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.
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
