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:
- The OpenTable S-1
- OpenTable Shares Soar Nearly 60% in IPO Feast (AP)
- OpenTable IPO Harkens Back to Dot-Com Heyday (MarketWatch)
- Investors Find Appetite for Tech Offerings (New York Times)
- OpenTable Shares Surge on First Day of Trading (Mercury News)