Perhaps the founders of Facebook, Groupon and Zynga should spend more time at their satellite offices in Seattle.
All three failed to live up the hype around their initial stock offerings.
Meanwhile Seattle’s biggest entrant in the current generation of Web startups has won over Wall Street in its first year as a public company.
The stock of online real-estate company Zillow has nearly doubled since it debuted at $20 last summer. Sales grew 75 percent last quarter to $28 million, employment has grown to 450 and most analysts following the company consider it a “buy.”
A successful IPO is not as hard as it sounds if you take certain steps to prepare, according to Chief Executive Spencer Rascoff, who shared tips and the inside story last week over lunch with a group of Seattle entrepreneurs.
1. Get to scale with revenue. The rule of thumb is to be on track to book annual sales of $100 million. Zillow was approaching $60 million.
2. Be profitable. This may seem obvious, but some unprofitable companies have succeeded in going public. However “in this new IPO climate — where so many growth companies have disappointed in the first couple of quarters of being public — it’s really, really important.” Rascoff waited until Zillow was profitable.
3. Be on a path to become compliant with Sarbanes-Oxley’s financial, or SOX, accounting and reporting regulations.
4. Be able to forecast results.
5. “Have a really good sense of the levers of your business.”
“You have to be at the place where your company’s mature enough that you know if ‘I do X, then Y will happen; if I hire 20 more inside sales people, this is what will happen to our revenue,’ ” he said.
Zillow was started in 2005 but didn’t really have a good handle on the levers of its business until a few years ago. Earlier on, it was still “experimenting so wildly across different aspects of the business.”
Rascoff, 36, said that’s been an issue for Groupon. It’s still a young company experimenting with its business model, leading to its restating earnings after its IPO.
The same issue is affecting Facebook, which is now experimenting with mobile ads.
“One of the reasons they’ve had a bit of a rocky start has been because they’re now learning all that — understanding the levers of their business as they shift to mobile, under the scrutiny and glare of being a public company,” he said.
At Zillow, “we wanted to wait until we had a good enough understanding of the levers of the business and therefore were able to forecast effectively.”
The company benefited in part from the experience of its founders. Hailing from Expedia and Microsoft, they all had experience launching other companies. They could also afford to start the company with $6 million of their own money.
Perhaps that gives Zillow a different perspective.
Rascoff also shared a surprisingly positive view of the financial-disclosure rules affecting public companies.
Instead of complaining about the regulatory burden, Rascoff said he was glad to provide more information to help investors better understand Zillow.
The filings weren’t that onerous and preparing them actually clarified Rascoff’s understanding of his business, he said.
“A lot of the stuff that SOX requires is just good business management as well — things like making sure you’ve got good internal controls, making sure that nobody can steal all your money and run off with it, and making sure you have proper accounting for things,” he said.
Most refreshing of all, though, may have been Rascoff’s candid take on the federal Jobs Act that became law in April.
Rascoff — a former investment banker — questioned the wisdom of the act allowing companies to prepare for their IPOs largely in secret, and then letting them disclose less details of their business to investors.
Rascoff expected that “there would be a stigma of companies not wanting to go this sketchy, somewhat quiet route” but so far that hasn’t been the case.
Zillow probably wouldn’t use the cloaking tools of the Jobs Act if it were going public now, Rascoff said.
“If it were us doing it right now, I think we would file the traditional way and not be on (the) confidential file because I like our story, I like our results,” he said. “I would be happy to let everybody see that earlier and build excitement and interest in the story.”
It’s almost unheard of for a chief executive to embrace these regulations. That gorgeous view from on high must be having an effect on Rascoff.