Internet IPOs: First, RetailMeNot. Next, Twitter?
After Facebook’s initial public offering 14 months ago—featuring a computer malfunction, misplaced trades, and lawsuits galore—a nuclear winter descended on consumer Internet equity listings. Investors interested in new technology deals ran from ill-defined metrics like consumer engagement and monthly active users. Instead, they sought solid revenue models powered by subscription and licensing fees at business software outfits such as data-visualization company Tableau Software and human resources software maker Workday.
Since Facebook’s flop, only two U.S. consumer Web companies have gone public: real estate site Trulia and travel search engine Kayak. Meanwhile, microblogging site Twitter remains on the sidelines with an estimated $9.8 billion valuation, higher than 95 percent of companies in the Nasdaq Composite Index. Other startups, such as cloud-storage company Dropbox, mobile-payment platform Square, and room-sharing service Airbnb, sport valuations well above $1 billion. It may be up to an online coupon site from Austin, Tex., to get those companies off the bench.
RetailMeNot, which provides digital discounts at more than 50,000 stores, is set to debut on Nasdaq on July 19 with a market capitalization just above $1 billion, according to regulatory filings. It’s not Groupon, which has missed earnings estimates and recently ousted Chief Executive Officer Andrew Mason; RetailMeNot has a gross margin of 94 percent, higher than any company in Standard & Poor’s 500-stock index and more than 20 percentage points better than Groupon—or Facebook. Because consumers find the coupons themselves through Web searches or when they make a purchase, the company has almost no labor or material costs. “We’re not saying we’re going to be profitable in two years or three years—we’re nicely profitable today,” RetailMeNot CEO Cotter Cunningham said in his roadshow video presentation to money managers.
Cunningham, formerly the chief operating officer at Bankrate, launched the company in 2009. RetailMeNot offers promotions such as 20 percent off purchases at Macy’s, $30 off a Kindle Fire from Amazon.com, or a $2 smoothie from Jamba Juice. In the first quarter its sales jumped 37 percent to $40.6 million. Since Facebook, “investors are aggressively looking for growth but care that there’s a larger story and path to profitability,” says Lise Buyer, principal at Class V Group in Portola Valley, Calif., which advises companies headed for the public markets. “The lesson from Facebook is that hype and popularity do not a successful IPO make.”
To avoid the risk of a face plant, Twitter and other prominent startups have opted to continue raising private money at IPO-type valuations. That allows them to keep their finances private, avoid regulations, and test new products without worrying about quarterly results. In a recent survey of 91 U.S. startups conducted by accounting firm KPMG, 45 percent of respondents said they prefer to remain private, more than 30 percent want to be acquired, and only 19 percent want to go public. “An IPO is not a goal—I think it’s an important step along the way,” Phil Libin, CEO of note-taking app company Evernote, told Charlie Rose last month. “You can really do a lot of damage if you get that step wrong.”
Along with Evernote, online bulletin board Pinterest, e-tailer Fab.com, and music-streaming service Spotify have all raised money at $1 billion-plus valuations in the past year. (The other companies declined to comment.) But as attractive as it is to entrepreneurs to raise private money at public-market prices, startup investors and venture capital funds want to cash out in an initial offering or outright acquisition. “You start relying on something north of $3 to $4 billion, in some cases higher, to justify what you’ve done,” says Craig Hanson, a general partner at venture firm Next World Capital. “There aren’t going to be very many companies that hit that.”
RetailMeNot’s last funding round in late 2011 implied a valuation of about $800 million. Twenty months later, the firms that led that round, JPMorgan Chase and Institutional Venture Partners, are counting on a strong IPO to make a significant profit. (RetailMeNot spokesman Brian Hoyt declined to comment, citing the pre-IPO quiet period.) A successful offering could help erase the sour taste left by Facebook. Next World’s Hanson says a few more consumer IPOs coupled with shrinking U.S. regulatory requirements will encourage more companies to tap public markets instead of relying on excessive private capital. The Jumpstart Our Business Startups Act, signed into law by President Obama last year, reduces the amount of disclosure required for emerging companies and lets them keep their filing confidential until three weeks before the roadshow. “The burden of going public is a lot less than it used to be,” says Hanson. “That will have an appreciable effect over time.”