Can love be hacked into a successful public company?
Can love be engineered into a successful public company?
That’s the question in the air as online dating startup Zoosk prepares to go public. After six years of acquiring users and monetizing them, founders Shayan Zadeh and Alex Mehr decided the time was right for a public offering. They’re hoping to raise $100 million through the IPO, according to the S-1 filed earlier this week.
Although the company had a robust 2013, there’s plenty for potential investors to be concerned about before eating up Zoosk shares. For one thing, the company’s marketing costs to acquire users are through the roof, eating up 72 percent percent of their total revenue in 2013. For another, there are very few online dating companies that have successfully grown into big public companies, with the exception being IAC — the owner of Match.com, OK Cupid, and part of Tinder. IAC doesn't really count though because it’s a major media conglomerate and not just an online dating entity. It also owns websites like Expedia and About.com.
The other biggest players in online dating have fared less well. eHarmony is still a private company and hasn't taken an exit despite sitting on $113 million in venture since 2000 (Sequoia and Technology Crossover Ventures are investors). Spark Networks' — owner of JDate and Christian Mingle — stock has largely stagnated since going public in 2006, with shares up less than ten percent eight years later.
But perhaps Zoosk will buck the trend. It has never fit into the typical online dating company trajectory. With two engineering founders, it originally started as a thesis that had nothing to do with love at all. It started as technology to optimize ships. Not relation-ships. Sea-ships. Zoosk's founders, Shayan Zadeh and Alex Mehr, discussed it with PandoDaily in an interview months ago, long before the S-1 filing.
“For my PhD thesis, I designed a language for real time project management for complex engineering systems,” Zadeh says. My eyes glaze over and he tries to explain via an example. “If you want to maximize for the speed of the ship but take into account the fuel, how do you optimize this kind of complex problem?” Really thrilling stuff. If you’re flashing back to your traumatic high school algebra class, you’re not alone.
Unfortunately, the Iranian duo had visa issues and couldn’t start their own company without leaving the United States. They shelved their research and landed more traditional jobs — with the coveted accompanying visas — at NASA and Microsoft. There they toiled away for five years, when the time seemed right to start a company.
They cycled through several ideas that eventually morphed into a “Hot or Not” esque application for rating people’s Facebook photos. That led the duo to build online matchmaking software through the social networking site.
This time, they decided to apply what they had learned about ship optimization to dating.
“Our original company was optimizing for competing objectives and the same applies here,” Zadeh says. “Looking for two people with dissimilar tastes and finding the pairs who have attraction, maximizing the possibility of success. The same principles apply.”
Mehr chimed in, “It’s so much better to optimize for love than for ships."
“The ships would never have sent a letter thanking us and inviting us to their wedding,” Zadeh agrees.
Although the company eventually moved off the ill-fated Facebook platform and built their own system, that premise — of engineering love — would become Zoosk’s value add in the crowded space of online dating. Zadeh and Mehr like to say that Match, with its branding and advertising spend, is based on marketing, eHarmony, with its questionnaires, is based on psychology, and Zoosk, with its algorithms, is based on engineering. I suppose that means OkCupid is based on broke-assness, for people who can’t pay for the rest.
The Zoosk technology gathers information about what a user is interested in not through questionnaires, but through their behavior. As they click through profiles, lingering and spending more time on some users then others, sending, responding to, and ignoring messages, all their actions are feeding into mysterious allegedly all-powerful algorithms that determine who, exactly, a user might like. Said algorithms then surface users who have a higher probability of liking each other.
Does it work? Who knows. The founders, of course, can trot out couple after couple who have met and married through the site, but their competitors could do the same. Zoosk’s user numbers have skyrocketed in the last year, growing 44 percent from 18 million registered users to 26 million, but that’s just as likely the result of their huge marketing budget as it is their match making prowess.
Still, Zoosk's value add was enough to catch the eye of the "Love VC" -- Canaan's Deepak Kamra. Kamra got the nickname of Love VC after back-to-back dating site investments, his first being Match.com back in 1995. "There are hundreds of dating sites and nothing really struck us as being able to challenge Match.com until Zoosk," Kamra told PandoDaily months prior to the S-1 filing.
He liked that the company targeted a younger audience through Facebook, leveraging the social wave, and continued to grow through mobile. After Kamra heard about Zoosk through a friend, Canaan led the startup's Series B in 2008, participating in every subsequent round since. "The guys running this are rocket scientists," Kamra says. "They're using the data to match people better, provide more interactions, and to get people to convert to being paying users. I think [big data] is the next wave dating sites will ride."
Engineered love is a compelling narrative for a consumer company, but a fun story does not a successful public company make. Zoosk has a lot of challenges ahead of it, particularly if it’s expected to grow into a big entity following its IPO. Dating sites are fraught with perils that few such companies have successfully avoided.
In Zoosk’s S-1 filing are hints of the business mountains it has not yet scaled. In 2013, they spent $128.7 million in advertising to get users, a full 72 percent of their $178.2 million in revenue. That was a little better than 2012, but not by much. In 2012 they spent $92.7 million on marketing to get users, 85 percent of their $109.1 million in revenue.
85 percent and 72 percent of revenue going just to user acquisition costs. That doesn't include employee paychecks or server space for processing all that dating data or any other infrastructure spending. It doesn't
The amount money Zoosk is still shelling out to grow is worrying, particularly given that dating site users — by their very nature — are not in it for the long term. Zoosk makes itself obsolete in a user’s life the moment it successful does what it claims to do: Matchmake them. Why go on a dating site if you’ve landed a lover?
The founders have intentions to make Zoosk a bigger platform than just dating. They’ve rolled out features like relationship advice sections, reminders for anniversaries, and coupons for date activities. When we spoke in September, Zadeh said, “Think Siri or Google Now for their online dating experience. It should always be with you. ‘Where should I take them on a second date?’ ‘What should I ask them?’”
It’s a good theory for growing the company. But as IPO day approaches, it’s certainly not the bulk of Zoosk’s business and it’s not what it’s known for. It's known for engineering love, and sending algorithmically matched lovers merrily on their way towards marriage.
[Illustration by Hallie Bateman for Pandodaily]