HostingCon 2007-Interview with Paul Stapleton, DH Capital

Paul Stapleton, the managing director at media, Internet and telecommunications investment banking firm DH Capital is a recurring face at most, if not all, of the hosting events we attend. So, while we were at HostingCon 2007 we decided to sit down with him for a chat and gain some insight into his enthusiastic interest and steadfast belief in the Web hosting merger and acquisition scene.

We unfortunately ran into some technical issues with the audio, so we'll be sharing transcriptions of our interviews with you instead. Sorry for any inconvenience.

WHIR TV: We always seem to see you around at these hosting events. What's behind your interest with the Web hosting industry?

PS: Well, myself and several of my partners at DH Capital have been focused on hosting and recurring revenues over the broadband Internet for well over a decade. So our interest in hosting is just a natural extension of the merger and acquisition advice we've been providing over the last 10 years.

WHIR TV: Why are you here at HostingCon in particular?

PS: We think it's quite important to get involved early with operators. We pride ourselves in knowing how the business actually works as well as the financial side. And it's an unregulated business, you can't just pick up a directory and get statistics. You have to go out and meet the people and walking the tradeshow floor is a great way to do that.

Also, we have a thesis about what online advertising can look like as a revenue stream inside the hosting business. We think the hosting business has extraordinary insight into what's happening on the box, who's coming to the box and how long they're staying. We think that's a wonderful recipe for building an online advertising revenue stream so we're out looking for companies who agree with that message and are building products like middleware, software, analytics to build online revenue into the hosting business.

WHIR TV: Would you say that there's a lot of activity going on in terms of mergers and acquisitions in hosting? Is there a lot of interest?

PS: Well, there's always interest. Entrepreneurs work very hard to receive a big payday. In terms of activity, we've described the activity in hosting as just coming into its maturity. And what I mean by that is, if you look backwards, transactions to date have been a lot of small transactions where people are buying other peoples' customer accounts rather than a sustainable cash-flowing business or a very few large transactions. But we think there's a whole middle-market of activity that's about to occur and come online in the next couple of years.

WHIR TV: Really? Can you elaborate on that?

PS: Well, if you're a $5 to 25 million hosting company today you probably have very nice cash flows and sustainability to those cash flows. You also probably know an awful lot about your customer-base, how much they churn, what they pay you per month and what your margin is on that. That allows you to calculate the value of your business. And as that becomes more clear and more and more risk is pushed out, we think these businesses are just becoming more and more valuable.

WHIR TV: What kind of advice would you give a company that is interested in putting out its business for acquisition? How can they prep themselves for it?

PS: These businesses are very good at the infrastructure side, the technology side. I would encourage them to spend more time understanding and managing their channel, their marketing and their sales. Study your customer base. Really understand it. Who's buying from you and why, what your churn looks like, what does your revenue per unit look like and what does your cash flow look like? With that data, and the historical data looking back, we can help you determine your valuation quite easily.

WHIR TV: Would you say that there is a growing interest from businesses outside of Web hosting that are starting to want to get involved in this industry?

PS: Honestly, new money is not quite here yet. However, our thesis is that that's going to change given the strong economic drivers of the business. We've seen it in other parallel recurring revenue Internet industries before. We saw it 10-years-ago in the dial-up industry, we're seeing it right now in the large-scale facilities-based enterprise hosting category. We think it's only a matter of time.

WHIR TV: How big do you think Web hosting will be in terms of a market perspective?

PS: It's hard to say. You get into questions of definition. You get into a bunch of assumptions. We take comfort in the fact that it's a service business that can support lots of well-run businesses and you can build a great company in this category almost regardless of how big the overall market is if you understand your customers and the product sets they want.

TAGS: "HostingCon 2007", "DH Capital"