Skullcandy Joins the IPO Party

This should certainly be music to the ears of IPO watchers:

Just a day after professional social network site LinkedIn submitted its paperwork for a public offering, headphone maker Skullcandy filed its S-1 with the Securities and Exchange Commission to go public.

With the economic recovery on firmer ground, the IPO market has once again opened up. Earlier this week, IPOs from online publisher Demand Media and consumer information provider Nielsen were both well received by investors, pricing above their expected ranges. There's also the ongoing buzz about Groupon and Facebook joining the pipeline in the not-too-distant future.

As a three time Inc. 500 company, we've been privy to parts of Skullcandy's financials for some time, but the new filing gives us a much more detailed look. (If you notice a difference between the revenues reported by Inc. and those in the S-1, we list gross sales, while the filing shows net.)

Of particular note is the increased revenue between 2008 and 2009 (up 47 percent), but the steep decline in profitability (net income fell 73 percent over the same period). The main culprit in the drop off is a pretty hefty interest expense item associated with $25 million in debt the company issued in February 2009, which bears an 11 percent interest rate. Skullcandy has reduced that amount outstanding to $7.3 million, but issued another $16.5 million in debt at the end of last year. Not surprisingly, part of the proceeds from the public offering will be used to pay off this debt. No word yet on the size of the offering, though the company spelled out another $20 million in items it needs to pay down. Anything raised in excess of those expenses will go to working capital and general corporate purposes.

Located in Park City, Utah, Skullcandy was founded by Rick Alden in 2003, targeting its products exclusively to skateboarders and snowboarders. Though the products have since gone mainstream (Target and Best Buy each accounted for more than 10 percent of Skullcandy's net sales in 2009, according to the S-1), the focus remains on the alternative sports market.

'Our core has expanded from skateboard and snowboard shops to include stores that sell sneakers, bikes, vinyl records, and electric guitars,' Alden told Inc. in 2008. 'Those account for only 10 percent of our revenue, but it's the most important 10 percent, and we have to protect it. So we sponsor boarders, surfers, and BMX bikers. One hundred percent of our marketing efforts focus on that segment.'

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The Small-Business Lending Riddle

Just before Christmas, the Treasury Department released the terms for banks wishing to tap into the $30-billion Small Business Lending Fund created by Congress. Many would-be participants were less than enthused by what they found. One of the big sticking points was that Small Business Administration loans would not count as small-business lending for purposes of the fund. (Other gripes include volatile interest rates and requirements that would force institutions to find matching funds for any money they receive, according to trade publication American Banker.)

I've previously written about why banks love making SBA loans: obviously they come with government backing, but there is also an active secondary market for them, meaning they're easy to get off your books if you want to clear up space on your balance sheet or simply earn a quick profit. Of the small-business lending that is occurring right now, a disproportionate amount is SBA-backed.

The new lending fund kind of throws that in the faces of banks -- and I like that. It's an insistence that banks learn to make loans to small businesses on their own and not simply lean on the guidelines – and backing – provided by the government.

Still, banks are reluctant to do it. They've yet to devise consistent criteria that makes a small-business loan palatable in terms of risk and reward. Banks too often look at a small business like the person running it, depending on FICO scores and the like. To really open up lending to smaller Main Street businesses, they'll need to do better than that.

And I believe they can, especially if third-party vendors step in to make the investment in the technology necessary to do it. One company trying to fill the gap is On Deck, which Inc. first covered in May 2009.

On Deck has created its own measure of creditworthiness for businesses with annual revenue between $300,000 and $3,000,000. They dig into cash flow and other business credit data that is usually too time consuming for a bank to bother with for a $30,000 loan that has a life span of a year or less, which is the average size for On Deck.

Earlier this week, On Deck announced it has directly made over $100 million in loans to thousands of small businesses in the U.S. since it launched in 2006. That, of course, is a pretty small part of the needs of Main Street businesses. And On Deck doesn't have access to ultra-cheap funding like banks, instead relying on sources like institutional investors, meaning its scale is relatively limited and its loans are pretty expensive.

Still, it's a significant milestone because On Deck now believes it has sufficient data on the performance of its platform and loans to entice large banks to use it. (On Deck loans have special requirements and features you can read about in the May 2009 story.)

On Deck CEO Mitch Jacobs recently told me that the intention was always to be a company that provided the technology infrastructure for banks to make small-business loans and replace the reliance on credit agencies, not to be a lender. But first, On Deck had to put its money where its mouth is and show real results. 'Now we have enough data,' Jacobs says. 'The idea is to kill the cost of the traditional credit review process.'

That cost has been a major – if not the biggest -- hindrance in getting big banks to see Main Street businesses as a risk worth taking.

Private investment in the proper technology could be the key to solving that riddle.

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How Demand Media Keeps its Books

With Max Chafkin off to Wisconsin for the holidays, I'll fill in for him and cover the ongoing saga of the Demand Media IPO.

To briefly catch you up, the media start-up is hoping to raise $125 million through a public offering to support its strategy of expertly matching content to what people want and paying the producers of said content below-market wages. Many have looked to this as a model that could make media profitable again. Indeed, Wired wrote that it was 'profitable as hell.'

But, after it filed for its IPO in August, that claim came under a lot of scrutiny because its financials based on generally accepted accounting principles (GAAP) showed that – drum roll – it, in fact, was not profitable. Instead, those profitability claims were based on non-GAAP calculations that backed out little things like depreciation, amortization and other non-cash items.

Yesterday, Demand Media filed yet another amended S-1 with the Securities and Exchange Commission. Part of the hold up with the IPO, All Things D reports, is that government regulators would like to know a little bit more about how Demand Media accounts for its content costs.

From All Things D:

Currently, using a concept of 'long-lived' content, Demand has been amortizing those expenses over five years, since it says it continues to generate revenue on that material over that much time…That's different from many companies in the publishing business, which typically account for costs of creating content immediately as they are incurred or over a much shorter time period.

Demand justifies this treatment by saying its content has an evergreen nature and generates revenue over five years, so amortizing the related expenses over the same period should be kosher.

All of this, of course, is based on a 'sophisticated algorithmic platform–which other content creators do not have,' according to All Things D.

Sounds pretty mysterious to me. Now, what if that algorithm is a bit off? Demand says:

 'Changes from the five year useful life we currently use to amortize our capitalized content would have a significant impact on our financial statements. For example, if underlying assumptions were to change such that our estimate of the weighted average useful life of our media content was higher by one year from January 1, 2010, our net loss would decrease by approximately $1.6 million for the nine months ended September 30, 2010, and would increase by approximately $2.4 million should the weighted average useful life be reduced by one year.'

Creating an algorithm forecasting content consumption habits sounds like a daunting task (please tell me how we'll consume media in five years and I'll get my checkbook). But betting your financials on it sounds crazy to me. The above paragraph confirms the seriousness in a shift. Digging into the August S-1 filing, we find that the life expectancy for Demand content was 5.6 years at that time and then, in the latest filing, it was down to 5.4 years. That's a 3.5 percent change over a couple months in the wrong direction for Demand.

Yes, sounds like this saga is just getting going.

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Groupon Growing Up, Hires CFO

Everybody's favorite local coupon site Groupon finally got around to hiring a CFO after going the first two years of its existence without one. Jason Child will join the Chicago-based start-up after 12 years in the finance department of Amazon.

'Groupon is one of the most amazing businesses I have ever seen,' said Child in a press release. He spent seven years at the now defunct accounting firm Arthur Andersen prior to joining Amazon.

It's somewhat amazing that Groupon grew to the size it did without a finance chief. We're talking about a business that just turned down $6 billion from Google, has raised $170 million, and has run coupon promotions for tens of thousands of businesses, including national brands like Gap and the Body Shop.

As Barron's pointed out, it's not totally unusual for young, VC-backed companies to not have a CFO. But following Google's high-profile courting of Groupon, it was clearly time to get serious about the cash register.

 

Think your business is ready to bring on a finance pro? Check out this guide on choosing the best type for your operations.

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Small Business Backing Wal-Mart?

Think small businesses fear the price-slashing competitive tactics of Wal-Mart? Well, you'd be wrong. That is, if you go by a Wal-Mart-funded survey of New York City businesses with 50 employees or less.

Crain's New York Business reports:

New York City small business owners favor bringing Walmart to the five boroughs by a count of 62% to 27%, according to a survey released Monday by the retail giant.

In an effort to strike a preemptive blow to a City Council hearing next month that is expected to be loaded with Walmart opponents, the survey was conducted by noted Democratic pollster Doug Schoen. It randomly sampled 400 New York City small businesses with 50 employees or less and asked owners or senior executives whether they wanted Walmart to come to town. Support among small retailers was weakest, with 55% in favor versus 36% against. Service-oriented businesses favored a Walmart by 65% to 25% and commercial businesses were most adamant in their endorsement, at 75% to 19%.

The top reason given by respondents favoring a giant Wal-Mart box somewhere in New York was the belief that it would create jobs, followed by more product choices and lower prices.

Wal-Mart has been trying for years to tap into the massive New York market but has been repeatedly thwarted. Many opponents question what net effect a Wal-Mart store would have on job creation, given that the presence of the retailer known for rock-bottom prices is likely to put more than a few mom-and-pop sized shops out of business.

Polling, of course, is a shady business and rarely do you ever get to see exactly how the questions are framed and you only get a vague sense of who is being interviewed. But let's assume that the findings are accurate and small businesses aren't intimidated by Wal-Mart entering their turf. Why could that be?

I've got a couple of thoughts. First, a great number of stores in New York are either highly specialized or have a loyal customer base that won't be sucked away by Wal-Mart. Second, the stores New Yorkers frequent often have as much to do with convenience as anything. Ever try lugging your groceries home on a crowded subway?

But if Wal-Wart wants in, I'm not clear on why it should be stopped. Ultimately, competition is good for businesses and there just seems something wrong with politicians seeking to block Wal-Mart from the city when it's already home to Target and Home Depot stores.

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Milo.com Snapped Up by eBay

The Business Insider is reporting that eBay has struck a deal to buy San Francisco start-up Milo.com for $75 million.

Jack Abraham, the son of comScore founder Magid Abraham and an Inc. 30 Under 30 honoree this year, founded the site in 2008 in order to provide real time data about what products a store has in stock. He's only 24. No word yet on whether he'll be heading to eBay with his company. Abraham would not comment on the report when contacted by Inc.

Milo.com, named after Abraham's Jack Russell Terrier, tracks information on 50,000 stores and 2.8 million products. In its first year, traffic jumped 70 percent and currently draws more than one million unique visitors a month.

Abramson has raised $5 million from True Ventures and several high-profile angel investors including Aaron Patzer of Mint.com fame, Katerina Fake from Flickr, Jawed Karim of YouTube, and his father.

Abraham is the second 30 Under 30 honoree to make a deal with eBay this year: in June, Jeffrey Powers and Vikas Reddy of Occipital sold their RedLaser iPhone app, which lets users scan barcodes to search for better prices online, to the e-commerce giant for an undisclosed sum.

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No Kicking the Free Shipping Habit

Earlier today, Wal-Mart announced it will provide free shipping on more than 60,000 online items during the holidays with no minimum purchase required.

This is big news for anyone in the e-commerce sphere. As Dow Jones Newswire reports:

"For the largest retailer in the world to lay down the gauntlet makes everyone in retail have to think about how what they offer compares," said Noam Paransky, retail strategist at Kurt Salmon Associates. "I would say at this moment retailers are evaluating just how economically they can provide something, or something similar, to what Wal-Mart is doing.'

It appears that free shipping is becoming to online shopping what zero percent financing is to the auto industry. If you need a boost in sales, flip that switch. (To illustrate how dependent that kind of relationship can become, an auto analyst once described zero percent financing to me as 'crack for car companies.')

And with the U.S. consumer so skittish, many retailers are turning that light on. A survey released today by Stamps.com found that 64 percent of respondents said free shipping, with or without minimum spend, is the most effective promotion they can offer during the holiday season, and more than half will be offering free shipping on more products this year compared to last holiday season.

The strategy, of course, can wreak havoc on margins. If that shipping cost isn't coming out of the consumer's pocket, it's coming out of yours.

But, in addition to increased sales, there's another upside: 52 percent of the Stamps.com survey respondents who use free shipping with minimum spend report their average order size increases by at least $4.

Perhaps the scariest thing for online shop operators is that shoppers don't just love free shipping; they expect it. A ComScore survey cited by Dow Jones found that 55 percent of shoppers said they would abandon their cart if free shipping was not offered.

So I hope you've got lots of bulbs, because it looks like this light might be on for a while.

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When Equity Speaks Louder than Cash

News leaked today that Google is giving all its employees a generous 10 percent salary bump (See more on the story in the Inc.com reporters' blog). 

Here's an analysis of what it means from the Business Insider's Henry Blodget:

'Well, first it suggests that Google is still an awesome place to work. Given that employee retention has been a problem, it also suggests that Google is now going the extra mile to keep its employees happy. Lastly, it suggests that the company's financial performance continues to be very strong.'

I believe all those things are true, but the move also highlights something else: it says the biggest weapon Google has against competitors like Facebook when it comes to attracting and keeping talent is cash it already has on hand. The promise of a giant, future equity payout has sailed away from Google employees.

While Google no doubt supplies a hefty paycheck to its workers, because of its already sky-high stock price (roughly $620 a share as I write this), it can't offer the sort of eye-popping creation of wealth that something like an IPO can.

Programmers are the lifeblood of a tech company. They're going to want to go where they can have the most freedom, biggest impact -- and reap the financial rewards of their work. So Imagine you're a young, hotshot programmer at Google who joined after it went public. You are paid very nicely, but you sit in a position previously held by someone who has already cashed in her millions and moved on to the next adventure. Plus, the secretary might be worth more than you ever will be. Facebook and Twitter might look just a little appealing.

For its part, Google insisted in an internal memo that its workers want the cold hard cash:

'We've heard from your feedback…that salary is more important to you than any other component of pay (i.e., bonus and equity). To address that, we're moving a portion of your bonus into your base salary, so now it's income you can count on, every time you get your paycheck.'

That may very well be the case, but I would add 'salary is more important to you than any other component of pay that Google can offer.' Send that survey around to Facebook employees and I'd wager you'd find a few more that would love additional equity instead.

This attraction-of-talent problem isn't just at the programmer level. In 2007, Google went searching for a new CFO. You'd think it would be one of the more glamorous positions in the finance world, but it took Google a year to fill. The hire, Patrick Pichette, wasn't some tech world superstar, but the president of operations at Canadian telecom giant BCE (formerly Bell Canada). I'm in no way trying to insinuate anything bad about Pichette, who is by all accounts a very fine executive, but the choice was considered something of a head-scratcher given his rather staid background. Recruiters I talked to at the time believed the lack of a big upside in Google's stock limited the candidate pool.

Contrast that with Facebook, which went hunting for a CFO last March. That search was completed in just a few months and returned David Ebersman, who by age 38 had already served as CFO of biotech pioneer Genentech for four years. Impressive stuff -- and probably the kind of resume you'd expect from a Google hire in, I don't know, 2003.

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