

GrubHub Raises $192M Pricing IPO Above Marketed Range - yueq
http://www.bloomberg.com/news/2014-04-03/grubhub-raises-192-million-pricing-ipo-above-marketed-range.html

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mbesto
> _At the IPO price, it will debut at a valuation of about $2 billion, or
> almost 15 times last year’s revenue._

Can someone with a classic financial finance background answer this: why do
analysts take revenue * multipliers for valuations? Aren't most valuations
based on EBITDA * multipliers? Is this just an odd side effect of the numerous
tech companies without EBITDA?

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drone
I don't have a classical finance background, but I have started and sold
companies that have been valued on revenue and on EBITDA.

Here's my simplified take on it, YMMV:

For companies with high variable costs, you value on EBITDA. For companies
with low variable costs, you value on revenue.

Consider a widget maker, each widget he sells for $1.00 costs him $0.65 in
materials to make, his margins are 35% per sale. Therefore, it's much better
to value his company based on EBITDA, or how effective he is after all of
those variable costs that can't be whisked away.

Now, consider a SaaS app maker. She has a variable cost of about $0.03 for
every dollar she sells in services, or 97% margin per sale. You'd value based
on her revenue, as profits are not constrained by variable costs, but by fixed
costs which can be reduced if needed.

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mbesto
Cool, thanks, that was really insightful. One counterpoint about this
statement:

> _You 'd value based on her revenue, as profits are not constrained by
> variable costs, but by fixed costs which can be reduced if needed._

If we assume that acqui-hires are indeed a model in today's M&A, then doesn't
this negate the idea that these fixed costs are fungible (i.e. people) and
therefore cost reduction is not possible? Also, I keep hearing this notion
that cost of sale goes down in SaaS. This might be true in early to mid stage
SaaS, but at mass scale, I haven't seen this to be true.

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drone
Acqui-hires have little to do with business fundamentals, and are outside of
the scope of this calculation. They're simply measured as "Enough to attract
the talent away from their existing venture." Typically in these deals, the
core business is shut down and the variable/fixed costs aren't given any
relevance.

I'm not sure about there being a hard and fast rule of cost-of-sale in SaaS -
I would expect that's largely based on the target customer, enterprise targets
are usually going to have a higher customer acquisition cost than consumer
targets. Or, by cost of sale, do you mean variable cost? If variable costs
approached those of manufacturing in software companies, you'd have to take a
hard look at the management and consider replacing them quickly. =)

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mbesto
Well cost of sale in SaaS can be fixed (salary) and variable (compensation +
marketing). I'm referring more to companies that have an "Enterprise" tier, or
rather at least require Account Executives that are a must to drive sales with
higher profile clients. Any company that does make serious money (that would
be worth valuing) would IMHO warrant this type of structure (Basecamp and a
few others being the rare exceptions to this rule).

> _If variable costs approached those of manufacturing in software companies,
> you 'd have to take a hard look at the management and consider replacing
> them quickly. =)_

Having looked at various large SaaS companies (SF, Workday, etc) the variable
costs _appear_ to be quite high.

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drone
> _Having looked at various large SaaS companies (SF, Workday, etc) the
> variable costs appear to be quite high._

Yeah, I've seen some of that too, but I still think that outside of certain
specialized markets and products, that the variable costs shouldn't approach
60%+ on the LTV of a sale. I would also tend to calculate commissions and one-
time marketing expenses not only against the first month or payment period,
but on the total LTV of the sale.

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Edmond
Whatever else, the GrubHub guys are impressive entrepreneurs...

Back in about 2006 when they were just starting out, I had a competing site
and remember how sh*tty their site was (even had .jsp in the homepage file
extension!); from that to becoming a $2 billion company (granted with Seamless
merger)...all hats off to them...

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codemonkeymike
I looked into GrubHub to do online ordering for my mothers deli, after seeing
the roughly 25% fee I can safely say that many small business will look
elsewhere... eventually.

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rory096
Hey Mike! Not to blatantly self-promote on HN, but my startup Foodio
([http://getfoodio.com](http://getfoodio.com)) is based around the ideas that
GrubHub's fees are insane; restaurants can't wait for their money for a week;
and online ordering should promote the restaurant's brand, not a middleman. We
charge $295 to build custom online & mobile ordering, and then it's just 5% of
sales.

We're a small startup out of Charlottesville, VA, but we'd love to help out
your mother if we can! Hit me up at rory at getfoodio dot com if you're
interested.

~~~
mason55
Your choice really depends on your brand. I live in NYC and most of the time
that I order food online I just go to Seamless and decide what looks good.
There's only been one restaurant that I order from off their own site and
that's a pizza place that I love that isn't on Seamless.

If you're a random sushi or Chinese place it's worth the 25% to be in the
Seamless directory because otherwise no one will ever order from you. Katz's
Deli could probably get away with ordering on their own site because their
brand is good enough.

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codemonkeymike
They may be on Seamless or Grubhub (both the same company) so that their
business may be noticed in the crowded NYC delivery market, but when they can
offer a +25% reduction in delivery price by having their own site you will see
people using GrubHub as a directory not an ordering platform. What I am
getting at is that it is not a sustainable business model, especially because
chain restaurants which make up most of the growth in restaurants can afford
to make and market their own ordering platform. Also for a small business
outside of a "hip" city there is little traction for a service which creates
bad faith with customers by jacking up prices, which I've seen can make some
people really angry.

~~~
mason55
It's against ToS to offer lower prices outside of Seamless than you offer on
Seamless. That's why no one does it.

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refrigerator
Is it just coincidence that Just Eat (GrubHub for the UK) IPO'd today too?

