Which Hyperlocal Startup Will Be Next to IPO?

After two years of relative quiet on the IPO-front, the hyperlocal industry is once again set to make a splash in the public markets. This year’s class is flush with some of the biggest names in tech, and signals a key shift in the business models that dominate the local technology market today.

The local IPO-season began in January, when shares of Care.com, the eight-year old marketplace for babysitters and other caregivers, soared on the first day of trading. It was the first of crowded field of tech companies set to potentially hit the public markets so far this year, which includes well-known startups like Dropbox, Jawbone, Uber, and Square.

A rising tide for tech IPOs
Last year was a banner year for venture-backed technology IPOs. According to the National Venture Capital Association, 82 VC-backed companies raised a total of $11.25 billion in IPOs, the most VC-backed IPOs since 2007. Todd Van Fleet, vice president at private equity firm First Analysis, says that the trend will likely continue in 2014 as public investors search out high-growth companies in a stronger-than-usual equity market.

“In an environment like today, in which the broader economy remains sluggish, the kind of growth offered in the technology sector is at a premium,” Van Fleet told Street Fight in an interview. “So for widely-recognized tech brands with strong growth rates attached to them, the market has and likely will receive those pretty well whether or not they are actually turning a profit.”

The markets have had a volatile relationship with the local firms in the past. Groupon and Angie’s list, which began trading within a week of each other in November 2011, both have seen their shares dive over the past two years (the former more dramatically than the latter.) Yelp, on the other hand, got plenty of support from investors last year — its share price nearly tripled in 2013 after relatively flat trading the previous year.

From content to commerce
One of the notable shifts in this year’s IPO class is the abundance of local commerce businesses. The year’s top candidates — namely, Airbnb, Uber, Square, and Grubhub — present a sharp contrast to Angie’s list and Yelp, which built large business by using content to aggregate audience, and then selling that audience to advertisers.

For investors, the shift in business models will likely require a change in the way they evaluate the businesses, says Van Fleet, who has covered Angie’s List and Yelp as an analyst. Whereas investors typically look at pure reach as the key indicator for ad-supported businesses, Fleet says that investors will likely expect a greater degree of profitability and scalability in this year’s class.

Here are a few key companies in the local space that could potentially find their way to the public markets in the near future.

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1) Grubhub
Launched: 1999, 2004
Funding: $51 million, $40 million

For Grubhub, an IPO is already in the works. The online ordering firm, which merged with competitor Seamless in August, officially threw its hat in the IPO ring late last month with the public filing of its prospectus with the SEC. The filing portrayed a business with steady growth and solid — albeit, declining — profits.

For the most part, the growth in its network has translated into a strong balance sheet. The company, which makes its money by charging restaurants a commission for each transaction that the platform processes, is profitable. Together, the now-merged firms generated $137 million in revenue in 2013, with Grubhub contributing $26.3 million from the beginning of the year until the merger closed on August 8th.

But as revenue grew over the past few years, profits shrunk. In 2011, for instance, Seamless alone brought in nearly twice the profit, which the two companies generated last year. While profits are not a top concern for technology IPOs, the lack of leverage in the operating margin of the business could indicate a long-term challenge for the company.

2) Airbnb
Launched: 2008
Funding: $326 million

One of the technology industry’s hottest startups, the accommodation rental service is on the fast track to a public offering. The company raised a massive $200 million series C round of funding toward the end of 2012, and quietly banked more than $150 million more in the summer of 2013, according to a report by the Wall Street Journal.

Last July, the company raised concerns when it put the brakes on its international expansion after two years of rapid international growth. However, the decision demonstrated an awareness of the troubles faced by Groupon in its years after going public, as it struggled to bring its fractured international operations, which largely came through haphazard acquisitions, to profitability. And while the company continues to face some regulatory challenges, the tide appears to have turned in its favor.

Beyond geographic growth however, what’s particularly interesting from an investment standpoint is the company’s ability to find incremental revenues. Last year, the company rolled out travel guides for its largest markets, which could provide a platform from which the firm could start to generate advertising and lead generation revenue from local businesses. And in January, reports surfaced that the company was testing an on-demand cleaning service for renters a la Homejoy or Exec.

3) Square
Launched: 2009
Funding: $341 million

The Square rumor mill is as manic as ever. After the payments company reportedly held discussions with banks about a potential 2014 IPO, Fox Business reported last week that the payments company has postponed its IPO indefinitely, opting instead for raising another private equity round.

The big challenge for Square in 2014 is to move beyond the very small business (VSB) market, where the company’s mobile’s card reader has dominated, and engage medium and larger-sized retailers many of whom already have a payments and point-of-sale infrastructure in place. Last month, the company took a big step in that direction, scoring a major deal with Whole Foods to process payments for the specialty foods sections of the organic grocery stores.

Competition in the payments from upstarts like Square and web-players like eBay will likely put a downward pressure on the interchange fees, which traditionally generated revenue for these companies. The question for Square will be whether it can counterbalance those declining revenues by developing new, ancillary products and services around a customer’s payment data.

4) Uber
Launched: 2009
Funding: $307 million

A 2014 IPO is likely a longshot for the logistics company, which raised a massive $258 million round last summer — but it’s undoubtedly still in the mix. During an interview with CNBC last November, Travis Kalanick, the company’s chief executive, played down the prospects that the company might IPO in the coming year, saying that has had “no interest in taking the company public anytime in the near future.” Instead, he said the company would focus on expanding geographically, bringing the taxi app to the remaining top 500 urban markets in the world.

As with Square, what’s interesting for Uber is whether it can expand beyond taxis into other, ancillary businesses. The on-demand taxi market, like payments, is increasingly competitive, and the company’s ability to iterate into other services will demonstrate the wider addressable market for the startup.

Steven Jacobs is Street Fight’s deputy editor.