Zillow’s IPO to Test Appetite for Smaller Offers

Zillow Inc.’s initial public offering, slated to price today, will do more than raise money for the real estate website. It will signal whether other small dot-com companies can join the IPO frenzy.

Newly minted public companies LinkedIn Corp., Pandora Media Inc. and HomeAway Inc. all had valuations of at least $2 billion when they started trading, along with quarterly sales of more than $50 million. Zillow, which had first-quarter revenue of $11.3 million, will probably be valued at about $460 million.

Venture capitalists are watching to see how much interest money managers have in smaller dot-coms and whether financial analysts will cover them. Of the handful of sub-$500 million companies to hold IPOs so far this year, most have seen their shares decline.

“To see more offerings like that, there needs to be an ecosystem,” said Maha Ibrahim, a partner at venture firm Canaan Partners in Menlo Park, California. Institutional investors need to be equipped to deal with small-cap stocks, “and you need to have a richer analyst community,” she said.

Zillow expects to raise as much as $62.3 million in its IPO. Founded in 2004 by Rich Barton and Lloyd Frink, the company makes money by selling subscriptions to real estate and mortgage professionals. Zillow also sells advertising on the site. It has a database of about 100 million U.S. homes that potential buyers and renters can browse, and Zillow lets consumers connect with real estate agents.

Photographer: Daniel Acker/Bloomberg

Zillow expects to raise as much as $62.3 million in its IPO. Close

Zillow expects to raise as much as $62.3 million in its IPO.

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Photographer: Daniel Acker/Bloomberg

Zillow expects to raise as much as $62.3 million in its IPO.

Katie Curnutte, a spokeswoman for the Seattle-based company, declined to comment, citing a pre-IPO quiet period.

‘We’ll Be Watching’

Trulia Inc., a San Francisco-based competitor, will be one of the startups monitoring the offering. Trulia has discussed plans to go public itself, said spokesman Ken Shuman, who declined to provide a revenue figure or potential valuation.

“There are more agents buying advertising and more agent engagement on Trulia than there is at Zillow,” he said. “We feel even more optimistic about the opportunity for our business. We’ll be watching just like everybody else.”

The outcome of Zillow could help other startups decide if they should file for IPOs or stay private. The list may include companies like EHarmony Inc., Etsy Inc., Redfin and TheLadders, based on their valuations on private-company exchanges.

In the 1990s, it was more common for companies of Zillow’s size to go public. There were fund managers focused on small-cap stocks and more boutique banks to lead the offerings, provide analyst coverage and trade the shares. After the dot-com bubble burst, the industry contracted. Moreover, the Sarbanes-Oxley Act of 2002 raised the legal and auditing fees for public companies.

Too Small?

Kevin Landis, who’s been investing in technology stocks for 17 years at Firsthand Funds in San Jose, California, said a decade ago he would have invested in companies valued at less than $500 million. Now, that’s unlikely.

“Throw in a little inflation and a lot of Sarbanes-Oxley compliance and that might be too small a number,” said Landis, whose firm manages about $260 million in assets.

On a price-to-sales basis, Zillow is cheaper than other recent IPOs. At a market capitalization of $460 million, Zillow would be valued at about 10 times 2011 sales, assuming revenue for the first quarter holds true for the rest of year. That compares with a 26 ratio for LinkedIn, 13.3 for Pandora and 16 for HomeAway.

CafePress’s IPO

CafePress Inc., an e-commerce service that lets users customize T-shirts and tote bags, is another smaller dot-com pushing ahead with an IPO. The San Mateo, California-based company announced plans last month to raise $80 million in a stock offering. It had first-quarter revenue of $32 million.

Seven technology companies have gone public this year with valuations of less than $500 million. Four of them now trade below their offer price. Of the 14 IPOs with valuations above $500 million, meanwhile, 10 have traded higher since their IPO.

It’s not clear which companies would be ready and willing to try for an IPO if Zillow is a success. SharesPost Inc., an exchange for shares of private companies, shows a range of startups trading at valuations of less than $1 billion. Some of them may want to make the leap to public stock exchanges.

Dating site EHarmony is valued at $526 million on the exchange. Etsy, an online marketplace for handmade goods, has an implied value of $260.3 million, based on a trade in March. A purchase of stock in TheLadders in May valued the job-search site at $237 million. A January contract valued Redfin, a real estate site, at $227.1 million.

‘How Low?’

It’s hard to tell if public investors would be interested in companies that small, said Jeffrey Crowe, a partner at Norwest Venture Partners in Palo Alto, California.

“The question is: How low does it go?” he said. “Any venture firm wants to see how those guys do and ask if that will open the market for other companies of that profile to get out.”

For Zillow, the company’s challenges extend beyond its small size. It has lost money every year since its inception, including $826,000 in the first quarter. Competition is also picking up from Trulia and Realtor.com.

Trulia’s Shuman said his company has more real estate agents as paying subscribers. And Zillow has lost more money. In its almost seven-year history, Zillow has lost $79.5 million, or 2 1/2 times the amount of money that Trulia has raised.

To attract public investors, smaller companies need to prove they can grow quickly and become profitable, said Sharon Wienbar, a managing director at Scale Venture Partners in Foster City, California. She’s an investor in online marketing company Reply! Inc., which filed for its IPO in 2010 and has yet to go public.

“In a relatively smooth market, where portfolio managers have a reason to believe growth will be sustained and companies will become more profitable, you can get companies of this size public,” Wienbar said. “Zillow will be a new mark for the market.”

To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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