Editor’s note: Russ McGuire is the online director of Business Reform Magazine. Each issue of Business Reform features practical advice on operating successfully in business while glorifying God.
You’ve probably never heard of RedEnvelope. They are a classic Internet startup?along the lines of Amazon and Peapod. They take a traditional off-line sales opportunity?in their case, buying a gift?and bring it online as an eCommerce transaction. However, unlike Amazon, they have never been profitable. But unlike Peapod, they are still around as an independent company, with a delivery model that works, and a business plan that has a lot of people confident. Confident enough, in fact, that the company has announced its initial public stock offering (IPO).
RedEnvelope is a small company, even by Internet standards. Last year, it lost $7.7 million on $70 million in sales and it served just over a million customers. However, it’s got a big problem with $77 million in debt. The company is hoping to raise over $40 million from the IPO, which should help cover costs long enough to see if management can make the company profitable.
In comparison, Amazon does around $4 billion a year in sales, and even Overstock.com is about twice as big as RedEnvelope.
So, what makes this small and somewhat troubled eCommerce player so noteworthy?
The fact that they are so typical.
You see, a lot of money has been invested in entrepreneurial technology companies over the past five years. Much of that money was foolishly invested in companies that never had a hope of reaching profitability. Some of it was invested hopefully in companies with solid business plans built upon less than solid market assumptions?in other words, smart business people effectively serving customers that go away (i.e. Internet companies) don’t look so smart at the end of the day.
But some of that money was invested in companies with a great idea, a smart group of employees, serving real customer needs, and with a business plan that actually stands a chance of making money.
Unfortunately, sometimes life doesn’t seem fair. There are still a few of the companies backed by foolish investors hanging around. And there are a lot of companies that maybe could’ve made it that have been shut down due to a lack of capital to keep the doors open.
For the rest, RedEnvelope’s IPO should be the strongest indicator yet of whether they have a chance to survive.
If investors are willing to buy publicly-traded stock in a technology company that hasn’t yet made money, that currently has lots of debt, but that has a growing topline (sales grew by about $15 million last year) and shrinking losses (they were just about cut in half), then there may be hope for lots of entrepreneurs and their investors.
In contrast, a Google IPO will be meaningless to technology entrepreneurs. No one looks like Google. Lots of start-ups look like RedEnvelope.
RedEnvelope is using the “Dutch Auction” mechanism for their IPO. That means, instead of having a big first-day of trading in the stock where the price can swing wildly up or down, the company’s banker will accept sealed bids from potential investors indicating the number of shares they’re willing to buy at a given price.
If the response from investors is weak, then RedEnvelope may cancel the IPO, or they may simply find that they raise a lot less money than they’d hoped. That would be very bad news for entrepreneurs. In fact, it could spark the shutdown of many companies that have been holding out hope for a near-term IPO.
But, if investors are anxious to invest and there’s more demand for shares than RedEnvelope is willing to sell, then that would indicate a pent-up demand for IPOs from companies that look like RedEnvelope. In that case, we will likely see a flood of new stock filings and a sense of relief in the entrepreneurial community.
According to the company’s web site, the name RedEnvelope comes from an Asian tradition that gifts are often given in a red envelope?”a timeless symbol of good fortune, love, and appreciation.” Technology entrepreneurs are certainly hoping for a nice gift in the RedEnvelope IPO!
Russ McGuire is Online Director for Business Reform. Prior to joining Business
Reform, Mr. McGuire spent over twenty years in technology industries, performing various roles from writing mission critical software for the nuclear power and defense industries to developing core business strategies in the telecom industry. Mr. McGuire is currently focused on helping businesspeople apply God’s eternal truths to their real-world business challenges through Business Reform’s online services. He can be reached at [email protected].
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