INSIGHT: 6 Billion-Dollar Startups You Wouldn’t Expect

Valuations are tricky labels. Slapped on startups following a VC funding round, they often spark ire and doomsday calls of a tech bubble, with many valuations representing many times the startup’s annual revenue total. But they are as much about potential success and exits as they are about current performance and a number of digital media startups including Pinterest, Airbnb and Spotify have garnered multibillion-dollar valuations thanks to factors like user numbers and growth rates. Here are five billion-dollar startups that might not be as sexy, but offer the same ingredients for success.

1. Sogou

China. It’s the market every Western firm wants in on, yet it’s the toughest to crack. Why? It’s a mixture of government regulation and censorship and the fact that many of China’s 618m internet users – the largest on the planet – enjoy local alternatives to global services. Google is the most high-profile example of a company that has struggled to make a dent in the country. The firm has butted heads with the strict Chinese government for years over censorship and is banned in the country more often than not. As such, it commands less than 3% of China’s web search market.

Though Baidu is the biggest beneficiary of Google’s relative absence in the country, with a 63% share of the market, opportunities have also arisen for other players like Sogou. The web portal, owned by Sohu.com, accounts for more than 10% of the Chinese search market and also offers other services such as a platform for online gaming. It’s growing fast. Revenues for its latest quarter came in at USD57m, up 53% year on year. That growth looks set to continue after the firm received a USD448m shot in the arm from Chinese online giant Tencent, in exchange for a third of the company, valuing the service at USD1.2bn. Tencent’s own search engine, Soso.com, controls approximately 3% of the Chinese search market. Though the services will technically remain separate, it extends their combined reach in what is a competitive space.
sogou.com

2. Good Technology

Employees using their personal mobile devices in the workplace is an unstoppable trend, but one that is giving businesses and their IT departments headaches. Businesses want to cut costs through not having to issue hardware to employees, but ensuring the security of sensitive company data or information remains paramount. Good Technology is one of the startups that has successfully capitalised on the ‘bring your own device’ (BYOD) trend, offering a range of third-party mobile device management solutions to businesses, government organisations and even mobile device manufacturers. Some 5,000 devices are activated using the firm’s technology daily and CEO says that Good Technology has grown its active users by 50% between Q2 and Q4 2013.

Its traction prompted Motorola to shell out USD400m for the firm in 2007 in a bid to better compete with BlackBerry, then known as Research In Motion. But it offloaded the firm two years later. Good Technology has since gone it alone as smartphone adoption has rocketed, racking up a host of big-name clients including Vodafone and the US Air Force. The firm picked up USD50m in April last year in a round that placed a USD1bn valuation on it ahead of an expected IPO. Fast-forward to January and Good Technology picked up a relatively modest USD5m, indicating that an IPO is not forthcoming in the immediate future.
good.com
                    

3. Deem

E-commerce is the hottest vertical within digital media. From western players like Amazon to eBay to Lazada and Zalora in emerging markets, there are many multibillion-dollar companies in the space. One service you might not have heard of is Deem. That is because the company, formerly known as Rearden Commerce, is a back-end commerce platform that focuses completely on businesses. It acts as a one-stop-shop for its clients, which include blue-chip giants like Siemens, GlaxoSmithKline, Coca-Cola and Goldman Sachs, to integrate commerce services like daily deals, buy and sell products and services between themselves, as well as providing a platform to manage expenses and costs.

It might not be as attractive as consumer-facing e-commerce, but it's big business. Businesses are willing to pay for technology that helps boost their capabilities and commerce is a lucrative revenue stream for any company. Providing ‘commerce-as-a-service’, as Deem puts it, is a smart move. The firm is not disclosing revenues, but has raised nearly half a billion dollars since it was founded in 1999 and is currently valued at USD1.4bn.
deem.com

4. Dianping

Local recommendation and discovery is a market ripe for growth as consumers continue to look for information on the go via smartphones and tablets. Firms like Foursquare, Groupon and Yelp are tackling the hyperlocal market in the West with reviews and location-based deals, with varying degrees of success. Yelp is the most successful of the trio, but the firm is struggling to turn a profit, recording a USD2.3m loss in its latest quarter, despite revenues climbing 68% year-on-year. Dianping is targeting the hyperlocal market in China and believes that it can go on to become larger than its US-based rivals as it expands.

The Shanghai-based startup essentially offers similar services to Yelp and Groupon. Originally focusing on restaurants, Dianping has expanded to what it dubs broader “local life”, offering recommendations, reviews and deals. The firm has racked up 90m monthly users - compared to Yelp’s 117m - with nearly three-quarters of Dianping’s traffic coming from mobile. It’s little wonder that some of China’s largest online players have circled Dianping, but CEO Zhang Tao believes that the US stock market is the firm’s most logical exit, forecasting a post-IPO market cap of USD10bn, five times the reported USD2bn that Baidu offered for Dianping toward the end of 2013. But the firm is yet to turn a profit itself, illustrating that while plenty of potential remains in the local space, there’s a long way to go before it is as lucrative as predictions suggest.
dianping.com

5. CloudFlare

As web access becomes more and more ubiquitous, security remains high on the agenda for all online businesses, from a one-man operation to a multi-national corporation. CloudFlare is focused on ensuring that website owners have smooth-running and secure offerings. It is racking up customers. One in every 20 websites online now uses the firm’s service, and CEO Matthew Prince says that revenues rocketed 460% year-on-year in 2013, placing the firm on target to hit profitability in 2014. So it’s no surprise that investors slapped a lofty USD1.2bn valuation on the company in 2012.

Online security is big business. The global market is set to be worth USD963.4m this year, up from USD241m in 2010, according to Technavio. Investors are chomping at the bit to get involved, with 95 startups receiving a combined USD.1bn in VC funding worldwide in 2013 alone. But CloudFlare is attracting customers with its website optimisation solutions also. With a broken link or website downtime not only providing security risks, but resulting in lost business, proprietors are loathe to take any chances. Toward the end of last year, Prince revealed the firm had raised another USD50m a year earlier, adding that the firm’s valuation was now some way higher than the USD1.2bn previously estimated.
cloudflare.com

6. Evernote

Personal management and note-storing app, Evernote, is a rare example of a popular consumer-facing app that doesn’t rely solely on premium subscriptions for revenue. The startup, which enables users to store ‘notes’, anything from a text document to an a web page, has racked up 85m users to date. But only 4.5m of those pay the firm’s USD5 a month or USD45 annual tariff in order to gain extra services like larger cloud storage space or collaboration features. Many of these are business clients rather than consumers and until recently, accounted for approximately 89% of the startup’s revenue.

But Evernote has made several moves to diversify its revenue streams, most recently launching Evernote Market. The marketplace offers a range of physical goods, from moleskin notepads to iPad styluses and document scanners. The move is paying off. Evernote VP Jeff Zwerner said this month that the market has delivered more than USD1m in revenue every month since its October launch, even attracting consumers that haven’t downloaded Evernote’s app, with 11% of sales coming from non-Evernote users. The success has lessened Evernote’s reliance on premium accounts, with a little more than two-thirds of its sales now coming from subscriptions. The firm, which was valued at a reported USD2bn after its last USD85m funding round in December 2012, is now turning its attentions to a possible IPO, with Evernote CEO Phil Libin admitting the firm is likely to go public “in two or three years”.
evernote.com