there are a lot of reasons for buying a company. An ordinary investor buys shares because they expect a return (there are other reasons, some complex, emotional and not readily analysed by a focus on economic incentives, but it's primarily about return); that return may come from the company being a soaraway success, or from the company being so desirable to another, larger company that it is acquired at a premium.

"The stock market figures from analysts, who reckoned as high as $9 billion, was probably simple madness riding on the outer skin of a very big and volatile bubble"

When companies buy other companies, though, the picture is more complex. They might be buying a potential competitor they'd rather integrate than face off against (think of Facebook buying Instagram, for example). They could be acquiring technology they think will fuel their own future products (as is the case with most of Apple's quiet acquisitions). They could be buying IP (Disney is the king of this, buying Lucasfilm, Marvel and Pixar), or they could be buying a product line (Apple buying Beats comes under this category), or they could be buying talent and know-how. This last category is sometimes called an acqui-hire, when a company purchases another not because they want their products (the product is often shut down - this happens to successful small software firms all the time, to the utter exasperation of their users) but because they want the team who created them.

Usually, an acquisition will include a few elements from that list in its reasoning process. So how does that relate to Rovio's potential multi-billion valuations? Well, the stock market figures from analysts, who reckoned as high as $9 billion, was probably simple madness riding on the outer skin of a very big and volatile bubble. Rovio was the biggest name in mobile games, and everyone knew mobile games were going to be huge (as indeed they have become); investors, urged on by analysts, would have driven up the stock price to dizzying heights before the problem that we're now all aware of came to light, namely that Rovio only really had one mobile game, and that it hadn't anticipated the importance of the F2P model.

Only a couple of years after that hypothetical IPO, Rovio would have been in a disastrous situation - Angry Birds was at its lowest ebb, no other IPs were picking up the slack, the F2P model had left them in the dust as competitors like King and Supercell had soared past them. Unlike the real world, where all of that happened but the company was able to plod onwards, regroup and achieve some modicum of success, our hypothetical multi-billion-dollar IPO Rovio would have lost billions in shareholder value, and it's unlikely any of the senior team would have survived the ensuing revolt. (Though, of course, they'd all have been stonkingly rich, so don't shed too many tears for their hypothetical woes.)

"The very thing which makes a company valuable can change over time. Today, Rovio is a very competent company with a single good IP, and valued appropriately as such"

Zynga's offer of $2.3 billion, however, was based on an entirely different logic. Zynga didn't really need Angry Birds, and wasn't really prepared to pay billions for it. In 2011, Zynga was the most successful player in the Facebook game space, and one of the leading pioneers of F2P business models - but on mobile, it was nowhere. Its domain was browser games, and it simply hadn't adopted the technologies and strategies required to move that expertise and audience onto smartphones. Zynga was being left behind and it knew it; it offered to buy Rovio not in order to own Angry Birds, but in order to own the studio that had created the world's most successful mobile game. In short, Zynga wanted to buy something which back in 2011 was almost impossibly valuable, precisely because it was so rare - experience of creating and launching a hit mobile game.

That's why timing is so crucial; not just because risks and rewards rise and fall over time, but because the very thing which makes a company valuable can change over time. Today, Rovio is a very competent company with a single good IP, and valued appropriately as such. Five years ago, though, Rovio owned something that could only ever be fleeting - just about the only expertise on the planet in launching a hit game on smartphones. That knowledge and experience, to the right bidder, was quite genuinely worth billions (and it's interesting to wonder what the mobile game space might look like today had Zynga and Rovio actually been able to marry their respective know-how in an effective way); today, it's almost worthless, with the tale of how Rovio made a global hit out of Angry Birds being worth a minor book deal at best, not a multi-billion dollar acquisition.

That's the core of why timing is everything. It's not just about selling at the peak and buying in the troughs; it's about recognising what it is that a company actually owns that's valuable, to whom, and what the window for the existence of that value might be. Rovio got this wrong - perhaps through overconfidence, or simply a mistaken assessment of the market's direction - but at least they were able to weather the storm and are getting a second chance. Most companies don't. Failing to make an honest and deep assessment of where a company's value lies is a costly mistake which generally has no do-overs.