Flushed with cash, Apple, Inc.($AAPL) may be in talks to purchase Beats Electronics, LLC (“Beats by Dr. Dre”) for $3.2 billion, which could catapult Hip-Hop producer Dr. Dre’s net worth north of a billion dollars. I’ve been casually paying attention to Beats by Dr. Dre since its 2008 formation by Dr. Dre and Jimmy Iovine, both West Coast music and brand impresarios. Here are the interesting lessons new companies and startups can leverage from observing the $AAPL – Beats by Dr. Dre deal
- Get Quality Partnerships Early: Beats by Dr. Dre’s originally partnered with Monster Cable to manufacture the iconic-branded audio products. Monster Cable is an audiophile’s favorite supplier of high-end audio cables and accessories. Iovine and Dr. Dre knew they could justify the ridiculous price point for their products if the underlying quality was decent. Subsequent deals with Hewlett-Packard and Chrystler reinforced this partnership point.
- Sometimes, “Who” Invests is as important as “How Much”: Consider this – in 2011, HTC, the Taiwanese mobile device manufacturer, paid $309 million for a 50.1% stake in Beats By Dr. Dre, sending the company’s implied valuation to $618 million. Barely a year later, HTC is sold half of its stake back to Iovine and Dr. Dre for $150 million. Doesn’t appear like HTC made any money from the sale and it looked like the co-founders weren’t getting everything that they wanted from HTC either. Reputable yet controversial private equity firm Carlyle Group LP takes down a minority stake in Beats By Dr. Dre for undisclosed terms, but later reports state that Carlyle’s purchase was around $500 million. Carlyle’s purchase added value in two ways: (1) as a reputable private equity firm that rarely gets it wrong, its investment signaled to the market that Beats By Dr. Dre is undervalued; and (2) the capital paid down a $150 million loan to HTC and gave Beats By Dr. Dre a way to break up with HTC while increasing the implied market value 67% from $600 million to $1 billion.
Startups should consider the Who as well as the How Much when deciding to raise funds. Lawyers who represent startups should also be cognizant of the private equity, angel funding, and venture funding heavy hitters when counseling a startup venture. Always feel free to contact us if you’re planning a new business, startup, new venture.