Photo: Business Insider
The leading private-sale company in the U.S., Gilt Groupe, is raising $80-$100 million from private-market investors, industry sources say.The deal will likely value Gilt at around $1 billion.
The U.S. leader in a sector that saw a big exit last week–HauteLook’s $270 million sale to Nordstrom–Gilt Groupe was founded by Kevin Ryan, Dwight Merriman, Alexis Maybank, Alexandra Wilkis Wilson, and others in 2007.
The New York-based company has raised more than $80 million of capital in several rounds from Matrix, General Atlantic, and others. Gilt booked about $270 million in revenue in the fiscal year ending June 2010, and its revenue should approach $500 million this fiscal year.
The valuation for this latest financing will be about 2X revenue, which is similar to the price Nordstrom paid for HauteLook last week (an industry source says HauteLook’s revenue was $115 million in 2010 and will be about $150-$160 million this year).
The online “private sale” industry appeared out of nowhere about a decade ago when French entrepreneur Jacques-Antoine Granjon founded a company called Vente-Privee in France. Vente-Privee is still the world leader, with more than $1 billion in sales last year, and Granjon’s goal is to become the “Amazon of the event sale,” with $15 billion of revenue a year.Following on Vente-Privee’s success–and reversing the normal trend of US online business-models being copied abroad–several US private-sale businesses have been founded in the US in the past five years, including Gilt Groupe, Rue La La, One Kings Lane, HauteLook, Zulily, and ideeli.
All of these companies have grown extraordinarily quickly, rattling traditional retailers and the online ecommerce giants in the process. Two of the companies–Rue La La and HauteLook–have now been sold (GSI Commerce bought Rue La La for $350 million last year). One Kings Lane, which focuses on home-furnishings, just raised $23 million from Kleiner Perkins and Greylock. Zulily, founded by former Blue Nile CEO Mark Vadon, focuses on the kids category and already has more than a million customers.
As is to be expected after such torrid growth, the flash-sale industry is also now experiencing growing pains: Growth rates are slowing, managing inventory and fulfillment is challenging, and none of the companies are consistently profitable yet. GSI Commerce just missed earnings and took a big write-off, which it blamed on Rue La La. Between fulfillment, logistics, and merchandising (knowing what inventory to buy and when), the business is also extraordinarily complicated, especially at scale, and it requires more capital to build and operate than pure online businesses.
Gilt Groupe, for example, is rumoured to have been stuck with a hefty chunk of unsold inventory last year, a factor that one industry source believes contributed to its decision to raise more capital now.
A source at Gilt says the inventory story is overblown: Gilt was indeed left with more inventory than it wanted after last summer, the source says, but compared to a traditional retailer, Gilt’s level of inventory is still very low. The company has only $45 million of inventory now, equivalent to about 10% of this year’s sales, and it turns its inventory an impressive 8-10 times per year. (This compares to 2X-3X for some traditional retailers). As Gilt becomes more efficient, our source says, the company believes it can increase its inventory turns to 10X-12X per year.
Importantly, these growing pains are nothing new in the online retailing business.
Amazon, for example, went through an even more violent coming-of-age in 2000-2002, after its first five years of explosive growth. In the late 1990s, Amazon entered several complex new product categories in rapid succession, while building out an international fulfillment network. When the dotcom bubble burst, Amazon was suddenly squeezed for cash, and the company was forced to turn its focus to efficiency rather than growth. A couple of years later, however, after consolidating its distribution centres and improving its fulfillment, merchandizing, and marketing efficiency, Amazon finally turned a profit. This forever silenced the many Amazon critics who had spent the latter half of the 1990s explaining why it would never succeed as a business. And in the decade since, Amazon has become a global ecommerce powerhouse.
The challenge of transitioning from explosively growing startups to mature, profitable businesses isn’t the only issue facing the private-sale industry. The spectacular recent growth of Groupon, Living Social, and other “daily deal” companies, for example, has emerged as a new threat. Gilt Groupe has responded by launching its own “daily deal” competitor, Gilt City, but the explosion of competitors offering brands and retailers a new way to move inventory will likely put more pressure on profit margins.
Amazon’s inevitable entry into the business also looms as a future threat: The company bought a European flash-sale site, BuyVIP, last fall, and one industry source says it is now hiring people to help it enter the apparel sector in the US.
All of these issues make HauteLook’s decision to sell and Gilt’s decision to raise more cash look prudent.
And, importantly, the broader picture remains excellent, especially for the industry leaders.
As the industry’s extraordinary growth over the past five years illustrates, private sales have developed into a major new sector of the ecommerce industry. Nordstrom’s purchase of HauteLook shows that traditional retailers feel they need to enter the business, and none have had any success launching flash-sale sites themselves. Walmart, Target, Macy’s, TJ Maxx, and others are potential buyers of the remaining pure-play companies, as are Amazon and eBay.Amazon’s recent purchases of Zappos and diapers.com show that the company is not afraid to buy its way into attractive sectors instead of building them, and Amazon also has the wherewithal (and balls) to pay the premiums that industry leaders command.
The suddenly-rejuvenated IPO market, meanwhile, offers another potential attractive exit for Gilt Groupe’s investors.
In short, despite its growing pains, the flash-sale business represents a huge opportunity, and Gilt is still the clear US leader. So it’s not surprising that there’s demand for the company’s stock at a ~$1 billion valuation.
Disclosure: Two of Gilt Groupe’s co-founders, Kevin Ryan and Dwight Merriman, are also co-founders and board members of Business Insider.