A look into Carbonite’s IPO

August 18, 2011

As an entrepreneur, David Friend has been around the block a few times. The 63-year-old has built and sold four companies and raised a ton of venture capital along the way. That still didn’t prepare him for the wild ride he experienced in taking his company public.

After the dust cleared, Friend was the CEO of his first publicly traded company, but one with a significantly reduced share value and market cap, as Carbonite (CARB) became the lone U.S. tech firm to IPO last week.

“Everybody was betting against us,” said Friend, whose Boston-based online backup company reduced its debut share price from $17 to $10 in order to get out, in one the worst trading periods in nearly three years. At the close of trading on Wednesday, Carbonite’s share price had jumped to more than $15. “We kind of proved everybody wrong, but it was definitely a high-wire act.”

The same week saw nine other companies shelve their IPO plans. So why did Carbonite plow ahead?

“Maybe the reward for taking a bit of punishment on the price is that we’re getting a lot of publicity,” said Friend, who co-founded Carbonite in 2005, after wasting $1,300 in a failed bid to retrieve his daughter’s term paper from a dead laptop. “We want to do a lot of strategic acquisitions over the next five years and it’s a lot easier if you have a public currency.”

Friend is no stranger to exits, having sold four of the five companies he co-founded (Sonexis, FaxNet, Computer Pictures and GEAC Computer Corp) over the last 30 years.

So why did he decide to go public with Carbonite, after selling his other companies?

“If we were in a niche market where $50 or $100 million in revenue would be viewed as a real homerun, then I think you could be a candidate for sale,” said Friend, who believes over the next few years the online backup market will be divided up among a handful of companies and he wants to make sure Carbonite is top of the heap. “This is clearly a market opportunity that’s larger than anything I’ve had in my career.”

Venture capitalist Mark Suster agreed, calling it an “enormous market space,” but was not so buoyant about Carbonite’s IPO.

“I question whether the market is giving them huge value as being a major player in the future,” said Suster, a partner at Los Angeles-based GRP Partners, adding that many tech companies continue to raise money privately in order to avoid having to release risky financial numbers such as customer acquisition and marketing costs. “If he could have raised $100 million in the private market, I think he would have.”

Friend revealed that Carbonite spends as much as $55 to land customers, who spend just $59 annually to backup their PC’s documents, pictures, videos and other precious data. He justified the high acquisition cost by pointing to Carbonite’s own research that shows once converted, their customers stick with them – on average – for 5 years.

“That’s why we’re able to go out in the most horrible IPO market in recent memory, because the fund managers really understand it. It’s not a pie-in-the-sky business model,” he said.

Suster points out that new entrants to the space, like Dropbox, have far lower customer acquisition costs. Last month TechCrunch reported that Dropbox was raising a new funding round between $200 and $300 million that would give it a jaw-dropping valuation between $5 billion and $10 billion.

“You’re talking about somebody that is potentially raising at 30 times the value of Carbonite (about $370 million at close of trading on Wednesday),” said Suster, who nevertheless described Dropbox’s valuation as “crazy.” “Dropbox doesn’t provide the same level of backup and restore as Carbonite today, but where will the market be in three years time?”

Carbonite has yet to turn a profit, despite rising revenues. Still the company, which has more than a million customers in the U.S., including many small businesses, has raised nearly $70 million in venture capital, the most recent being a $20 million round last January led by San Francisco-based Crosslink Capital that included previous investors Menlo Ventures, Performance Equity, and Common Angels Fund.

Pravin Vazirani, a partner at Silicon Valley-based Menlo Ventures, sits on Carbonite’s board and said he had nightly phone calls with Friend during the week leading up to the IPO.

“At one point we thought this wasn’t going to happen,” said Vasirani, whose firm used the public offering to purchase more shares in the company and increase its ownership stake to about 25 percent. “Somewhere around Day 5 or Day 6 of the road show that was the day the market had its 500-point drop.”

Most of the venture capital Carbonite raised has been spent on brand building through aggressive marketing.

“We spent $24 million on advertising last year to build our brand. It’s a defense against everybody else who’s out there,” said Friend, whose strategy from the get-go has been “to have a small piece of a big pie.”

In the early days, that included cutting a $1-million check to prominent talk-radio host Rush Limbaugh.

“He started talking about Carbonite on the air and the cash register started ringing and it’s been ringing ever since,” said Friend. “It was just a ballsy move and it paid off for us.”

It’s the same kind of thinking that helped Friend stay the IPO course, while others pulled the chute.

He also got some inspiration last week while en route to New York from Boston, before ringing the opening bell at the Nasdaq. The passenger sitting next to him on the flight just happened to be a happy Carbonite customer.

“It’s fun to have a product with a brand name,” Friend said, adding: “It keeps me going through the rough times and things like last week, which was enough to drive people to distraction.”

Paria couch
One comment

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I’m confused about the claim that they have been able to acquire customers at $55. That doesn’t seem to be supported by the financial data in their S1 filing.

The breakdown I found most illuminating was done at Wikibon, here: http://wikibon.org/wiki/v/The_Economics_ of_Carbonite,_or_lack_thereof#The_Cost_o f_a_Customer

This analysis (based on the S1 data) suggests an acquisition cost that is almost twice as high. Did Friend/Carbonite provide more detail on cost of acquisition?

Perhaps most importantly, do they intend to report this metric in their quarterly updates?

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