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Squarespace IPO | S-1 Breakdown

By 

Alex Clayton

May 4, 2021

Company Overview

Squarespace, a leading all-in-one SaaS platform for businesses to build and manage their business online, filed for a direct listing and plans to trade on May 19th. The company has registered 40.4M shares to sell in the direct listing with the price to be determined. The company offers website hosting as well as tools for building and marketing to an online audience and for managing ecommerce sales, all through an easy-to-use drag and drop interface. Squarespace has opted for a direct listing vs. a traditional IPO similar to companies like Coinbase and Roblox*. The company plans to list their Class A shares on the NYSE under the ticker “SQSP.” Goldman Sachs is the first bank named as Squarespace’s financial advisor. It’s not surprising that the company is pursuing a direct listing given their recent fundraise of $305M at a $10B valuation led by Dragoneer, Tiger Global, and D1 Capital Partners, and their cash flow generation -- the company generated $152M of free cash flow in 2020.  

The company’s vision is that they “exist to help people with creative ideas stand out and succeed” and their mission is to “enable millions to build a brand and transact with their customers in an impactful and beautiful online presence.” The product is an all-in-one platform for businesses -- primarily SMBs or small and medium-sized businesses -- to 1) manage their presence which includes their website, domains, social media, 2) commerce which includes scheduling (Acuity), ecommerce payments and infrastructure, member areas and hospitality (via Tock), and 3) marketing, which includes campaigns, SEO and analytics. Their product radically simplifies the process for an SMB to run an online business and users can choose from a variety of templates, and Squarespace doesn’t require coding, so non-technical users can build online experiences using their drag-and-drop interface. Squarespace also touts its focus on modern design. More on the product and their acquisitions later in this post.

Squarespace has been around for quite some time and launched publicly in 2004. The company has a large scale today and did $621.1M in revenue in 2020, up 28% YoY, and ended Q1 (March 31st) at $754.2M of implied ARRR (the company reports a metric called Annual run rate revenue), up 36% YoY. Squarespace ended Q1’21 with 3.8M unique subscribers (or customers), up 19% YoY. While Squarespace isn’t growing as rapidly as some other SaaS companies, they are generating a significant amount of cash -- they generated $51.8M of unlevered free flow in Q1’21, a 29% margin. Commerce is a rapidly growing product line as well; Squarespace did $4B in GMV in 2020, up 91% YoY and commerce revenue was $143.3M in 2020, up 78% YoY. The company mentions COVID has increased demand for their platform as many businesses have been forced to go online. The company is based in New York City and has 1,261 full-time employees (FTEs) and customers across 180 countries. Squarespace was founded in 2003 and has raised $579M in total funding over the life of the company (more in the ownership section below).

A timeline and graphic of the company’s timeline in the S-1 are below.

  • In 2004, we launched publicly as a blogging service to enable our customers to publish their content online.
  • In 2006, we hired our first employees.
  • ​In 2010, we raised a combined $38.5 million from Accel and Index Ventures.
  • ​In 2012, we surpassed 100 employees and transitioned the platform to service the next phase of the internet with sophisticated and design-forward presentations, enabling businesses and independent creators to tell their brand stories in a professional manner, including on mobile devices.
  • ​In 2013, we launched our commerce offerings, giving customers the ability to sell physical and digital goods directly from our platform.
  • ​In 2014, we raised $40 million from General Atlantic.
  • ​In 2015, we surpassed 500 employees and crossed $100 million in bookings.
  • ​In 2016, we began generating net income.
  • ​In 2019, we completed our first three acquisitions, continued to expand our commerce functionality and introduced Scheduling, Social, Marketing and Email Campaigns, which broadened our suite of solutions and points of entry to our platform.
  • ​In 2020, we reached $664.7 million in bookings and 1,200 employees.
Source: Company S-1

Product

Squarespace’s product is a website builder, commerce engine, and marketing suite for online businesses and empowers their customers to build, manage, and grow their brand online. While Squarespace’s product competes with many point solutions, they have broadened their product to encompass everything an SMB would need to run their business online and has three primary pillars 1) Presence 2) Commerce, and 3) Marketing. Presence is the core product. The company’s customers span a wide variety of industries and use cases, from small businesses and independent creators, such as restaurants, photographers, wedding planners, artists, musicians, and bloggers, to iconic brands. More on each product pillar below.

Presence (74% of total revenue in Q1’21): Core product offering which is the drag-and-drop website builder. It includes the following:

  • Websites: Comprehensive set of website templates for users to build websites and bring their ideas to life quickly. Provides hundred of customer settings, fonts, color palettes, and photo editing capabilities. 
  • Domains: Enables users to easily buy a domain for their website and offers domain management tools / security features.
  • Social (Unfold): Social media graphics application that was the #1 ranked graphics app in the Apple Store in 52 countries, with 1B+ stories across 40M downloads. Unfold also enables businesses to create and manage brand assets on social platforms from a single place and enables stories to be shared online.
  • Enterprise: For larger customers, includes a set of premium features with dedicated support, bulk purchase packaging, custom payment methods, and SSO (Single Sign-On).
  • Google Workspace (Professional Email): Enables customers to have professional email on custom domains enable customers to activate Google Workspace on their domains that are hosted by Squarespace.

Commerce (26% of total revenue in Q1’21): Tools for customers to offering ecommerce features.

  • Commerce: Ecommerce functionality integrated into the core platform. Supports the sale of physical products, subscriptions, content, and services without the need for third-party tools or integrations. Also provides inventory management, product merchandising, customer relationship management, customized purchase confirmation emails, product promotions, gift cards, and selling on Instagram. 
  • Scheduling: Can be an add-on or a standalone subscription. Offers scheduling for bookings and appointments and classes (acquired through AcuityScheduling). Integrates with popular calendars and video conference tools and includes customizable communications for appointment confirmations, reminders, follow-ups, and intake forms. 
  • Member Areas: Customers can create exclusive members-only content and have full control over how to charge for access. As an add-on subscription, Member Areas enables additional commerce use cases including virtual classes, private podcasts, and paid newsletters. 

Marketing: Add-ons to presence and commerce subscriptions and provides customers with marketing tools such as email campaigns, SEO, and analytics.

  • Email campaigns: Similar to a MailChimp, offers email marketing capabilities with contact lists, profiles, and customer order information.
  • SEO: Every Squarespace website and online store comes optimized to be indexed and found online with a suite of features and guides that help maximize prominence among search results. Squarespace was the first website builder to integrate directly with Google Search Console, giving customers a view into how they are being seen and found on Google. 
  • Analytics: Squarespace has developed its own custom analytics solution that incorporates data from websites, commerce, and email solutions into a single view for customers. Without an integrated platform, customers would be forced to use multiple third-party tools, resulting in a fragmented view of their data across multiple systems.

A graphic from their S-1 on their product pillars is below.

Source: Company S-1

Summary Metrics and GTM (Go-to-Market)

Squarespace sells to SMB (small and medium-sized businesses) and has very little enterprise traction to date (they mention that <1% of bookings in 2020 came from enterprise customers). Subscription revenue represented 94.2% of total revenue last quarter and as mentioned earlier, the company just crossed $750M of ARRR (Annual run rate revenue). ARRR is a non-GAAP metric that Squarespace discloses which is defined as monthly revenue from subscription fees and revenue generated in conjunction with associated fees (fees taken or assessed in conjunction with commerce transactions) in the last month of the period multiplied by 12. Most companies don’t report ARR and we have to use quarterly subscription revenue multiplied by 4 as a proxy, which in this case is lower at $676.9M. Commerce, which is Squarespace’s Shopify competitor, is driving a lot of the company’s growth and in Q1’21, the company processed $1.2B of GMV (gross merchandise value), up 100.1% YoY. Squarespace offers 4 pricing tiers ranging from $12 -> $40/month and customers can pay annually or monthly (annual subscriptions represent 70% and monthly represents 30%). Squarespace drives leads to their website through marketing and has only a very small enterprise sales team; almost all revenue comes from self-serve. Squarespace doesn’t release specific dollar-based net retention figures but does disclose a cash retention rate (more on that later). The company was at 85.6% in 2020. Squarespace grew ARRR 36% YoY in the most recent period with 29% unlevered FCF margins, which is impressive growth and profitability for a company with average revenue per customer of $190 in 2020.

Here is an output of their price page from the website:

Source: Company website

Below are more stats on the business and industry from the S-1:

Company stats

  • As of Q1’21, Squarespace had 3.8 million unique subscriptions (customers). The average customer paid $190 per year in Q1’21 and those customers processed $1.2B of GMV in Q1’21. The number of unique subscriptions (customers) has grown sequentially across 21 consecutive quarters.
  • Subscription revenue accounted for 96.4% and 94.3% of total revenue in fiscal 2019 and 2020, respectively.
  • Squarespace generated net income every year since 2016.
  • The company increased marketing and sales spend over 40% in the year ended December 31, 2020 relative to the year ended December 31, 2019 due to COVID i.e. more companies needed to go online and Squarespace wanted to take advantage.
  • In 2020, Squarespace processed ~$3.9B of GMV, an increase of 90.7% from 2019. 
  • Their business is impacted by seasonal fluctuations and the company typically registers a greater number of new unique subscriptions during the first quarter of a year. Q3 is also strong when customers engage more frequently with their users in advance of the holiday shopping season.
  • As of 2020, Squarespace had customers in ~180 countries and international customers represented ~30% of total bookings.
  • Squarespace is a very SMB-focused company and no individual unique subscription / customer accounted for more than 1% of total bookings in 2019 or 2020 or in Q1’21.
  • Squarespace is able to process and manage large-scale traffic on their customers’ websites and process 2.3B website views monthly (averaging over 45,000 requests per second) from 1B+ unique visitors.
  • Squarespace has 99.95% uptime for their products and aim for sub-second latencies for core user experience interactions.
  • Squarespace has a dual-class voting structure and class A shares have one vote per share and Class B has ten votes per share and Class C has no voting rights. CEO, Anthony Casalena, holds 68.2% of the voting power of outstanding capital stock
  • Squarespace has ~$540M in total debt.

Industry stats

  • According to Intuit, there are over 800M small businesses and self-employed ventures globally, and according to the Kauffman Index, ~540,000 new businesses are created each month in the United States. According to Clutch, ~46% of small and medium-sized businesses (“SMBs”) are not online today.
  • Squarespace pitches its design-first approach and cites a couple of studies about it’s importance: 94% of first impressions are design-related, and it takes less than 0.05 seconds for someone to form an opinion about whether they like a website or not. 
  • According to a survey conducted by Rareform New Media, 48% of people cite website design as the number one factor in determining the credibility of a business.
  • Statista projects 2.1B+ people worldwide are expected to purchase goods and services online by 2021. This will accelerate the growth of global retail ecommerce, which eMarketer expects to increase from $3.5T in 2019 to $6.5T in 2023, representing 22% of overall retail spending in 2023. 
  • In 2020, online commerce sales accelerated with the onset of COVID-19, as consumers spent $347B online with U.S. retailers in the first six months of 2020, up 30% YoY, according to Digital Commerce 360.
  • In response to a recent survey of SMBs commissioned by Mono Solutions, 71% of SMBs prefer DIY (“do-it-yourself”) or DIFM (“do-it-for-me”) versus hiring an agency to create and maintain their online presence.
  • There is significant room for international expansion and according to eMarketer, worldwide internet penetration is at 51% vs. the U.S. at 90%.

Market Opportunity

Squarespace’s market opportunity was large but got even bigger through COVID as more and more companies had to go online to survive, as evidenced by Squarespace’s accelerating growth rate in 2020. The SMB market is massive and Squarespace discloses a few statistics from research on their total market opportunity: 1) According to the World Trade Organization, SMBs represent over 90% of all global companies and contribute 55% of GDP in developed economies. 2) Based on data from Intuit, as of 2019, there are an estimated 800M SMBs and self-employed ventures worldwide. Given those numbers, Squarespace believes their market opportunity to be greater than $150B by applying their average revenue by subscriber/customer to those TAM (total addressable market) figures. The company also mentions the growth in ecommerce software as a tailwind and notes that Statista projects the size of the ecommerce software application market to grow from $6.3B in 2020 to $7.3B in 2024.

Competition

The SMB website hosting, marketing, and ecommerce infrastructure market is undoubtedly competitive and Squarespace faces competition across the different pillars of their product offerings. The company calls out some of the following: 1) Online presence/website solutions such as Automattic, Wix, and Weebly 2) ecommerce solutions such as Shopify and BigCommerce 3) domain registration and hosting services such as GoDaddy 4) email marketing products like MailChimp and ActiveCampaign and 5) scheduling solutions such as MindBody and Calendly. There are also other companies such as Kajabi* that offer all-in-one solutions for online knowledge businesses, Webflow* which offers companies the ability to create websites without code, and Patreon, where creators can manage and monetize their online presence. For SMBs, having to manage multiple tools for your ecommerce infrastructure, payments, hosting and marketing isn’t ideal so Squarespace’s all-in-one solution that is easy-to-use offers a strong value proposition against point solutions. While Squarespace offers all-in-one functionality, they have many competitors that focus on different aspects of their business.

Investors and Ownership

Squarespace has raised $579M in equity financings according to Pitchbook and has ~$540M in debt. Investors include General Atlantic, Accel, D1 Capital, Tiger, Dragoneer, T.Rowe Price, Fidelity, Index, and others. 5%+ pre-offering institutional investor shareholders include General Atlantic (18.7%), Index (13.3%), and Accel (10.6%). Anthony Casalena, CEO & co-founder, holds a 33.5% stake (all percentage ownerships calculated based on fully-diluted shares outstanding). The last round was a $305M round in March 2021 which included new investors Dragoneer, Tiger Global, D1 Capital Partners, and Fidelity at a $10B valuation ($68.42 per share). Given Squarespace is opting for a direct listing where no primary capital will be raised and their focus on M&A, strengthening the balance sheet before the direct listing is not surprising. Interestingly, in December of 2019 the company repurchased stock from a couple of employees, Accel, General Atlantic, and Index, which sold $60.5M, $108.3M, and $78.9M, respectively. CEO, Anthony Casalena, sold $96.8M.

An output of the cap table ownership and per series prices is below.

Source: Company S-1

Below is a chart of the preferred price per share disclosure and the share repurchase the company did in late 2019.

Source: Company S-1

Voting Structure and CEO Performance Award

Squarespace has dual-class stock and CEO, Anthony Casalena, represents ~68% of the total voting power of outstanding capital stock. The company mentions “he will have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of our directors. As a founder-led company, we believe that this voting structure aligns our interests in creating stockholder value.” Moreover, the board of Squarespace created a long-term incentive plan for CEO, Anthony Casalena, in April of 2021. The S-1 mentions “The Casalena Performance Award is divided into ten equal tranches that are eligible to vest based on our achievement of ten different and steadily increasing stock price targets, each of which will be deemed to have been achieved when the average closing price of a share of our Class A common stock on the trading days over any consecutive 30 calendar day period during the Performance Period equals or exceeds the applicable stock price goal.” Mr. Casalena must be employed by the company at the time the market condition is met in order to vest in any tranche of the award. At the highest target of $420.00/share, Mr. Casalena would receive a cumulative 2,750,000 shares, worth ~$1.2B. Given Mr. Casalena controls the company and is worth ~$3.3B at the last round price, a performance award is a great retention mechanism. Coinbase and Affirm, recent IPOs, both had performance award plans for their respective CEOs as well. Mr. Casalena has also run the company for almost 20 years.

Mergers and Acquisitions (M&A)

Acquisitions are a core part of Squarespace’s growth strategy and Tock was the most recent. Tock did $23M of revenue in 2020 and $9.1M of revenue in Q1 of 2021, representing 3.6% and 4.8% of total revenue. The company previously completed and integrated 3 other strategic acquisitions: Acuity ($50M), an end-to-end scheduling service provider, in April 2019; Videolicious ($12M), a provider of video creation solutions, in August 2019; and Unfold ($50M), a social toolkit for storytellers, in October 2019. An output of other acquisitions is below.

Source: Company S-1

Financials and Other Metrics Outputs

Squarespace is a $750M+ ARR business with ~30% unlevered FCF margins, growing 30%+ YoY, displaying impressive scale and efficiency for a company selling a $200/year SaaS product. COVID has been an accelerant for the company -- revenue growth has slightly increased from 26% YoY in March-2020 to 31% YoY in Q1'21. At the same time, the company has stepped up spend on sales and marketing to drive further growth. Non-GAAP operating margin was 15% in 2020 and in Q1’21 down to 1% with most of the drop coming from the company’s increased investment in sales and marketing (55% of revenue in Q1’21 vs. 42% in 2020). Their implied months to pay back, which is the inverse of a CAC ratio (implied net new ARR multiplied by gross margin/sales and marketing spend of the prior quarter), was at a 22-month median over the past 8 quarters. Squarespace has raised ~$580M in total funding (according to Pitchbook) and has $183M in cash. Given they have spent at $338M (discloseD) on acquisitions the number implies they have spent ~$60M to get to $750M+ in ARR, a 13x+ ratio of ending ARR / implied net burn to IPO quarter (it’s probably even better if the data was available to strip out secondary sales). Squarespace has been a highly efficient business to date. Outputs of other metrics are below:

Historical P&L and Metrics ($000's)

Source: Company S-1

Quarterly Revenue ($M)

Source: Company S-1

Implied Ending ARR ($M)

Squarespace reports ARRR (Annual run rate revenue) but only for a few periods so the chart below plots implied ARR (quarterly subscription revenue * 4), which is lower than their reported ARRR figure, but helpful to see the trendline over time. Squarespace added $26.7M of implied net new ARR over the past quarter and $160.4M over the past year.

Source: Company S-1

Subscription vs Non-Subscription Revenue %

Source: Company S-1

Average Revenue Per Unique Subscription / Customer

The average customer pays Squarespace almost $200/year and the company is growing that number slightly year-over-year.

Source: Company S-1

Quarterly non-GAAP Gross Margin and Operating Expenses as a % of Revenue

Source: Company S-1

GAAP and Non-GAAP Operating and Net Income Margins

Source: Company S-1

Cash Retention and Cohorts

Squarespace doesn't release a dollar-based net retention or net dollar retention figure, but they do release something called cash retention rate, which is similar. It is the "percentage of revenue share and subscription bookings received in the current period from website and domain subscriptions in existence during the same period in the prior year. In calculating cash retention, revenue share from contractual arrangements is allocated to the relevant subscription base based on the gross merchandise value (“GMV”) processed on the platform."  Their cash retention rate for the years ended December 31, 2018, 2019 and 2020 was 83.2%, 83.5% and 85.6%, respectively.

Source: Company S-1

Squarespace also releases a graphic that represents cumulative cash from each website and domain subscription cohort. As evidenced from the chart, their cohorts grow over time.

Source: Company S-1

Sales Efficiency and Payback Periods

Squarespace doesn't release customer counts at every quarter, but the below output plots their implied months to payback using the inverse of a CAC ratio (net new implied ARR multiplied by non-GAAP gross margin/non-GAAP sales and marketing spend of the prior quarter). The magic number is defined as implied net new ARR/non-GAAP sales and marketing spend of the prior quarter. Apart from a slow quarter in Q1'20, Squarespace has been quite efficient. The median months-to-pay-back over the disclosure period is 22 months.

Source: Company S-1

Cash Flows ($M)

Source: Company S-1

Quarterly P&L (000's)

Source: Company S-1

Valuation ($M)

Squarespace will trade like other high-growth SaaS companies: on a multiple of forward revenue and while they generate cash, will not likely steer investors to that as a multiple. Wix (NasdaqGS:WIX) and BigCommerce (NasdaqGM:BIGC) and probably good comparables and I've outputted their current multiples and the implied valuation for Squarespace below using their multiples. The output below uses NTM (next-twelve-months) revenue based on an illustrative range of growth rates and comparable EV (enterprise value) / NTM revenue multiples from other public, high-growth SaaS businesses. As mentioned in other posts, companies do not release projections or guidance in S-1's. It's very possible Squarespace could trade above their last round of $10B in March of 2021.

Note: Enterprise value ranges and growth rates are illustrative.

Final Thoughts

Squarespace is operating in a massive market, have broadened their product suite through acquisitions, has strong metrics, an efficient and self-serve GTM model, and their market is seeing tailwinds due to COVID -- businesses need to come online to survive. Moreover, their product offering is essentially the digital "front door" for their customers and given their focus on best-in-class design, customers will be drawn to their solution to offer a great experience to their potential customers. Additionally, their commerce business is growing GMV ~100% YoY and could be a huge growth driver for the company going forward. Shopify (NYSE:SHOP) is worth ~$150B and Squarespace is already competing there and vying to gain market share against them. On the other hand, there are multi-billion-dollar private companies that offer just a piece of Squarespace's product in the email marketing, scheduling, online classes and membership spaces, let alone the size and scale of Shopify (NYSE:SHOP). Will customers choose an all-in-one solution like Squarespace or opt for best-of-breed solutions like those offered from companies like Calendly for scheduling, Kajabi* for online knowledge businesses, or Webflow* for no-code website design? The market is probably big enough for both approaches to work but competition will be a huge question for Squarespace in the future. Although, given the exuberance around technology IPOs -- and in particular those like Squarespace that have large scale, an efficient GTM and actually make money -- they should have a very successful listing / IPO.

*Meritech is a shareholder in Kajabi, Roblox and Webflow.

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Special thanks to Chris Gaertner for the help on this post.

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