Archive for the ‘Growth Equity’ Category

Groupon Raises A Billion Dollars

Wednesday, January 12th, 2011

Analysts are debating whether or not Groupon’s capital raise sets the record for the largest raise by a private company in a single venture capital round. However, until it is revealed how much of the financing was new equity capital, we cannot know for sure. Groupon did not detail how the company plans on spending the money, besides using it to “fuel global expansion, invest in technology, and provide liquidity for employees and early investors.” In the past year, Groupon has expanded from 1 to 35 countries, launched in almost 500 new markets, up from 30 markets in 2009, increased subscribers by 2500% reaching over 50 millions users, saved consumers 1.5 billion dollars, and worked with 58,000 local businesses, serving over 100,000 deals worldwide. The Company’s success stems from its ability to offer small businesses that don’t usually advertise online a way to reach local markets. Their success has attracted big investors, including Andreessen Horowitz, Battery Ventures, Greylock Partners, Maverick Capital, Silver Lake, Technology Crossover Ventures, and DST.

Groupon, the site that sells daily coupons for local businesses, has raised $950 million from investors, the largest amount raised by a start-up.

The investment follows Google’s $6 billion bid for Groupon, which fell apart last month. The list of new investors in the company include some of Silicon Valley’s hottest names, like Andreessen Horowitz and Kleiner Perkins Caufield & Byers.

Groupon, which is just over two years old and based in Chicago, has quickly catapulted into the ranks of the top tech companies. By selling coupons, like ones that offer $20 worth of books for $10 at a local bookstore, it gives small businesses a way to advertise and find new customers without spending money upfront.

“They’ve cracked the code on a formula for how to basically give access on the Internet as a marketing channel for offline merchants,” said Marc Andreessen, co-founder of Andreessen Horowitz and a veteran of Silicon Valley. “It’s a very, very big deal because there are a lot of offline merchants that have not been able to use the Internet as a marketing vehicle.”

Mr. Andreessen said Groupon can play the same advertising role for small, offline businesses, like dry cleaners and cafes, that Google’s AdWords has played for online businesses.

“That’s why Google was interested,” he said.

Some analysts have questioned whether Groupon, whose revenue has been zooming upward, can continue to grow at the same rate. Local businesses usually heavily discount their products on Groupon, so they may not want to sell coupons more than once or twice, and some businesses have complained that they lost money on Groupon and that the people who bought the coupons did not become repeat customers.

But in an interview last week, Rob Solomon, Groupon’s president, said there were so many small businesses worldwide that Groupon can continue to grow rapidly, expanding beyond businesses like restaurants and yoga studios to law firms, for instance. He also said the company planned to offer other services to small businesses, like tools to manage their relationships with customers. These include running promotions themselves.

The record-breaking amount of money that Groupon has raised gives the company the ability to expand into those new areas — and to cash out earlier investors who may be getting impatient after the company walked away from Google’s buy-out offer.

For the venture capital firms, the investment is a way to get into one of the fastest-growing companies. Kleiner Perkins, which made a name for itself last decade with investments in Google and Amazon.com, has been slow to social media, but is turning that around with recent investments in Twitter and Groupon.

Mr. Andreessen said he considered Groupon, Facebook, Skype and Zynga — all companies in which his firm has invested — to be the four most promising companies in this era of Web start-ups, comparable to Google, Yahoo, eBay and Amazon a decade ago.

Other investors include Battery Ventures, Greylock Partners, Maverick Capital, Silver Lake, Technology Crossover Ventures and DST, the Russian investment firm that previously invested in Groupon.

NetSpend IPO Skyrockets 20% – Prepaid Cards Serving the Underbanked

Wednesday, October 20th, 2010

NetSpend Skyrockets After IPO

Who would have thought that a prepaid card manufacturer could reach a $1.2 billion valuation?

IPO Details

On October 19th, NetSpend Holdings (NASDAQ: NTSP), a marketer and distributor of prepaid debit cards, was able to complete a successful $204 million initial public offering, rising over 18% in its first day of trading.  The IPO was one of the most successful of the summer.  Shares of NetSpend jumped to almost $14 on October 20th from their initial $11 IPO price.  The IPO proceeds were used by Oak Investment Partners to cut the investment firm’s stake in the company from 47% to 39%.

The company sold 18.5 million shares on the 19th, after pushing back the date of its debut due to the investigation of its customer Metabank by the U.S. Office of Thrift Supervision.   Competitor Green Dot Corp., the largest provider of prepaid debit cards has rallied 35% since July.  On the other hand, Meta Financial has fallen 60% since it was forced to shut down one of its credit card programs.

Valuation

According to Rolfe Winkler of the Wall Street Journal, investors were paying $550+ apiece for each share of NetSpend purchased through its IPO.  Netspend has an enterprise value (BEV) of about $1.2 billion, which implies a $590 valuation on its cards, whereas competitor Green Dot is valued at $630+ per card.   One reason for the high valuation may lie in the fact that pre-IPO investors cannot sell their stakes until April 2011.

Risks

The risk in investing in NetSpend lies in the fact that the company’s processing fees per card provide only $11 in revenue per month.  Marketing and distribution expenses are fairly high as well, and customers also only use cards for 1 year before cancelling.  Churn is a significant issue for the company.  This is why the company’s EBIT or operating margin is only about 15%.  Due to the emergence to competitors and market saturation, NetSpend’s growth has decelerated from 50% in 2006 to 20% in 2009.

Business Model

Since 2005, there have been a number of prepaid card providers that have emerged and have been targeting low income consumers underserved by banks.  NetSpend has about two million active cards and is the second largest player in the United States with 40% market share.  It attracts customers by promising no overdraft fees and minimum balances.  As more banks turn away from low income customers, there may be potential for continued growth in this market.  The company claims that $7.6 billion in transactions were made using its cards in 2009.

NetSpend cards are sold at 39,000 retail store locations and are used by 800 corporate employers who use NetSpend cards to pay employees without bank accounts.  The cards are also FDIC-insured and are Visa & Mastercard branded.

Market

Approximately 25% of households in the United States are underbanked, and are searching for alternatives to traditional bank accounts.  The industry has growth at a CAGR of 49% from 2005 to 2009 and has reached a market size of approximately $300 million.  The business is also scalable, with industry average EBITDA margins at 25%.