Agile VC:
My idle thoughts on tech startups
“Cliff Notes” S-1s (Part I): Quinstreet
February 7, 2010 · 3 min.
Venturesome off to a slow start here in 2010, but I’m working on a series of posts that will hopefully be interesting / useful to readers of this blog.
Since I previously described 2010 as a potentially strong year for IPOs, I thought I’d follow-up with some analysis of recent VC-backed internet startups which are in the process of going public. In the last several months there have been a number of S-1 filings including QuinStreet, Ancestry.com, ReachLocal, and Everyday Health (fka Waterfront Media).
S-1’s are chock full of interesting information, but it takes a long time to comb through them and you have to know where to look to find the data. So I thought I’d do a series of “cliff notes” versions of these filings for reasonably quick and easy reading. In many cases I know folks who are involved with these companies as execs or investors, but I will be relying solely on public info from the S-1’s and not anything communicated privately. Also my descriptions of what these companies do and how they do it aren’t precisely how they might position themselves, but simply a rough distillation of their business for the interested observer. First up will be Quinstreet…
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Filing Date: S-1 filed Nov 19, 2009 (subsequently updated)
Founding Date: 1999
Headquarters: Silicon Valley (Foster City, CA)
What They Do: Online direct marketing for consumer services companies, primarily in for-profit education and financial services
How They Do It: Operate websites (or partner w/ existing sites) w/ content relevant to their clients’ services, e.g. WorldWideLearn.com for education, CardRatings.com and Insure.com for fin’l svcs
How They Make Money: Essentially arbitrage paid search advertising and SEO to their network of sites and convert some portion of these visitors to qualified leads (name, email, address, etc) or clicks, which their clients then pay higher amounts for
Financial Snapshot:
- 2009 Revenue: $293 million (1)
- Revenue Growth: 36% YoY (2009 FY), 15% YoY (2008 FY)
- 2009 Gross Profit: $88 million (1)
- Gross Margin: 30% –> i.e. for every $1 of revenue, QuinStreet spends $0.70 on paid search, rev share (traffic acquisition costs – TAC) to partner sites, and other direct costs
- 2009 Net Income: $21 million (1)
Notable Aspects of Their Business:
- High Revenue Concentration: QuinStreet’s depended on the education vertical for most of its revenue, though it’s been diversifying in recent years primarily into financial services. Education accounted for 78% of revenue in FY 2007, 74% in FY 2008, and 58% in FY 2009. For-profit education firm DeVry is their biggest customer, singlehandedly accounting for 22% of revenue in FY 2007, 23% in FY 2008, and 19% in FY 2009. QuinStreet appears to be concerned about “additional challenge with regard to DeVry” which has “recently retained an advertising agency” and has reduced it’s business with QuinStreet.
- Aquisitions of Partner Sites: QuinStreet has been highly acquisitive, spending nearly $190M in recent years to buy sites. This strategy gives them greater control over the content network and has enabled the company to both strengthen existing verticals and expand into new ones. Interestingly QuinStreet has used cash (both from operations and a credit facility) to complete most of these deals, as opposed to equity.
Pre-IPO Funding History: (2)
Series A Preferred
- $9.1M round, closed July 1999
- Major investors were Split Rock Partners [$3.6M] (3), Sutter Hill Ventures [$2.8M], and Rosewood Capital [$1.0M]
- Post-money valuation may be as high as $36M though probably lower than that (4)
- 8% dividend, 1x liquidation preference (5)
Series B Preferred
- $29M round, closed in Dec 2000
- Major new investors were J&W Seligman [$9.5M] (6) and Catterton Partners [$6.0M]
- Post-money valuation may be as high as $88M though probably lower than that (4)
- 8% dividend, 1.75x liquidation preference (5)
Series C Preferred
- There was a small ($500K) Series C round which appears to be related to a company Quinstreet acquired in the UK
Notes:
(1) 2009 calendar year results (1/1/09 – 12/31/09), QuinStreet reports on fiscal year ending June 30
(2) Gleaned from both S-1 itself and exhibits (preferred stock investor rights agrmt, certificate of incorporation, etc)
(3) Split Rock was formerly St. Paul Venture Capital, the VC arm of a large insurance company
(4) S-1’s typically provide info about number of shares, share price, and date of issuance for each round of preferred stock financing but not how many common shares were outstanding at the time. By 2007 there were approximately 15M common shares fully-diluted outstanding, it’s likely there were fewer common shares at the time of the Ser A (1999) or Ser B (2000).
(5) The preferred stock classes will all be converted to common at the IPO, so liquidation preference and other rights will go away
(6) J&W Seligman exited the private equity business and their Quinstreet shares were acquired by GGV Capital and W Capital in the secondary market
Disclaimer:
This post should in no way be construed as a recommendation to purchase QuinStreet stock or any other security, these are simply my own personal observations