In the wake of Google’s dalliance with Yelp, another online local advertising company, ReachLocal, filed for an IPO today to raise $100 million. In a guest post yesterday, Paul Kedrosky suggested that startups like Yelp and others may opt to try their luck with IPOs instead of trying to be acquired. It looks like ReachLocal is ready to get the IPO ball rolling again.
ReachLocal provides a one-stop online advertising shop for about 15,000 small local businesses. A peek at its IPO filing reveals its revenues, profits, and financial condition (see tables below). But the one figure which really stands out is how many sales people it is hiring. The company employs 525 sales people who hock local ads around the world, up from 28 in 2006. Those sales people generated $143 million in revenues the first three quarters of 2009, up 38 percent from the same period in 2008.
The company is obviously hiring like crazy to grab as much market share as possible. While it lists net income of $2.2 million for the first three quarters of the year, that is only because of an accounting gain on the acquisition of an Australian subsidiary. ReachLocal isn’t even producing operating profits, showing a $4.4 million operating loss the first nine months of the year. Although at least it is cashflow positive, producing $12 million in net cash over that period.
Local businesses tend to need a lot of handholding when it comes to advertising online. ReachLocal has a “feet on the street” model, with sales people going door to door to gain business. It adds a personal touch, but that doesn’t seem like it would scale too well. Yelp, in contrast, has about 300 employees total, with 200 of those in sales. And TC50 startup Yext, which sells pay-per-call ads to local businesses, already has 50 sales folks and plans to hire 100 more next year. But Yelp and Yext don’t go knocking door-to-door, so theoretically they should be able to sell more ads with fewer sales people. Nevertheless, there is obviously a battle brewing over who will dominate the online local advertising market and the size of the sales armies will be a key determinant of who ends up winning.
It is a safe bet that ReachLocal will use a big chunk of the $100 million in proceeds it hopes to raise at the IPO on hiring yet more sales people. ReachLocal previously raised about $68 million in venture capital since it was founded in 2004. Investors include VantagePoint Ventures, Rho Capital, and Opportunities Partners.
(Click on the tables below to view larger images).