Demand Media Hires Goldman, Bolsters Board – IPO Coming?

Demand Media has been killing it for four years now. The snapshot from Alexa below show’s‘s inexorable rise from Alexa global ranking below 800 to an Alexa ranking of 144 over the last two years.

In the U.S., ehow is the 44th most trafficked site according to Alexa.   Demand has driven this remarkable growth by taking the traditional media concept of “make it and they will come” and turning it on its head, leveraging search data  from the likes of Google and YouTube to understand and then “produce content people demand”.   Understanding what people want is one third of the value equation.  The second part is producing it at a low cost.  Demand accomplishes this through Demand Studios, which counts over 10,000 “qualified” contributors that Demand pays very modest fees ($5, $10, $30 plus potential revenue share) to produce the content.  While some deride this production technique as a content farm (a topic well covered in this recent Time article about Demand where the author says he can make $60/hr) , why argue with success?  In fact, smart people like Tim Armstrong at AOL are trying to copy Demand’s “farming” technique.  The third part of the value chain is the search optimization that lands the content near the top of many long tail search querries (e.g. “how to raise earth day awareness“).

But ehow is just one part of the growing Demand Media empire.  The company had its root in the high margin “direct navigation” business, when they raised their initial round of capital and purchased various domain name portfolios that they monetize with Google search links.  Demand also purchased enom, the second largest domain registrar, after GoDaddy, with over 9.5 million domain names under management in its wholesaling model.  While a low margin business, enom is well positioned to scoop up valuable domain names that are dropped by registrants.    Other Demand Media brands include Lance Armstrong’s (U.S. Alexa 722), comedy site (U.S. Alexa 422), and white label social networking platform Pluck.

You have to love the company for so many reasons.  First and foremost is its creativity turning traditional media on its head.  Second, I love companies with a well defined Manifesto that includes tenets like “never rest”.  Third, the CEO, Richard Rosenblatt is a three time winner already.  You can get lucky once, but three successes (iMall acquired by @Home for $565mm, MySpace’s parent Intermix acquired by News Corp. for $649mm, and now Demand) is the mark of a truly remarkable entrepreneur.   And finally, Demand is adding significant heft to its management ranks.

In March, Demand added Yahoo and MSN vet Joanne Bradford as its Chief Revenue Officer.  This week they announced the addition of Peter Guber and Josh James to its Board of Directors.  Guber is an uber Hollywood insider who, in his spare time, teaches a new media class at the UCLA Film School with Rosenblatt.  James is the revered head of web analytic giant Omniture, recently acquired by Adobe for $1.8 billion.

So all this leads to the question of an IPO.  To date, the company has raised over $350 million, the last round at a purported valuation in excess of $1 billion.  The company is rumored to profitable on its $250+ million in run rate revenue.  While the domain business was a large part of the business in the early days, SecondShares estimates that its now less than 40% of the business, and getting smaller everyday.  While the domain name business is not going to garner a very high multiple (see Marchex which trades at about 2X revenue), the content business is on a tear, and Demand shares would surely be in demand in an IPO.  The FT recently reported that Demand had hired Goldman Sachs to explore an IPO.  We’d love to write a research report on the company at SecondShares, but alas, for obvious reasons, management turned down our request for a meeting.  With so much revenue on the table, and so little information about how it falls to the bottom line, we can’t write a credible report without some help from management.   But we like to highlight great companies whenever we find one.

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2 Responses to Demand Media Hires Goldman, Bolsters Board – IPO Coming?

  1. Byrne says:

    The problem with Demand’s long-term model is that they are largely exploiting a problem with search engine algorithms: right now, search engines heavily weight a site’s general credibility (i.e. the number of links, weighted by the credibility of the sites that link to them). Combine this with the search engines’ preference for an exact title match, and the increased frequency of “Google Suggest” keywords, and you’ve created an opportunity for a company like Demand Media to insert itself into lots of potentially profitable search queries.

    Their weakness: Google could (and eventually will) change their algorithm, and Demand Media’s ad income will suffer. Google is obsessed with minimizing the number of clicks it takes to reach a given piece of information, and Demand Media’s articles will only make the company money if they don’t answer the reader’s question–because that’s the only reason the reader will exit through an ad.

    Remember that: Demand Media must have articles that are good enough for the search engines to index them (i.e. they must be in English), but bad enough that under no circumstances are they the actual page you’d want to land on.

    The non-eHow properties don’t necessarily have this problem. Many of them monetize through CPM advertising, instead of CPC.

    One cool thing Demand Media could do is to allow people to hedge their exposure to pay per click costs. Demand has a theoretical “inventory” of future paid clicks, and they don’t necessarily have a bullish or bearish outlook on the price of those clicks. If they sell them instead, it’s easy money (and working capital). This actually enhances their algorithm, too: right now, PPC ads are priced on an opaque spot market. If Demand Media ran a de facto futures market, they could incorporate expected future click prices into their profitability model (and then sell those clicks in advance to capture the profit right away).

  2. Paul says:

    People should look at the numbers closely and see that growth rate of ehow has been slowing. Traffic does not equates earnings but the quality of it does (check myspace a couple years ago). Putting a graph that spans two years long and pointing to huge growth is a but misleading.

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