sport football: Bending Spoons

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Welcome back!

I have a special deep dive piece today, where I take look a rollup strategy that hadn't gotten much attention until recently. Today we're talking about Bending Spoons.

The Founders of Bending Spoons

This is one of my favorite rollup stories to follow and while I've been tracking them for a while, they're actually a recent leveraged loan issuer. Obviously, this conversation will be public in nature and will not refer to any materials they've provided lenders. They came to the TLB market recently to raise a $600mm TLB, with UOP to fund the Brightcove deal + to bolster cash for future M&A. S&P estimated a 5x '24E Leveraged Ratio (it's more like a turn or two lower) and rated them B+/Stable.

Bending Spoons is an Italian software company that acquires consumer mobile apps, focusing on improving the profitability of apps with an established user base rather than starting from scratch. Their strategy focuses on 1) monetization (generally aggressively raising prices) 2) adding new features and 3) centralizing the team (lay off acquired employees). The Company has over 100 digital products, 300mm monthly active users, and ~90% of revenue generated from consumers on subscription plans.

Before we get into it, I have a quick programming note: Effective, Sunday, April 27th, I'm merging in The Wall Street Rollup into the typical weekly newsletter cadence. We've been operating the newsletters separately, but given the fact that a lot of my newsletter focus is on The Wall Street Rollup, it's time to integrate it into the flow of existing HYH Newsletter readers. You'll be able to opt out of Wall Street Rollup specific posts at any time.

Let's get into it.

Founded in 2013, Bending Spoons CEO Luca Ferrari cited that they focus on existing apps because their first startup failed due to poor product-market fit.

Ferrari calls Bending Spoons "like if Berkshire Hathaway and Google had a baby", with a mix of being a tech operator and being a capital allocation focused business.

The Company has been a shining light in Italy, giving Milan based devs very competitive pay. In 2020, the Italian government tapped Bending Spoons to create Immuni, the country's contact-tracing app during the COVID-19 pandemic.

Bending Spoons employees seem to love it - the 500+ Milan staff are reportedly well compensated and they're not the ones subject to mass layoffs. As top tier devs, they get paid well by Milan (and London) standards and have the technical ability to take on a lot of different things. There's also obviously a major difference in labor cost in Milan, vs. the U.S. and Silicon Valley. A Bending Spoons employee is called a "Spooner". The jokes write themselves here. In the "A Great Spooner" guide on the Bending Spoons website, there's a manual on how a great spooner must have 1) extreme ownership of their work, 2) a sense of urgency, and 3) sky-high standards - with intolerance towards a lack of ambition or effort.

The Company was bootstrapped in the beginning, before eventually raising rounds of financing. The first raise, a $340mm financing round, was in late 2022 in order to build a war chest for a large pipeline of deals. This was led by NB Renaissance and H14, valuing the company at >$1B. Ryan Reynolds was even part of this investor group (maybe I was too hard on him in a prior piece). Following the 2021 tech bubble, valuations came down and Bending Spoons saw an opportunity to pursue deals aggressively. They also raised $155mm in early 2024, with investors such as Durable Capital, Baillie Gifford, Cox Enterprises, and Tamburi Investment Partners. This valued Bending Spoons at $2.55B. There was also a $500mm debt raise in 2022 to fund user acquisition and smaller acquisitions. This financial backing was from Intesa Sanpaolo, an Italian bank that helped with the acquisition of WeTransfer.

Back in October 2024, the Company floated interest in an IPO. CEO Luca Ferrari said there were no firm plans, but they were looking to be ready for it.

The Playbook:

Criteria: Bending Spoons' focus is to primarily buy consumer mobile apps that have an established user base but are underperforming or too bloated. Ideally, these are subscription-based apps with loyal users that are being under-monetized, have been under-invested in, and/or might be a VC orphan. The Company looks at productivity, creative, and utility apps (note-taking, file sharing, photo/video editing, social platforms, etc.); but doesn't look at gaming apps.

They reportedly have a pipeline of over 5,000 companies, but narrow down significantly.

Reasonable payback periods & light financial obligations: There is significant discipline when approaching these transactions, with a clear path to stronger profitability being focus number 1. Bending Spoons focuses on product, IP, and users as opposed to absorbing the entire corporate structure. Generally, they're going to be looking for venture orphans, aka companies that are done getting venture funding and are stuck between a rock and a hard place.

A path towards predictable, growing revenue: A push towards recurring revenue is crucial, with Bending Spoons moving from one-time payments into incentivizing users to sign up for annual plans. Aggressive price hikes is a massive part of the investment thesis - they just A/B test on pricing until they reach a breaking point.

Mass layoffs: Following an acquisition, acquired employees shouldn't expect to stick around too long (or even come over with the deal). Once the new app is integrated, the original team is out the door and Bending Spoons' Milan-based team will take it from here. This provides immediate operating efficiencies by removing duplicative roles and improving operating leverage. While these cuts have been perceivably ruthless in nature, these staffs may have been too large relative to revenue.

Deals:

Now we're going to talk about some of the deals they've done. Their 8 largest products are ~76% of revenue and ~73% of EBITDA, so the bigger, more popular apps are important here.

Splice: The mobile video editor app was sold to Bending Spoons by GoPro in 2018 and is a core part of the total portfolio. Layoffs have been noted on Glassdoor, but it's unclear how severe it's been relative to some of the other layoff stories I'll share momentarily. The 2nd core, earlier deal is Remini: An image restoration app that leverages gen-AI was sold to Bending Spoons in 2021, and has reached 90mm monthly active users by 2024. Remini's $40/month pricing is well above what comparable apps charge.

The Evernote transaction: Bending Spoons acquired the note-taking app in January 2023, rebuilt the Evernote backend, and shipped 75 improvements within its first year. Evernote has $100mm ARR and 250mm registered users, but was unprofitable and stagnating prior to the acquisition. Evernote, which was founded in 2000, once had a $1B valuation, but is rumored to have sold for 1x ARR.

Following the acquisition of Evernote, the majority of the ~250 employees were laid off. By July 2023, nearly all of the staff was gone. Bending Spoons retained almost none of the original personnel and preferred to trust their existing team vs. the team previously working on the app.

Evernote was a stark example of the Bending Spoons pricing playbook in action. Evernote's free plan was curtailed to 50 notes, with a push to a conversion to paid. Premium annual plans jumped from $80/year to $129.99/year. This is by design - while some customers will leave, the more committed and sticky users will stick around and pay more.

While there are some not-price sensitive consumers who will keep their Evernote subscription running forever, there's some competitive threats to the business model. Microsoft OneNote is free with Office and Notion, a notes based startup a lot of Tech folks love, is $8/month.

Mosaic Group Apps: In January 2024, the Company acquired a group of non-core mobile apps from IAC's Mosaic Group for a little over $100mm. This included utility apps like Clime, a call blocker app called RoboKiller, and a translation tool called iTranslate. However, Bending Spoons did not bring on the 330 staff members, making the transaction immediately profit-accretive once the staff were let go.

Meetup: Meetup was an community events platform owned by WeWork that had 60mm+ members. This is a social network-like product, which is different from the typical Bending Spoons deal. Terms weren't disclosed, but this January 2024 deal was a fire sale and Meetup was originally a $200mm deal. This was another instance where, while not disclosed, there was a massive restructuring in conjunction with the transaction.

Brightcove: Bending Spoons recently acquired Brightcove, an online B2B video platform, for $233mm, an EV/Sales multiple only slightly above 1x '24E Revenue, with a '24E EV/Adj. EBITDA multiple of 14.5x. To me, that seems like expensive thesis creep, but that's a pre-synergy multiple. The "synergies" didn't take long to be announced. Bending Spoons is laying off 198 employees, nearly 2/3 of Brightcove's 300 U.S. employee base, and compared to the ~600 worldwide employee base.

We Transfer: In mid-2024, the Company acquired WeTransfer, a Dutch file-sharing app, who had previously been planning a 716mm IPO back in 2022 (the IPO was pulled). Given this dynamic, this was likely another classic distressed transaction. It's estimated 75% of WeTransfer's 350 person staff was laid off weeks after the deal closed.

Other transactions include the mid-2024 acquisition of Issuu, a platform that converts PDFs into flip-book publications and FilMic a video camera app in September 2022. FiLMiC was a good example of Bending Spoons pricing power - switching from plans of a one-time $14.99 purchase to a $2.99/week or $49.99/year plan. All 22 members of the FiLMiC team were laid off one year after the transaction. This was another classic example of Bending Spoons handling things inhouse.

StreamYard was an asset that Hopin acquired but had to sell to Bending Spoons. Bending Spoons bought assets from Hopin at a fraction of the $250mm price Hopin previously paid for after Hopin's $7.7B valuation fell apart. StreamYard was an example where pricing rose 80%, from $25/month to $45/month.

Recently, Bending Spoons acquired komoot, a Germany-based app for outdoor enthusiasts who need route planning and navigation tools. komoot was in the early phases of improving monetization, with speculation that komoot's 45mm users may be in for a pricier ride now that Bending Spoons is at the helm.

Bending Spoons CEO Luca Ferrari, posing for a Reuters piece last year

Financials: Revenue has grown from $162mm in 2022 to $392mm in 2023. A prior forecast estimated $500mm of FY2024E Sales. Note, S&P shared that 2024 Gross Margins were 77%. The big jump in 2023 came from Evernote and organic growth from Remini and Splice.

I'd say the most notable competition are the direct app peers - like Notion for note-taking and then Capcut for video editing. But generally, what you need to know is that switching costs for these products are super low.

When you look at these deals, you start to notice some patterns. The reality is, from a consumer standpoint these are lower quality apps that they're getting a good deal on, they revamp, cut costs, and then they squeeze on pricing.

When you're doing these types of deals you need to be disciplined on valuations to make the math work: While the Company naturally keeps a lot of these multiples tight to the chest, it was heavily implied above that these are all distressed or low multiple transactions. For distressed transactions, in general, there's a lack of granularity and no disclosed sale price or financial #s in a lot of press releases.

The Mobile App landscape draws comparisons to a lot of different industries

The rise of mobile apps that spent a lot on marketing, but were more of a fad or could never really monetize, led to a stalled-out situation that is really dicey and tough for businesses to manage. A sinking ship type of asset boxes management teams into having to make a choice such as being a forced seller or doing a firesale. There's got to be a countless number of stories like this in the mobile apps space - and there's obviously a ton of dynamics like this in other industries.

In some ways, the Bending Spoons playbook is similar to Constellation Software, the Canadian company that has been acquiring B2B software companies for decades. Obviously, PE shops that roll up software companies (like Vista Equity and Thoma Bravo in enterprise software) are some comps as well. But IAC was once a competitor in the consumer mobile space, using Mosaic, its mobile apps division, for roll-ups – but IAC ended up selling those assets to Bending Spoons, effectively bowing out of the strategy. Upland Software is an example of a tech rollup playbook as well. They try to target late-stage "dead unicorns", aggressively cut costs, and then run the business for cash. However, things have gone south at Upland, due to the highly competitive nature of the enterprise software space and due to overpaying for crappier assets.

What drew me to Bending Spoons initially was the tech-enabled products they're looking at, combined with the classic private equity playbook. A lot of PE valuation creation comes from developing a tech-enabled approach that drives revenue and cost synergies. But the big draw was due to the fact that they are doing something hard, and zoning in on a typical type of rollup.

Cause, look - here's the deal. The future of rollups is going to have to be focused on harder, more challenging consolidations. The lowest-hanging fruit has already been plucked.

We don't talk about efficient market theory in the private markets, but it's there to some extent. Sure, there are off-market deals, but there is some level of that efficient market hypothesis that plays out in the private markets.

If everyone thinks HVAC rollups are a "no-brainer", then that increases bidding for HVAC add-ons, and then suddenly the return profile makes it less of a no-brainer. So realistically, rollups and ventures into other industries are going to have to be in spaces that are more challenging and more esoteric.

We've already seen this play out in the LMM or SMB space - where you roll up enough of these higher-risk businesses and then eventually you have a much larger platform that hypothetically de-risks things and gives you a platform-level multiple.

The pitfalls of doing a rollup in a tougher industry is that you may not fully de-risk. If the rollup of the businesses is predicated on buying 10 pieces of "crap" - you just get one big mud-pie. That mud pie might be worth a lot, but at a certain time, it was just a bunch of pieces of mud. I want to dig into some tougher rollup stories in some future pieces this year.

Conclusion:

Ultimately, Bending Spoons has pioneered bringing a PE-style playbook into a newer market where it has technical sophistication. Then from there, raising pricing, pushing monetization, and ruthlessly cutting expenses is the typical PE playbook.

There certainly is some level of product improvement though, where Bending Spoons looks at an asset, thinks the prior team did a shit job, takes it over, and fixes things and implements things the way they want it to be. A stagnating product with a bloated cost structure is the prime Bending Spoons target.

Having many apps with moderate scale all aggregated creates solid synergies with a platform approach to handling the backend, analytics, marketing, and having an overall shared infrastructure.

I still think Bending Spoons is going to win, but some of the parts of the car will need to be replaced over time: This is a very methodically built rollup, but I think they're well aware that the more they squeeze, the less juice is going to come out of an asset. The way I see this going is they're going to have very robust payback periods on their purchases due to the distressed prices, quick overhaul, and massive uplift in ARPU; followed by an eventual decline in paid users and revenue as more challengers come in and offer something more consumer friendly. I think they're well aware of this and as a result, keep the acquisition train humming along to beat out the "decline rate" in the assets. What I'm pretty much saying is that they have to keep buying companies in order to continue to grow the platform and stabilize long-term revenue. This means you should potentially be viewing acquisition expenses as a recurring expense, like capex.

I would expect this Company to eventually go public and have a good outcome for everyone with equity, but there are certainly risks about the sturdiness of the foundation of these apps. I think incumbent investors and the founders will walk away with a lot of money, but they are most certainly going to have keep buying assets to sustain revenue and earnings growth.

That's all for this edition, until next time.

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Investment advice provided by Autopilot Advisers, LLC ("Autopilot"), an SEC-registered investment adviser. The portfolios are in partnership with Autopilot. Past performance does not guarantee future results. Investing carries risks, including loss of principal. As always be smart out there.