In this episode of Industry Focus: Tech, Dylan Lewis chats with Motley Fool contributor Brian Feroldi about an exciting new upcoming IPO of a software-as-a-service e-commerce company. They'll discuss its business strategy, finances and leadership, competitors, risk factors, growth opportunities, and more.

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This video was recorded on July 17, 2020.

Dylan Lewis: It's Friday, July 17, and we are talking about an e-commerce IPO. I'm your host Dylan Lewis, and I'm joined by's supreme sultan of shoddy substandard-ness, Brian Feroldi. Ah! the alliteration, it always gets me, Brian; I thought I was going to trip up over that one.

Brian Feroldi: You did great, Dylan. If only ad reads were that good. [laughs]

Lewis: That's right. Yeah. Oh, boy! You know, I think our producers are probably happy that we don't have any third-party ads anymore, because there's a lot of extra editing for them back when we did. I'm almost surprised, Brian, that you didn't work Shopify (SHOP 0.29%) into that S-alliterative intro, because today on the show we are going to be talking about an upcoming IPO that is very much in the Shopify realm of the market.

Feroldi: Yes, BigCommerce is coming public. This is one of Shopify's primary competitors. They have a business model that is very similar to them, although there are some differences between the two. But it's very clear that BigCommerce has seen what's happened to Shopify's stock price this year, taken a look at that valuation, and said, "Hey! I want a piece of that." So it makes complete sense for the company to be pushing this forward now.

Lewis: Yeah, I think that that's a really interesting point, because a lot of folks have put IPO plans or direct listing plans, what have you, on hold with the market uncertainty. You know, typically companies like to go public when people are feeling really good about the market, they know there's going to be "support" for the stock and for the issuance, and that they are not going to wind up with a broken IPO. We talk all the time about the different incentives of the IPOs, but people generally like to see their stock price go up a little bit after they go public.

It would be easy to think that now is not a great time for a company to go public with everything that's going on, but a quick look at what's going on with the Shopify stock. I think people over at BigCommerce are probably licking their chops hoping to get their stock publicly listed. [laughs]

Feroldi: And how could they not be? Shopify has been one of the biggest winners, really, of the last five years, up many, many times in value. It's been growing at an exceptionally high rate, so it makes complete sense for BigCommerce to get a generous valuation when they come public. And we don't know what it's going to be yet, because we just have the initial S-1, so we are not working with complete information, but I always enjoy digging into information when it comes out about exciting companies such as BigCommerce.

Lewis: Yeah, we get to do the first take, right? This is green space; we haven't talked about this business yet. I don't know if I've heard too many Fools talk about it yet, so it'll be fun to dive in. I always love doing these S-1 shows. People probably aren't going to be surprised by this, with the Shopify comparison: This company works as a software-as-a-service platform in the e-commerce space. It's probably going to be a very familiar model for anyone who happens to own Shopify or follow that business.

Feroldi: Yes, exactly. So, they operate an online platform that makes it easy for businesses to create online stores. They help with everything from website creation itself, getting the back office up and running, and they also offer direct integrations with marketplaces, like Amazon and eBay. You can quickly get your products out there on social networks like Facebook and Instagram, they have integrations with the search engines like Google and Bing. And they also offer online and offline connections to point-of-sale systems, such as Square or Clover, so it's a very robust and built-out platform. And if you did not have an online presence, this seems like a great choice to go to and have one established very quickly.

Lewis: Yeah, at core, they're trying to make it easy for people to get their footprint online and build out all the functionality that they want, generally going to be more commerce-oriented with what they're trying to do, but I could not think of a more relevant business right now.

Feroldi: Yes, exactly. And as we said, they can help with everything from store design to the hosting. They also help handle the payments and the reporting. And the amazing thing is, this business was really a hypergrowth company right from the start. It was actually founded in 2009 in Australia. Within a year of their founding, they had 10,000 customers. One year after they were founded, 10,000 customers! That's just amazing growth. Now, they did move from Australia to the United States in 2011, and they've now already nabbed some pretty big investments from some famous VC firms, the most famous of which is SoftBank, and the company has gone over some transition in the last couple of years.

In 2015, the original founders did move on, and a new CEO named Brent Bellm was brought in. He came from HomeAway, he also worked at PayPal and eBay previously, and he joined the company. And at the time, BigCommerce was solely focused on small businesses, but Bellm shifted the company's focus toward the mid-market, which they defined as a company with $1 million to $50 million in revenue, as well as enterprise-grade customers, which as a company, they defined as more than $50 million in annual revenue.

And they've done a nice job. In just the last couple of years, they've signed up several big customers that include Ben & Jerry's, SC Johnson, Sony, Toyota, and today they have 60,000 online stores in 120 countries. Now, that's pretty impressive, but comparisons are always helpful, Dylan, and Shopify has 1 million customers worldwide. So hats off to BigCommerce -- they've grown a lot, but they're still much, much smaller than Shopify.

Lewis: I think with both of those businesses, it's so fascinating, because you assume a company like Ben & Jerry's or Sony, you know, has their own in-house e-commerce platform. They're big enough for sure, right, that they would be building out their own site and their own functionality. And yet they have these software-as-a-service players under the hood making them go. And the more you dig into these businesses, the more and more you realize how wide their reach is, and how many pretty big companies are relying on them. These aren't mom-and-pop shops necessarily that are using them to sell trinkets, like they would on Etsy, there are a lot of pretty big bona fide businesses using both of these. Shopify just happens to have a couple more merchants and probably some higher-profile names.

Feroldi: Yeah, but big companies want things to be easy as well, right? So that speaks volumes about how useful these platforms are, if they can attract big names like that to come to them versus going out and spending the money on their own. It does show you that there really is something to this business model.

Lewis: The best thing about getting the S-1, Brian, is we go from thinking we know what's going on with a company to actually getting a sense of the financials and starting to dig into some of the numbers. You queued up the business model. Why don't we talk about the financials here?

Feroldi: Well, so the company's business model, as we said, is very similar to Shopify; it's a software-as-a-service model, and they generate revenue in two primary ways. The first way is through subscription sales, and that's 71% of the total, and that includes platform, subscription fees, professional fees, sales of SSL certificates. You can get started on their platform for basically $30 a month; that's a very attractive price point for small businesses.

And that business is growing OK -- 17% growth last year. The faster-growing part of their business is what they call their "partner and service" revenue. So this is revenue-sharing arrangements that they have with some of their partners. So, if you join BigCommerce's platform and you want to add in a customer relationship management product, for example, you can do that right through BigCommerce's platform with just a couple of clicks. And those products are actually handled by partners, and BigCommerce just takes a commission and does a revenue-sharing agreement for getting that customer set up. And they have 600 of these pre-built applications.

I like that, I like that their model is, we're not going to compete with these other big names, we're actually going to partner with them. So that's a strategy that I certainly enjoy. And that part of the business -- the partner and service revenue -- was growing 38% last year. So it's a smaller part of the business for now, but it's growing faster.

Of course, all these numbers were pre-COVID, and as you can [laughs] imagine, just like we saw with Shopify, we saw some acceleration because of COVID.

Lewis: Yeah. Is the partner and service revenue, is it best to think of that as almost like a store within a store, where you're a customer of BigCommerce and you want to build other functionality in, they facilitate that, and take a little cut of it?

Feroldi: Exactly. So, if you want to offer payment solutions, they partner with companies like PayPal to do that. And whenever a transaction goes through, BigCommerce takes a small cut of that. Same thing if you want advanced analytics or you want to build in an enterprise resource planning platform -- you can do all that right through BigCommerce's portal, that's an attractive part of this platform. And they just take a commission based on the revenue that is generated from that.

Lewis: Yeah. So that allows them to be a little bit more neutral. And I would imagine that those partner and service revenues per customer grow as those customers grow. So rather than rolling people into all of their owned-and-operated stuff, they're kind of creating almost an app store, if you will, or a little marketplace for customers as they get bigger and their needs grow.

Feroldi: Yeah, that's exactly right. Plus there's also that $30 subscription price; that's the starting point. As a customer grows in importance and its revenue grows on the platform, they're naturally moved to higher and higher tiers over time, and that helps the company to generate more and more revenue from its customers over time too.

Lewis: Got you. I think one of the more curious things, looking at this company, Brian, and the financials in particular, was what we got with the balance sheet. [laughs] So we're talking about some sources of revenue there and some growth figures. And you know, 17%, 38%. Interesting. We always want to look at the health of the business in addition to the growth of the business, and we didn't get a lot of information in this S-1.

Feroldi: Yeah. And what we got wasn't exactly the best that we've ever seen, Dylan, right? So, as of March 31, BigCommerce reported that it had about $33 million in cash on its balance sheet. Now, that's the asset side. On the liability side, we saw $72 million in long-term debt and $225 million in convertible stock. So, that's a whole lot of liabilities and not much cash. Now, that had precluded the company from doing well. And as we said, from the revenue number, it is sticky revenue and it has grown significantly over the years. And as of the first quarter of 2020, a metric that we track for SaaS companies is annual revenue run-rate. So, it's basically what is your revenue that quarter and then annualize it. And that number was up to $137 million, which isn't inconsequential.

One of the things that I like about this business, that actually makes it look better than Shopify, is that because of its slightly differentiated model than Shopify, this company has really attractive gross margins. As of the most recent quarter, its gross margin came in at 77.5%. For comparison, Shopify's gross margin last quarter was 54.7%. That's a pretty significant delta.

Lewis: It's a big delta and it's on a dramatically smaller amount of revenue. You know, you would think that a company Shopify's size would be a little more competitive there, just because of the scale that they operate on.

Feroldi: On the flip side, in Shopify's defense, they are investing hugely into their fulfillment network, which is going to be much lower margin. So you can't knock Shopify completely there, but yes, like you, I was also pleasantly surprised to see that this company's gross margin was already that high even though it's way smaller than Shopify.

Lewis: Brian, you talked a little bit about it before, but I think anytime we talk about a SaaS company, Software-as-a-Service company, we have to talk moats, we have to talk about switching costs and take a look at that. Because one of the reasons that this is so attractive as a business model to us is, it's really hard to get out of one of these [laughs] customer relationships once you're in them. This is one of those businesses that benefits from that.

Feroldi: Yeah. Companies like this that are literally like the central nervous system behind a company's e-commerce presence, once you're in, you're in, and you're typically in for a long period of time. So, just like Shopify, BigCommerce benefits, I think, hugely from high switching costs. Once you navigate your entire e-commerce platform to this system and you have all these integrations with different companies, it's painful for the company to all of a sudden pull that out and switch at one time. So I would say that this company has a moat from high switching costs. There's also something to be said for its partnership ecosystem. As we mentioned before, it doesn't compete with its partners, it actually is a provider of revenue for them and they have 600 integrations built in. That, to me, is also something that not only makes this an attractive place for customers to go to, but once they're in, they tend to be in. So, that's attractive.

Lewis: Yeah, I think it's also attractive, just the pure space that they play in. You know, [laughs] we talked about the insane growth that Shopify shares have enjoyed over the last couple of years; that's because there's a really, really heavy tailwind pushing that company forward. If you aren't online right now, I don't know how you're operating as a business. And anyone that wasn't pre-COVID, I think is scrambling to do so.

Feroldi: Yeah, and there is -- to your point, obviously, COVID has accelerated that hugely, but there's still plenty of commerce that currently does not happen online. The company points out that in 2017, admittedly three years ago, about 10% of global retail sales were online, and that number is expected to jump to 21% by 2023, that's a massive number. I mean, it seems like a small percentage, but when you actually dial back and look at the actual retail sales, the global retail sales -- that is a huge amount of money that's going to be flowing online. So that is a huge tailwind for companies like Shopify and BigCommerce to ride.

Lewis: Yeah. And even if you focus on just the United States, Brian, we tend to really overestimate the penetration of e-commerce. I think as a percentage of overall U.S. retail, it's sub-20% even now. So, you know, there's still a lot of sales that are going to come online. This benefits this company, it obviously benefits Shopify as well. And for the most part, especially smaller businesses, they don't want to build this stuff out themselves.

Feroldi: Right. And I would like to look at companies like this and say, so what is the potential of this business? I normally like to see the company calculate a total addressable market opportunity for you. I didn't find any in the S-1, they just called out that they basically want to attract new customers, convince their existing customers to spend more, and expand internationally.

But if you look at Shopify, for example, Shopify is willing to put a number on it, and they said that they believe that their total addressable market for small- and medium-sized businesses is about $78 billion globally. That's just a huge number. And again, BigCommerce's annual revenue run-rate in Q1 was $137 million. So, it's captured a very, very small part of its potential pie.

Lewis: Yeah. Early in the growth ramp there. And before, you mentioned that they started out, really, kind of focusing on small businesses, moved to mid-market, and now there's a little bit more of an enterprise business going on for them as well. In the S-1, we see them break up their customers into two main groups to kind of categorize it.

Feroldi: Yes. So, they basically say, we have two different groups of customers: those that spend less than $2,000 with us annually, and those that spend more than $2,000 with us annually. As we said at the top of the show, they have 60,000 total customers. Only about 9,000 of them spend more than $2,000 with the company annually. However, those that do account for 79% of the total pie here. So, the company is more concentrated than you would think.

But that's OK to me, because mid-sized businesses and enterprise businesses are typically much more lucrative customers. Their businesses tend to be much more stable, you can grow with them much faster, and they don't tend to go out of business nearly at the same rate as small businesses do.

And they actually called out some pretty attractive numbers in their S-1 related to their customers that spend more than $2,000. So, they said, the average revenue from these customers was $12,000 last year, and that was up almost 25% over the year-ago period. That's a big jump. And, Dylan, we also -- one of our favorite metrics for SaaS companies is net revenue retention rate. And they basically called out that as 108% in 2019. That indicates there is a moat here for sure.

Lewis: Were you expecting that number to be higher? I mean, you know, we look at a lot of different SaaS companies, and I see one, I'm like, that's good, it doesn't really get me super-excited, though.

Feroldi: So, I like that they call out that this is a retention rate. Sometimes we can hear companies talk about an expansion rate. The retention rate does include churn, so that could be why it's not as eye-catching as we hear for some other companies. When I see that, as long as it's a true retention rate and it includes churn, that's actually a number that's pretty good in my opinion.

Lewis: Yeah, I guess that's a good point. And looking at the customer side of that stuff, Brian, I mean, there are a lot of different ways you can spin that customer data, you know? With just under 9,000 spending more than $2,000 -- that means, 50,000-plus of their customers are spending less than $2,000. If you wanted to paint a nice picture, you could say, well, they're going to wind up growing with a lot of those businesses, and that ratio should shift over time. But yeah, I mean, the revenue is highly consolidated among that [laughs] -- what is it? -- about 9,000 or so customers?

Feroldi: Yeah, it certainly is. And, yeah, the hope is that those other 51,000 businesses do grow in time to graduate to above that $2,000 level. And, Dylan, one thing that I liked about this company was that they specifically, in their S-1, called out a ratio that we look for that can be sometimes hard to find, which is, what's the lifetime value of a customer divided by the cost to acquire that customer. That's an important metric, but it tells you how much a company is spending to acquire a new customer versus how much revenue they will get over the course of that customer's lifetime. And they pointed out the number they calculated was 4.4 times. So for every $1 that they spend to acquire a customer, they expect to receive $4.40 in revenue over the course of that customer's lifetime. And again, let's remember, this is also a high margin business. So, typically anything over 3 to 1 is an attractive ratio. So, a pretty good number for BigCommerce on that front.

Lewis: Yeah. And I think that that customer spend and acquisition cost analysis is particularly important in the software-as-a-service space, because any high growth SaaS business worth its salt is going to be spending a lot to bring customers in. If they're in growth mode where they are trying to build out and enjoy as much of that total addressable market as they can early, because they know they got a sticky product, that's where the spend is going to go, that's where we see the spend going if we look over at their income statement. For the most part, we're seeing that the largest line item for them is sales and marketing. And so, if that money is being well-spent, awesome! Keep spending it.

Feroldi: Also, let's remember who they're competing against here. Their No. 1 opponent is Shopify, so hard to stand out when Shopify is sucking up so much air in the room.

Lewis: It absolutely is. I would not, personally, want to be competing against them. I mean, famously, Amazon decided, if you can't beat them, join them, right? They wound up deciding not to go into this space because they felt like Shopify was doing such a great job. I hope that BigCommerce can, at least grab some piece of that pie. You know, I like to root for the underdog every now and then, Brian. [laughs]

Feroldi: Well, as a Shopify shareholder myself, I'm not rooting for BigCommerce to succeed. [laughs] I'm happy with Shopify continuing to win.

Lewis: Do you think that this market is big enough for both of them?

Feroldi: Yes, I definitely do. This, to me, is not a market that is one winner take all. In fact, why else would BigCommerce have attracted 60,000 businesses if it was a winner take all? I think it could be a winner take most, but that doesn't necessarily mean that there's only going to be one successful investment in the space.

Lewis: No. I agree with you. I think it's a little curious that the founders left this company. I know, especially for your own scorecard, that's something that you really like to see is founder-led businesses. They tend to be a little bit more aligned, a little bit more long-term oriented. Do you know what the story is, with the new CEO and the founders leaving?

Feroldi: I don't know, I don't know the backstory. Only to say that, yeah, Bellm was brought in 2015, and he shifted the strategy, and it seems like with 80% of that revenue coming from that strategy shift, that seems to have been a positive move for BigCommerce. So, yes, the founders no longer are involved, that's not something that excites me. However, if you look at the Glassdoor ratings, the management team gets pretty good marks here. So, four stars out of five, overall, and 86% of employees approve of the CEO; that's not too bad.

Now, one thing we don't get with this S-1, Dylan, is the percent ownership for the executives, unfortunately. That information will be forthcoming. But I did see that Brent Bellm has basically 2.7 million stock options to his name, so whatever the stock price is at, times 2.7 million, is likely to be a whole lot of incentive for him to want to see this thing go higher. The CTO also owns another 1.5 million stock options. And the CMO, the Chief Marketing Officer, has 1 million to herself. So I don't know what to expect on a percentage basis, but that's at least a decent amount of skin in the game from what we've seen so far.

Lewis: Yeah, and while it's not a founder-leader, it is someone who's been at the company for several years. It's not like they brought in somebody last year to be the one who takes them public, you know, they didn't get the executive with experience taking four companies public and really just brought him to do just that. It seems like this is someone who's figured out how to grow the business well, and you know, is probably going to be here to stay.

I think the toughest thing for me to wrap my head around with this business is, what do they do better than Shopify? And I think there has to be an answer to that question, [laughs] you know, for them to operate in the space.

Feroldi: Right. And that's going to be a tough question to answer. There's a site out there that ranks e-commerce companies called BuiltWith, and they did call out in their S-1 that they were ranked the second-most used SaaS e-commerce platform -- a funny thing to brag about. And the No. 1 there is, of course, Shopify. And to me, that's the biggest risk here.

It's hard to say what is the differentiator, the true differentiator, here. We know that Shopify has gobs of cash, it has a wonderful founder-leader, and it has been investing aggressively in itself to build out a huge number of products that are all Shopify-branded, and that is resonating with customers, as you can see by the huge explosive growth in the number of customers on Shopify's platform. So, the competition is the No. 1 risk that I see here.

Another one we didn't call out, we didn't at least give the numbers on is, this company is still losing money. That's the reason why its balance sheet was kind of upside-down. Net loss last year, in 2019, was $43 million -- that looks to hold steady. In the first quarter, they lost $10 million, and that's both net income and they're burning free cash flow. So, hopefully they take a chunk of that capital that they raise from the IPO, and hopefully they can do so at a generous price, and fix up their balance sheet and use that money to get them to free cash flow positive.

So, like you, Dylan, it's hard for me to say, if I was a business owner, why would I go with BigCommerce when Shopify exists? The two do seem to be parallels. Knowing what I know now, I don't understand why I want to pick BigCommerce over Shopify.

Lewis: This is actually one of those times where I want to take advantage of our platform and say, listeners, if you are someone who has made these decisions, you know, for a small business or for a medium-sized business or an enterprise business, and you've stacked these two software solutions against each other, I would love to get your take on this. You can always shoot us an email at [email protected] or you can tweet us @MFIndustryFocus. Brian is @BrianFeroldi on Twitter, I am @WilyLewis. We love getting these, kind of, boots-on-the-ground examples of the customer use case, what people focus on in terms of features. And I think this is one, in particular, Brian, we're like, neither of us have had to build an e-commerce website. [laughs] So, you know, the functionality and what people prioritize is a little bit different depending on what you're trying to do.

Feroldi: Yeah, exactly. So, if you have built a website with either of these, please reach out to us and tell us what you're thinking. Obviously, there is something here. They would not have 60,000 customers if they weren't doing something different, it's just hard for me to see it as an outside investor.

Lewis: Yeah. And, you know, we'll get more information on this company. And I'll be really curious to see what the valuation looks like, because you could see them getting kind of carried away with how much [laughs] share price appreciation Shopify has shown over the last couple of years. So, that'll obviously be a critical part of this too. But there are a lot of spaces where I think you could buy a basket of stocks and do quite well. It's possible that e-commerce tools might wind up being one of them. I mean, you know, the War on Cash exists. I think if you had just bought all of the video game publishers five years ago, you'd probably be doing pretty well too. So, this could be one of those spaces, but there's certainly some questions for this company to address.

Feroldi: Yep. And I hope this company gets a really good IPO price, because they have a lot of work to do to clean up their balance sheet. And, again, for comparison, Shopify is currently trading at 63 times sales, so this company's sales last year were just over $100 million, so in theory, this could be a $5 billion or $6 billion business if they can match Shopify's valuation. I don't think they will, given that their growth rate is so much slower, but I think their decision to go public now is brilliantly timed.

Lewis: Yeah, management definitely knows what they're doing over there, [laughs] in terms of trying to raise capital, and that'll definitely help on the balance sheet.

Brian, always love doing these S-1 shows with you, thanks so much for hopping on and talking about it with me today.

Feroldi: Great to be back again, Dylan.

Lewis: [laughs] Listeners, that's going to do it for this episode of Industry Focus. Like I said, if you want to give us some thoughts on the e-commerce space, if you have any experience building a site with any of these tools, shoot us an email, [email protected], or tweet us @MFIndustryFocus. You can reach us there if you have any questions or ideas for shows as well.

If you want more stuff, subscribe on iTunes or wherever you get your podcasts.

And as always, people on the program may own companies discussed on the show, and Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear.

Thanks to Tim Sparks from all his work behind the glass. For Brian Feroldi, I'm Dylan Lewis, thanks for listening and Fool on!