GOING PUBLIC

As Zulily Prepares to Go Public, Let's Take a Closer Look at Its Business

Zulily's public filing pegs its valuation at $1.7 billion, but what if consumers are already over daily deals?
You Look Fabulous: Darrell Cavens (center) drops in on a shoot at one of Zulily’s 35 photo studios.
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Women's and children's apparel flash-sale site Zulily seems like an entrepreneur's fantasy success story.
 
Founded in 2009, it shot from startup obscurity to a valuation of $1 billion in three years, and is currently in the process of filing for an initial public offering with a new valuation approaching $2 billion. Early Tuesday morning it filed its S-1 notice to the Securities and Exchange Commission, signaling that it plans to begin its road show presentation to investors in the next few weeks. 
 
Zulily joins Twitter, which made its S-1 public last week, in announcing a late-year IPO plan. Though industry analysts view both companies as very promising, each faces significant risks. Twitter is already experiencing slackening expansion among its user base in the U.S., and has never turned a profit. Zulily is only just profitable, and will have to continue to innovate within the saturated flash sales space.
 
Sick of the Deal-of-the-Day?
 
Some question whether Zulily can continue its torrid pace of growth. "I am a little baffled by their growth, as our data indicates people are fatigued with this business model and getting too many emails, unless the discount is compelling, or the merchandise is compelling," says Sucharita Mulpuru, a retail analyst at Forrester.
 
Zulily's rapid ramp-up is not unlike Groupon's, Mulpuru notes, and that could be a worrisome sign. Groupon was one of the most hotly-anticipated Internet IPOs in the 2011, and its $13 billion valuation at the time was the largest since Google in 2004. Groupon had to restate operating income on its S-1, and soon disappointed investors with larger-than-expected losses, and rounds of layoffs.
 
That said, Zulily does seem to have devised some distinguishing strategies, including a proprietary email system capable of delivering, before 9AM each day, 10 million emails to consumers who have opted in to receive notices of 72-hour sales, Zulily CEO and co-founder Darrell Cavens (pictured above) told me during an interview late last year.
 
A Differentiating Characteristic: A Niche Focus
 
Others also say that Zulily has a longer-term sustainable business model than Groupon because it sells more profitable deals.
 
"Zulily has been quite successful focusing on a niche market for mom's and children's clothing," says Peter Adriaens, a startup expert and professor of entrepreneurship and strategy at the University of Michigan.
 
Unlike Groupon, which focused on retailers with little margin in their products and services, Zulily focuses on brand names that have a margin already built in, he says.
 
Mulpuru also points to the expertise of Mark Vadon, a Zulily cofounder and chairman, who guided his previous venture Blue Nile, an online jewelry retailer, to a successful IPO in 2004.
 
Only Just Profitable
 
Still, Zulily hasn't been operating all that long, and just recently became profitable in the first six months of this year. It reported net income of $2.4 million during the period, compared to a net loss of $6 million for the same six months a year earlier. For the first six months of the year, it reported $272 million in sales, more than double the same period a year earlier.
 
The company, which has nearly 1,000 employees, valued itself, using an income and market comparison approach, at about $1.7 billion as of May 30, 2013, with internal shares valued at $3.08 each. As of June 30, it reported about 500,000,000 class B common stock outstanding.
 
Before its IPO, Zulily raised $138.6 million of capital from venture firms including Andreessen Horowitz, August Capital, and Maveron, which now individually own between 7.3 percent and 23.6 percent of the company.
 
Cavens has always beenenthusiastic about Zulily's prospects. "I look at what we have done, and it is about delivering freshness and newness every single day, and moving at a pace in retail others have not seen," Cavens told me in late 2012.
IMAGE: Photograph by John Keatley
Last updated: Oct 8, 2013

JEREMY QUITTNER | Staff Writer | Staff Writer, Inc. and Inc.com

Jeremy Quittner is a staff writer for Inc. magazine and Inc.com. He previously covered technology for American Banker and entrepreneurship for BusinessWeek.




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