Why Gilt Should Spin Off Its Growth Businesses
Yes, flash sale purveyor Gilt Groupe should sell stakes in its side businesses to outside investors.
This is not just a crazy idea I just cooked up. The company regularly fields approaches from VCs and investors to this effect, and according to several people involved, Gilt is seriously entertaining them.
The reason? To incentivize employees of those faster growing businesses with equity in their individual "companies."
Gilt Groupe's flash sale product--a $500 million business--has reached a plateau. There's a shifting perception that Gilt doesn't offer exclusive luxury deals anymore and that as the recession fades away, designer brands are unwilling to discount their goods via flash sales. Likewise, there's more competition for inventory form copycat sites and Gilt's secret, insider-y appeal has faded. The company has recognized the need to shift away from the flash sale model, a move that it paints as "an opportunity to sell more things to the same customer."
The company's growth now must come from new segments like hotels and restaurants, which fortunately have unlimited inventory. Those side businesses--Jetsetter, Gilt Home, Gilt City and Gilt Taste are in fact growing. According to a report in The Business of Fashion, end-of-season apparel made up 95% of the company's revenue two years ago. Now it's less than 35%.
Then there's Jetsetter, which has around $100 million in revenue. Gilt Home is around $100 million as well. The younger Gilt City is between $50 million and $100 million (on the lower end of that range I suspect) and Gilt Taste is between $10 million and $20 million.
The problem is Jetsetter and Gilt Taste, in particular, are different animals. The sites employ former editors like Ruth Reichl, operating as a curated food or travel magazine that happens to be selling things.
Jetsetter and peers operate as startups within the larger Gilt organization, so luring in talent with Gilt Groupe equity doesn't directly incentivize them. The company's executives joke internally that Harvard Business School will make a case study out of their struggles to incentivize employees of smaller startups-within-a-startup.
Gilt's executives have looked at any number of options, including carving them out so they could take on outside VC money while retaining a stake. It's not unlike what IAC seeks to do with Vimeo. That way, Gilt could still benefit from the upside as stakeholders.
The problem is that it's a complicated deal. Gilt doesn't want to give up control of these businesses, and but most VCs don't want to invest in something they have to share with an arguably stagnating corporate parent.
Moreover, accounting rules dictate that if Gilt owns less than half of the company, it cannot include that revenue in its overall revenue on the top line but must still mark the costs and any loss on the bottom line. That doesn't suit a company that's gearing up to file an S-1 this year.
And Gilt isn't the only company struggling with this incentive issue. Last week I wrote about the same problem happening within ad holding companies and acquisition-happy media companies. It's a problem that is becoming so widespread that SecondMarket has announced a product that creates individual private stock exchanges for startups within larger companies.
A better solution might be not to sell or start companies-within-companies to begin with.