Under-the-radar Wayfair files for one of the largest ecommerce IPOs of the Web 2.0 era
Ask the average consumer to name the biggest home goods and furniture etailers, and Wayfair is unlikely to come up. But today the Boston-based giant filed to raise $350 million in a forthcoming IPO, revealing that it generated $915.8 million in 2013 revenue, up 52 percent from the $601 million it brought in in 2012. The company delivered 3.3 million orders to 2.1 million customers during the year.
So how has Wayfair remained so under the radar? Particularly considering how long Boston has been jonesing for a big consumer Internet hit?
First, the company generates only a fraction of its revenue under its namesake domain, Wayfair.com. It also operates Cookware.com, Luggage.com, EveryGrandfatherClock.com, AllModern.com, JossandMain.com, and other branded destinations, and owns furniture studio DwellStudio. Across these various sites, the company manages more than 7,000 individual vendors and uses drop-shipping to fulfil orders directly to the consumer. The company doesn’t just sell domestically either, reaching large numbers of customers in Canada, Germany and the UK as well.
Secondly, Wayfair was known as CSN Stores for more than half its life, rebranding in 2011 after nine years. And finally, Wayfair spent more than half its life as a bootstrapped venture, meaning it wasn’t garnering the kinds of fawning headlines that come with massive investment rounds and often portend rapid growth.
Wayfair did eventually go to the growth capital well, raising a total of $358 million across three rounds of funding, the most recent being a $157 million round in May of this year from T. Rowe Price. Anyone who’s been watching the late stage private markets lately knows that the arrival of such typical public market investors often signals a rapidly approaching IPO. The company also brought in public company management experience in former Warner Music CFO Michael Fleisher, providing another tell.
Wayfair’s other investors include Great Hill Partners (11.43%), HarbourVest Partners (7.03%), Battery Ventures (6.15%) and Spark Capital (4.4%). Interestingly, T. Rowe Price is not listed as a beneficial owner of 5 percent or more of the company. If accurate, that would mean that the company’s most recent private round carried a valuation of at least $3.14 billion. In another rarity within the ecommerce sector, Wayfair co-founders, CEO Niraj Shah and CTO Steve Conine have each been able to retain 28.9 percent of the company.
The preliminary S-1 does not reveal the price at which Wayfair will sell shares, and the target of $350 million could change as well. But we do learn that the company has structured this offering with two classes of stock, with IPO and public market investors buying Class A stock and insiders (founders, employees, and early investors) retaining Class B stock that carries 10 times the voting power. This would be a more significant distinction were it not for the fact that Shah and Conine own a combined 57.8 percent of the company, prior to this offering.
Wayfair has been an undercover darling among ecommerce industry insiders in recent years, but the company’s S-1 reveals that it still has some work to do if it wants to appeal to public market investors long-term. Despite its massive revenue, Wayfair lost $15.5 million in 2013 and followed that with another $51 million in losses during the first half of 2014 on 49 percent revenue growth to $574 million during the period. The company warns investors in its filing that it expects “operating losses and negative cash flow to increase significantly in the near-term as we increase investment in our business.”
Very few companies get the leeway to continue losing long-term, and those that do must deliver rapid growth and a compelling narrative around how those near term-losses will pay dividends the down the road. In the ecommerce sector in particular, Amazon is the rare company that has been able to convince investors to tolerate this kind of financial picture, and even the Seattle giant has seen its share of investor anger over the years. Few CEOs have the fortitude to laugh in the face of it like Jeff Bezos does.
Wayfair took advantage of the confidential filing provisions of the recently passed JOBS Act, which means that the company won’t be able to begin its roadshow until the week of September 8 – though it can wait longer should it choose, a likely outcome. This also means that the terms of Wayfair’s eventual IPO could differ from those in this preliminary filing as the company gathers feedback from the market as to how its story is being received.
Regardless of what happens between now and then, Wayfair is likely to be one of the biggest ecommerce exits this decade and is definitely a Web 2.0 standout. It’s on a short list of online retailers that have crossed the $1 billion mark, including only Amazon, eBay, Zappos (acquired by Amazon), and Zulily (market cap $4.6 billion). Waiting in the wings are Net-a-porter, Fanatics, JustFab, Gilt, One Kings Lane, and a handful of others who are hoping to achieve a similar outcome. And, of course, China’s Alibaba is preparing to blow all of these companies out of the water with its late-2014 mega-IPO. It’s worth noting that almost none of those are based in Silicon Valley. Ecommerce is the one category of the Internet where the rest of the US and the world compete handily.
Look beyond this relatively short list of success stories, however, and there are countless companies that have failed to achieve scale. As we’ve chronicled at Pando, Ecommerce is one of the most unforgiving verticals in that it demands excellence in branding, customer acquisition, customer support, supply chain management, and numerous other diciplines. (For a more in-depth look at what it takes to become an ecommerce unicorn, I recommend this excellent piece by Upfront Ventures’ Greg Bettinelli on his #LongLA blog.)
Wayfair is no spring chicken. The company has grown meticulously over the last 12 year, employing 1,558 full-time equivalent employees as of the end of 2013. Moreover, its founders have proven that they understand their market and how to build real value. Wayfair may not be throwing off piles of cash today, but that is only because its investing in the kind of marketing initiatives that allow for better than 50 percent yearly growth. It seems reasonable that the management could change that fact if it wanted to, but for the time being, growth appears to be more attractive than profitability. We should have a clear picture soon of how just how impressed Wall Street is with this narrative.
[Image via Spark Capital]