Special to 24/7 Wall St. From PrivCo

All too often the top 5% of high-growth companies are fawned over in the media, while the other 95% receive no attention at all. But what about those companies with big dreams of gaining membership to the unicorn club who get their horns clipped too early – they seem to be shunned and ignored until extinction is imminent. There are companies that are ignored after their initial growth spurt, and the best example we could think of was Gilt Groupe.

There were nine investors in Gilt Groupe’s Series E round in May of 2011. In 2011, those nine investors thought they were investing in the next startup to revolutionize the retailing market. Instead of getting the next Amazon for high fashion, they got a SpaceX test rocket. Lots of excitement, a bit of fizzle, and just when everything looked like it was about to take off, a catastrophic explosion occurred. Gilt Groupe was sold at a massive discount almost overnight, embracing an all-too-literal realization of what its business actual does.

But what if those investors could have seen the warning signs? Valuing a company is hard enough as is, and the art of valuation becomes increasingly more difficult in a new industry, even if the science (user metrics, basket sizes, growing market share) seems sound.

Giving our clients various metrics to help them make a more scientific decision is what we do at PrivCo. No financial model is perfect, no valuation tool is bulletproof, no forward-looking projection is gospel, but each piece of information helps. Taking the past as precedent, we utilized PrivCo’s private company financial database to present a number of factors about similar companies that PrivCo has access to. This would include everything from revenue, to latest funding rounds, market overviews, and the competition. The companies we’ve presented here have all made it past their initial growth curve. They were growing ­— now they’re not. No tombstone has been written for any of the companies presented below, but the available data may presage concern. None of these companies is predestined to see the same fate as Gilt Groupe, but, in a number of cases, the comparison with Gilt Groupe’s growth and decline progression should serve as a warning for investors.

Dropbox

Latest Funding Round: January 2014
Funding to Date: $1.1 bln
2015 Revenue: $400MM
Dropbox has undergone the unfortunate but all too often repeated path in Silicon Valley of being crowded out in the marketplace it helped create. While it’s not at Myspace-to-Facebook proportions, Dropbox was revolutionary for a time but is now dealing with the race to the bottom for consumer cloud storage. The company recognized this early on and has made a pivot to enhance its enterprise and business services, though it has found this market already populated with cloud and tech behemoths like Amazon, Google, and new entrant Box.

The company last raised equity in January 2014 (a $500MM debt round came four months later). Its valuation took a hit last March (actual markdown occurred in October ’15) when Fidelity marked down its shares in the company by 20%. For Dropbox to fully recover to its $10bln valuation, it will have to demonstrate that its enterprise-focused business is not only viable but growing. It has been two and a half years since it last received money and with revenues remaining flat, raising a down round at this stage could be the beginning of a downward spiral for the company. Dropbox is more likely to IPO than raise at a lower valuation, and it would be prudent to do so on the heels of Nutanix’ and Twilio’s debuts this year.

LivingSocial
Latest Funding Round: December 2011
Funding to Date: $948.2MM
2015 Revenue: $125MM

LivingSocial has seen its revenue fall dramatically over the past few years. In March of this year, the company cut nearly half of its staff. These are both tell-tale signs of a company in decline, and it will be interesting to see how the leaner operation will impact its market strategy going forward. While LivingSocial didn’t get crowded out by competitors, its acquisitions, offerings, and expansion all played into the corporate paralysis it finds itself in today. The company is testing out new products such as “Restaurant Plus” while scaling back its daily deals offering.

As the company scales down, its revenues have declined; this, however, might not be a bad thing. If LivingSocial can sustain its revenues above $100MM, efficiently utilize what remains of its nearly $1bln in funding, and finally provide some signs of growth for its new products, it could raise funds again. Growth and user metrics might take a few years to reverse the trend and grow again, and it’s hard to say whether LivingSocial’s balance sheet has the flexibility to withstand that without an additional capital raise, given that its last raise was in 2011. The next year for the company will be pivotal as its new products and leaner structure will provide a make-or-break scenario for the company and its investors.

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Shazam

Latest Funding Round: January 2015
Funding to Date: $141.1MM
2015 Revenue: £35.1MM
Shazam raised its valuation to over $1bln in January of 2015, with a $30MM raise. The company finished the year with a decline in revenue of just over 2%. These numbers alone could be a cause for concern, but with start-ups, even a revenue slowdown can be forgiven if there is a user growth story to replace it. The problem with Shazam is that its user growth trajectory has entered a mature stage, going from 80 million to 120 million monthly average users in roughly two years. It has done a stellar job of acquiring dedicated and loyal users, currently boasting 500 million downloads and 120 million monthly active users (MAU). For user growth comparisons, one of Shazam’s integration partners, Spotify, has over 100 million MAU and a valuation over $8bln. Spotify grew further and faster than Shazam and the potential upside for Spotify from a user perspective seems to be endless. For Shazam to continue growing its users so that it can eventually grow its revenue seems daunting, given that it has been around since 1999. After a nearly 16 year history, users are familiar with Shazam and the opportunity to grow its user base will have to come from an unforeseen avenue.

Financially, the company is doing much more to build up its monetization efforts and integrate with music streaming services like Spotify. There are reports claiming Shazam is responsible for 5% of music downloads globally, but it seems misplaced to put one’s hopes and dreams on the prospect of monetizing music purchases in a market rapidly shifting toward services like Spotify and Soundcloud Go. The company has raised $141MM to date, with its last raise nearly two years ago. If it cannot monetize and grow revenues, or at least present a viable plan to grow users, investors should look elsewhere if they really want a piece of the ever-changing digital music market.

Kabam

Latest Funding Round: July 2014
Funding to Date: $357.5MM
2015 Revenue: $400MM
Kabam is a company that was on a stellar growth path from 2011-2013. The company produces free and in-app purchase mobile games for iOS and Android, with popular titles like Hobbit Kingdoms of Middle Earth and a number of Marvel- and Star Wars-themed games. Kabam is unique in that it continuously partners with movie studios and builds games around popular franchises, timing its games’ debuts with movie releases like Fast & the Furious, Star Wars, and a number of Marvel titles.

Following the trend of the mobile gaming market, the company saw a sharp uptick in revenue in 2012, followed by a doubling of revenues the year after. In 2014, the company only grew revenue by 11% and in its latest year, the company has kept revenues about flat at $400MM. The mobile gaming market is filled with titans like Zynga, Gamevil and Tencent, making it harder than ever for any one gaming company, especially a newer entrant with fewer resources, to pull away as the leader in any particular segment. Some industry analysts predict that an M&A consolidation is long overdue in the oversaturated mobile gaming market. That route might be the only path for a company like Kabam, which has been unable to grow its revenues over the past two years.

Zenefits

Latest Funding Round: May 2015
Funding to Date: $583.7MM
2015 Revenue: $67.5MM
Zenefits makes the list not because it is not growing, it is. It’s just that Zenefits is not growing at the pace it said it would, and that is worrisome. Zenefits is an HR Management Software that integrates payroll and benefit plans for companies under 1,000 employees. Pushed by former CEO Parker Conrad, the company projected highly inflated annual recurring revenue of $100MM by year-end 2015. But Zenefits didn’t come close to hitting these projections, closing the year at $60MM. By February of this year, Conrad was ousted and replaced by the company’s COO, David Sacks (Sacks was also the original COO of PayPal). The company has employed a number of aggressive sales tactics (there are reports of its making all sales employees come in at 6am for leads to be given out) and has come under fire for selling insurance in states in which it isn’t licensed to do so.

Zenefits is in the middle of its turnaround, and having any member of the PayPal mafia to right the ship is a relatively sound bet for investors. The threats for Zenefits are that the valuation has been so high ($4.5bln at its last raise in May of 2015, then aggressively slashed to below $2bln in June of this year) and that it still has to live up to the inflated expectations of the Conrad era.

Zenefits has the benefit of not dealing with any direct competitors today, but with a three-year-old company, that can change overnight. As part of the turnaround, Sacks and his investors came to a new agreement in which shares and ownership would be revalued for its series A, B, and C round investors. The restructuring helped assuage some of its investors’ disappointment, though getting the existing board members to agree on fund raising near a $2bln valuation when it used to be $4.5bln will be no easy task going forward.

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Special to 24/7 Wall St. From PrivCo

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