Constant Contact Today … Exact Target Tomorrow

The valuations of email marketing companies have come a long way. Bronto was founded in 2002, in the midst of the dot com bust, when the valuations on technology companies were not much more than the values of the computers in their offices. We were immune to fluctuations in the market since we grew organically and were very shrewd with very little cash. This discipline let us grow while others were stumbling.
Fast forward a few years and the world has changed. EmailLabs, one of our competitors, was purchased in late-2005 on a 2x multiple — $20mm for roughly $10mm/year in revenue. Last year, VCs told me that they valued email marketing companies like Bronto at multiples of 2 to 4x revenue. More recently, the multiples have been closer to 4 to 6x. Email marketing / software-as-service companies are definitely en vogue and the Constant Contact furthers their popularity even more.

Constant Contact went public with a valuation of 9x revenue and now is sitting somewhere closer to 20x. In undoubtedly, they are valued at a premium because of their dominance and story with the small business market, but that’s a big premium. Of course, sometimes the market as a whole gets a little wacky, but their success, assuming it sustains, will certainly swing up the valuations for everyone in the space.

Will it last … probably not. Bubble-nomics never do. But, I am sure a number of companies will try to strike the iron while the iron is hot. Exact Target is my top guess for a number of reasons:

  • Significantly VC funded for a while so there’s pressure to sell;
  • Email marketing / software-as-a-service provider which can be easily comp-ed against Constant Contact;
  • Roughly $40mm in revenue just like Constant Contact so the comp plays well for the investment bankers here too.

I have to imagine that Exact Target is finalizing their S-1 right now — they would be crazy not to.

2 thoughts on “Constant Contact Today … Exact Target Tomorrow

  1. Greg Smith

    I take a different view of the impact of Constant Contact’s IPO on valuations. I think the “success” of the IPO is negative for other companies in the space. The problem with the market valuing CTCT at 20x revs is that this type of thinking inevitably leads to disappointment and a sentiment shift against the industry. Yes, CTCT is the dominate player, yes they have growth, but they are not profitable and investors will end up disappointed when the rug is pulled out from under them.
    Great point Greg. I see your point in the long term. However, in the short term, I’m not sure that’s the case. Prior to founding Bronto, I was with Red Hat and joined them before they went public and stayed with until about a year after their IPO. Their IPO soared for a company that made only $10mm the prior year and had a valuation that topped close to $20b five months later. Insane, but it opened up the IPO window for other lesser quality issues like VA Linux — which had an amazing run up and an even more amazing fall. The fact is that the VA Linux IPO should have never happened but did because of the opportunistic window created by the Red Hat IPO. This irrational environment does provide opportunities in the short-term. If Red Hat hadn’t gone public in a frothy environment and had a secondary offering in an even frothier environment, it wouldn’t be around today. Raising that much cash opens up doors. I expect companies like ET to be opportunistic and try to IPO in this window while the access to the public markets is open. If they wait too long, then yes .. the CC stock will most definitely go down and it make their future fund raising attempts more challenging.
    In business school, one of my professors used to add on to the classic economics truism “there are no profits in the long run” with ”
    but you can make a lot of money in the short-term.” I think that applies here.

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