Yext IPO: The New Local Reality

Manish Patel | Mar 20, 2017 2:29:21 PM

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For the past few days, there has been a lot of interest in the news of Yext's filing to go public. Industry insiders have pored over the pages of the S-1 filing, looking for clues as to what it means for the industry we call “local.”

Yext’s plan to ultimately go public has been a long time coming, and I’m thrilled for them. This is good for everyone, from their $117MM capital raise, to becoming the first company in this sector to go public. As a fellow CEO, I congratulate Howard, Brian and the Yext team. Going public is one of the most important events in a company’s life, to say the least.

As other CEO’s know, one of our key responsibilities is to drive valuation and consider exit strategies for our stakeholders. When a similar company demonstrates appeal to investors and a public market, it creates a significant market comparison. The IPO might become a good predictor of determining equity values in our fragmented industry.           

Like many in the local industry, I too have reviewed Yext’s S-1. Here are my takeaways and predictions for my peers building businesses in local:

Benchmarking Sales and Profitability Success
The S-1 makes clear that an investment in marketing and sales has paid off on the top line, using their filing as a benchmark for sales success in your own organization can be useful. In the fiscal year, ending January 31, 2017, Yext spent 66% of its revenue on sales & marketing vs. only 16% on research & development. They have 106 direct sales force employees, 266 other sales & marketing employees and likely over $124MM in revenues. They also stated that 22% of total revenues were tied to 5 customers.

Comparing the 66% against your sales expenses and/or your customer concentration is interesting. There aren't any directly comparable public companies, but if we look at other big names and recent IPO’s, we see a heavy investment in sales and marketing:

   - Snapchat: Just IPOed, sales & marketing cost at 31% of revenue
   - TrueCar: Car buying online platform, sales & marketing cost at 56% of revenue
   - Twitter: Sales & marketing cost at 38% of revenue
   - LinkedIn: Sales & marketing cost at 35% of revenue
   - Yelp: Sales & marketing cost at 54% of revenue
   - Angi: Sales cost at 34% of revenue, marketing cost at 20% of revenue
   - Dex Media: Selling cost is 23% of revenue
   - ReachLocal: IPOed in 2009, sales & marketing cost is 30% of revenue
   - Sales & Marketing costs at 30% of revenue

Expect a Market Consolidation

I have often joked about “Localgeddon” and written of this market consolidation over the last few years, and the Yext IPO may just be the catalyst for it. But there remain some very big unknowns, and their outcome will likely have repercussions around the industry. At this stage Yext’s last known valuation was 8.7x revenues, so let’s assume for now that this will remain the market metric. If successful, Yext will likely increase its pace of acquisitions.

Yext acquiring your company shouldn't be your focus. It should be the additional dollars that this industry will attract. Do yourself a favor and perform a mock due diligence against your company like any VC or PE would. Think about your own exit strategy:

  - Financials: Are your financials audited? Are your contracts buttoned up?
  - Human Resources: Org Chart? Say you received a cash infusion of capital, whom do you hire? 
  - Operations: Customer Retention? Revenue retention is more important
  - Product: How is your product roadmap? How are you driving adoption?
  - Sales: As we noted above, how effective is your Sales Engine?
  - Engineering - How scalable is your technology stack? 

Rise of Standards & Scrutiny for Operational Excellence
To be sure, Yext has played a key role in helping to educate the customers of this market whether they are SMB or agencies or enterprise.

I expect the kind of scrutiny that comes with being a public company will make higher standards a must. Too many companies are still selling like it's 2007, foregoing the importance of outcomes for vanity metrics like clicks, impressions and likes. I anticipate that we all will quickly begin to teach customers to seek standards and operational excellence throughout the sales process.

Another positive point for scrutiny with standards will result in a normalization of pricing.  The era of discounting and offering free services for market share will likely not continue in the long run. This is great news for the industry as it will remove a key component of commoditization. Yext will have to demonstrate a clear path to profitability.  If you are already a profitable company, or if you have developed their technology and service structure, this is a great advantage you will have.   

Focus on the Customer Experience
With the impending IPO, I say now more than ever is the need for a Chief Location Officer, a conduit within any organization that connects silos internally and helps meet today’s customer expectations using a critical element — location.

When I started in 1997, the saying went, "if you build it they will come.”  Today, if you offer a remarkable experience, they will come.

Services revenue is often a bad phrase when dealing with SaaS valuations. However, services are also part of that customer experience. Automation alone never does the trick. Local marketing at scale is not set it and forget it, and neither should be your offering. How they, or you, define ‘services’ will undoubtedly be scrutinized by the more educated customers. At Brandify, we focus on revenue and profit, but we make operational and service excellence the core standard of our business, and it’s to the credit of our team that our customer retention rate has been so high for the past 20 years. Investors love a sticky business model.

Yext’s attempt to IPO should be viewed as a great success not only for their business but for the industry as a whole. A high valuation attracts deep pockets, more importantly the deep pockets of institutional investors, and there are a lot of companies that can be prime candidates for this money.

Will companies that currently are showing profitability (coupled with product innovation) have a leg up in the game vs. the rest who are not? Most likely, yes. And equally important here is a company’s ability to achieve high revenue growth consistently year-over-year. Yext has demonstrated that there is a market. Understanding your next move will prove instrumental in the longevity of your company and the potential for venture capital or private equity funding.

Topics: Manishologies

Manish Patel

Manish Patel

Manish Patel is founder and CEO of Brandify.

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