Category Archives: IPO

OpenTable Has Been Chosen: A Successful IPO

Posted on May 21, 2009 | Leave a comment

One of my favorite kids’ movie scenes has always been the inside the claw game sequence in Toy Story. The heroes (Buzz and Woody) are trapped inside one of those games where you drop a claw and try to win a novelty gift, in this case a mutant alien doll.

Buzz: Who’s in charge here?
Dolls (looking up): The claw!!
Another Doll: The claw is our master!
Another Doll: The claw chooses who will go and who will stay!
…
Doll (grasped by the claw): I have been chosen! Farewell my friends!!

I love the accidental assignment of reverence to a game of chance. I love the perspective it provides on the “why me” situations we all inevitably face. And I love it as a metaphor for business situations.

For example, wearing my MBA hat, I’d say that if you want to get picked by the claw:

  • You need to be inside the machine, not anywhere else (e.g., on the loading dock)
  • You need to be at a good place inside the machine (e.g., after analyzing a pattern of where the claw drops more or less frequently)
  • And the rest is up to some combination of chance and external forces

Applying this to start-up companies, if you want to do an IPO:

  • You need to be a growing private company
  • You need to get yourself into the IPO window by hitting a set of size, growth, and profitability parameters
  • And you need the claw to pick you

This week, the claw chose OpenTable, the online restaurant reservations service founded in 1998, which today includes 10,000 restaurants and seats an average of 2.8M diners per month. Let’s take a quick look at their numbers:

  • 2007 revenue: $41.1M (+51% over 2006)
  • FTQ07 revenue: $29.4M (FTQ = first three quarters)
  • FTQ08 revenue: $41.3M (+40% over FTQ07)
  • 2007 operating income: -$0.9M
  • FTQ07 net income: -$0.7M
  • FTQ08 net income: $0.3M

So we see revenue growth of about 40-50%, profitability of about breakeven, and size of about $50M. (If you apply the FTQ08 growth rate to 2007 revenue, you end up figuring around $57M in 2008 revenue.)

All in all, I’d say this is pretty well in line with my estimated IPO window of 50/50/0 — i.e., $50M in revenues, 50% growth rate, and 0% operating margin.

As of 12/31/08, they employed 297 people.

Prior to the offering, which raised $60M for the company, its capital structure included:

  • Benchmark Capital: 26.4%
  • Impact Venture Partners: 17.5%
  • IAC/InterActive Corp: 10.9%
  • Integral Capital Partners: 7.5%

So, in aggregate, it appears that investors own 62.3% of the company for which they paid, in aggregate across three rounds, somewhere between $54M (as per Tradevibes) and $84M which is the total of preferred stock plus additional paid-in capital which presumably includes exercises of common. I don’t have time to reconcile the difference right now, but let’s call it $60M so we can continue the math fun.

Now, somewhat surprisingly, the stock had a big run-up after it came public. Per this TechCrunch story, the stock rose almost 60% on the first day, giving the company a market capitalization of $600M. That means the investors’ aggregate return is about 6:1 ($60M to buy a portion currently worth $360M — i.e., 60% of $600M). Remember that all these numbers are very rough and I’m reasonably sure the price varied greatly between rounds. But, overall, a healthy 6:1 for the VCs isn’t bad.

The San Jose Mercury News dramatized things a bit with this story: OpenTable IPO Ends Drought, Brings Hope to Valley. Excerpt:

But the recent paucity of IPOs has caused alarm for the venture industry,and has intensified a continuing shakeout among valley VC firms.The benefits of a healthier IPO market should ripple through the tech economy. Investors will use returns from successful IPOs to provide financing for seed-stage and mid-stage companies. Other investors will flock to invest in the valley once they see big payoffs as tech firms go public.

University of San Francisco business Professor Mark Cannice said the activity could “allow the Silicon Valley entrepreneurial machine to shift into a higher gear in 2009 and 2010.”

Overall, I’d say it is good news for the valley and, I’d argue, the individual investor (see past rants), if the IPO window does indeed open again.

For more information:

→ Leave a comment

Posted in IPO, OpenTable, Venture Capital

End of the IPO Drought in Sight?

Posted on May 5, 2009 | 1 Comment

See this post by venture capitalist Fred Wilson, guest bloggging on Business Insider (nee Silicon Alley Insider) and re-posted on his own well regarded A VC blog, entitled The End of the IPO Drought is Coming.

The five key points of the argument are:

  • VCs have been in the penalty box for the dot-com era for nearly 10 years. It may well be time to let them out.
  • There are a lot of solid companies in the IPO pipeline
  • Many of those solid companies have annuity business models
  • When investors want to buy small company stocks again they are going to want to buy simple, one-product businesses they understand that drive growth and aren’t too fancy (i.e., no financial tricks). That’s what VC creates.
  • Sarbanes-Oxley is now well sufficiently well understood so that compliance costs are dropping.

I agree with the first 4 points. On the last one, I’m not yet convinced. Certainly, experience has made things better, but my friends who run small public companies still describe SOX as a 2-4% tax on revenues, which is doubly difficult because these companies often have single-digit margins to begin with, and ergo end up unprofitable after SOX costs.

In addition, he discusses the NVCA (not to be confused with the NCVA at whose events I recently spend too much time) and its proposed four-point plan to restore liquidity to venture capital.

→ 1 Comment

Posted in IPO, Venture Capital

A Crack in the IPO Window: Rosetta Stone IPO

Posted on April 17, 2009 | 1 Comment

In the third IPO in April, language education provider Rosetta Stone went public this week, raising $112.5M. The IPO priced at $18, and the stock ended its first day of trading at $25.12, a 40% rise.

As one banker said to me: “this shows that investors are getting back into the business of investing.” I think that’s a good thing, not only because I run a private venture-backed company but, more importantly, because a closed IPO window (1) locks out John Q. Public from buying the shares of early- and mid-stage companies, (2) forces some companies to be sold “before their time,” potentially snubbing the lives of would-be, great independent companies, and (3) indirectly reduces the attractiveness of the venture capital machine that I’ve long argued is a highly effective engine for driving innovation in the economy.

Numbers-wise, Rosetta Stone is quite a bit above what I’d been calling the 50/50/0 IPO window that I’ve seen in the Software Equity Group’s IPO pipeline data ($50M+ in TTM revenues, 50%+ growth, 0%+ EBITDA.)

Rosetta Stone’s key numbers are:

  • 2008 revenue: $209M
  • 2008 growth: 52%
  • Adjusted EBITDA: 17% (see the S-1 for definition)

The company’s market cap was $385M and the end of the first day of trading. Their investor relations page is here. The S-1 is here.

→ 1 Comment

Posted in IPO

A Lone Voice in the Wild: OpenTable Files for IPO

Posted on February 4, 2009 | Leave a comment

In a display of either iron will or total unawareness, OpenTable, the online restaurant reservations service, filed an S-1 on 1/30/09 for an initial public offering of its shares.

I’m proud to report that with revenues of $41M in 2007 (and seemingly on track to report revenues of $55M+ in 2008) that company is roughly in line with my assessment of the IPO window parameters of 50/50/0 — i.e., $50M+ in revenues, 50% growth, and 0% profitability.

In fact, OpenTable is really on the edge of my window, just skooching above $50M in revenues, slightly low on growth (41% comparing the first three quarters of 2008 to 2007) and small net loss of $150K, which rounds to zero when divided by revenue.

Are they the leaders of the next wave of IPOs or are they simply crazy to consider an IPO in this market? I don’t know. Perhaps they’re both at the same time. But I’ve long argued that owning a share of Endeca (or OpenTable) is probably a lot less risky than, say, owning a share of General Motors or Lehman Brothers over the past year, so why not let John Q. Public again buy shares in early-stage growth companies? And there’s always somebody who has to go first.

By closing the IPO window and/or raising the IPO bar, you lock John Q. Public out the market for those companies (while not necessarily reducing his risk) and, in some cases, force companies to M&A exits, because they either don’t want to wait, or can’t raise enough private capital, to reach a higher IPO bar.

TechCrunch covers the filing here. I’ve embedded the S-1 below:

→ Leave a comment

Posted in IPO, OpenTable

30-Year Low in IPOs Suggests Pent-Up Demand

Posted on December 15, 2008 | 3 Comments

See this article on Bloomberg, entitled Fewest US IPOs Since 1979 Mean Pent-Up Demand.

Excerpt:

The chart of the day shows the number of initial share sales of more than $50 million completed each year in the past decade, according to data compiled by Renaissance. This year’s total, 43, is the lowest since 1979.

More than 200 U.S. companies are planning to go public, according to the firm. Only two, Home Bancorp Inc. and Grand Canyon Education Inc., have done so this quarter.

While I hate to be Pollyanna, I do firmly believe that the IPO market is highly cyclical and thus that one of the best indicators of a future open IPO window is the closure of the present one. And, while I don’t have data to support it, I’d generally agree with the elastic rebound theory idea that the longer the window has been closed the more companies will flow through it when it opens.

In my experience, it takes two things to go public:

  • Above-bar financials. There is typically some bar (usually found by examing recent deals) which would-be public companies must surpass regarding financial performance. For example, I think the current bar is roughly 75/50/0 — i.e., $75M+ in trailing twelve months revenues, 50%+ in growth rate, and 0% EBITDA.
  • An open IPO window.

The trick is, of course, having both at the same time.

→ 3 Comments

Posted in IPO