Posts from Groupon

Some Thoughts On The IPO Market For Web Companies

We have an IPO market for web companies again. I don't have all the names in front of me, but this year has brought IPOs for Pandora, LinkedIn, Groupon, Zynga, and TripAdvisor. These five companies are all trading for north of $1bn market cap. Pandora is at ~$1.5bn. LinkedIn is at ~$6bn. Groupon is at ~$15bn, Zynga is at ~$7bn, and TripAdvisor is at ~$3.5bn.

We can (and surely will in the comments) argue about these valuations. Some will say they are too high. Some will say they are too low. That's what makes a market. But in the aggregate, these valuations do not seem ridiculous to me. The public market investors are valuing these companies at prices that have some rationality to them.

What is possibly more interesting is that the public markets are valuing these companies at less than the late stage private market might value them at. Again, I don't have the data in front of me (I'm on vacation), but I believe that some of these companies had private financings at our above these current market caps.

The past decade (post Internet bubble, post Sarbox) brought a new normal to the late stage venture capital market. Companies are staying private longer. They are doing multiple rounds of growth financing privately. And they are doing multiple rounds of secondary liquidity for the founders, angels, and early investors. Mike Moritz calls these financings the "new IPOs".

This "new normal" is allowing these companies to stay private and develop into real businesses. With a lot of revenue. The five companies I mentioned at the top of this post will have close to $5bn in revenue this year. The company with the least amount of revenue is Pandora which, as of its last quarterly report, is operating at a $300mm annual revenue run rate.

These companies also have built sophisticated management teams that are highly capable of managing a business to meet the expectations of public market investors. They have strong operating executives, strong financial executives, and strong product and engineering leadership. They should be well run public companies.

The five companies I mentioned at the top of this post are carrying a combined market cap of $33bn. So they trade at an average of 6.6x revenues. And that is not including the cash they have on their balance sheets. I am not going to do the math, but I would bet if you back out the excess cash, you might see revenue multiples of less than 6x for this cohort. These are full valuations in a historical context, but these are not crazy valuations. If these companies can continue to grow at the rates they are currently growing, and if they can generate significant cash flow from their businesses (some of these companies already are doing that), then they should be more valuable in the next couple years, generating gains for the public market investors who hold the stock.

When Zynga was pricing its offering last week and getting ready to start trading its stock, I got a note from a friend who said "let's hope for a '99 style first day pop." I responded that was the last thing I wanted to see. And thankfully we did not get that.

It is not healthy for companies to trade at prices well beyond what they are worth. It puts incredible pressure on the team to deliver results that can't be delivered. And when the stock inevitably comes back to reality, the team feels like they somehow failed. Morale is impacted. The whole things is madness. And who benefits from that first day pop? Only the best customers of the banks who led the offerings. Why should they get a windfall when they did nothing to build the company and when they will be out of the stock so fast it will make your head spin?

The IPO market for web companies we have right now is rationale. We can argue whether it is pricing thse offerings correctly. But it feels about right to me. I believe we will see a bunch of IPOs next year, led by Facebook, which is the poster child of this whole "stay private longer" movement. If we as an industry can be patient, keep our companies private longer until they are truly IPO ready, then we should have a sustainable IPO market. That's where we seem to be headed. Let's not get greedy and screw it up.

Disclosure: USV has a significant holding in Zynga therefore I am long that stock through my interest in USV.

#stocks#VC & Technology

Users First, Brands Second

I like simple ways to think about things. Like mobile first, web second. These kinds of constructs work for me. One that I've been using a lot lately to describe what we like and don't like as much is User First, Brands Second.

When you are building your product and thinking about your go to market strategy, you need to decide who your first users will be and how they will take your product into the market. You can focus on getting everyday internet users first. Or you can focus on getting brands first and working with them to get users. This decision is critical and will impact almost everything about your business going forward. So don't make this decision lightly.

There are some great businesses that have gone with the Brands First, Users Second approach. Two that come to mind are Groupon and Buddy Media. They are very different businesses but both go first to brands, work with them to craft offerings for users, and then work to get those offerings in the hands of users.

Contrast that with Foursquare. The Foursquare app launched without any brands on it and went after user adoption directly. Today they have over 10mm registered users. Millions of users engaged on the Foursquare service attracts brands. And the brands come to Foursquare without much effort on Foursquare's part. This is the User First, Brand Second approach.

Facebook, Twitter, and Tumblr are all User First, Brands Second services. The brands are all over these services now. But for the most part, these services didn't do much to bring them. The engaged users did.

Our firm vastly prefers the Users First, Brands Second approach. I don't want to say definitively that we would not invest in a Brands First, Users Second business, but it would have to be something very interesting to get us to do it.

We do have several portfolio companies that took some version of a Brands First, Users Second approach to market. WorkMarket brings large employers and staffing firms onto their platform who put work orders into their system. That brings workers who pick up the work and get paid via the Workmarket platform. SoundCloud initially targeted audio content creators who put their work on the SoundCloud platform and according to Quantcast, that audio content brings over 14mm people a month to the service. But in both cases, these services launched day one with a valuable offering to both brands and users and they were not crafted specifically for the brand's benefit. That is a key point to be focused on.

The biggest problem with a Brands First, Users Second approach is you can get caught up in product development efforts to satisfy the brands and as a result you can't put enough energy into satisfying the users. And if that happens too much, you end up servicing the needs of the brands over the needs of the users and then you are a service business not a platform.

So when thinking about whether or not your company is a good fit for investment by our firm, think about whether your business is User First, Brand Second, or the other way around. That will be one of the first things we focus on when we evaluate it.

#VC & Technology#Web/Tech