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GoTo.com IPO Set To Go This Week

From the time idealab founder Bill Gross first showed me GoTo.com well over a year ago, I've been intrigued by the model of having advertisers pay for keyword placement. The question Wall Street will ask this week amid a fire sale for Internet stocks, will GoTo.com's IPO also rise to the top?

GoTo.com's business model is fairly straightforward and one used commonly in Yellow Pages, newspapers, magazines, TV. Advertisers that pay the most get the most play, spread, air time, etc. Nothing revolutionary, but an edge on the way Internet search engines juggle and jostle search results, banner ad and keyword sales.

Rather than call GoTo.com a "search engine" I see it more as an advertising engine with a search result component. For example, if you purchased the top slot on any keyword on GoTo.com it would be yours, unless a competitor outbids you. And so on. An ad auction using search as the metaphor. An 'eBay' of sorts for search.

The idea is that real businesses with better products and services would outbid those with inferior products and services, just as happens in the real world in other media. That the thousands of unwanted search results you often get at many search sites don't occur as frequently because those that paid appear up top.

Sounds fairly market-driven, which is why GoTo.com has grown from that simple laptop demo to a company that now employs 75 people and with sales that look attractive. The key attraction to me in GoTo.com is the model potentially makes the keywords more valuable over time as companies bid and outbid each other for top placement. It is a market-driven revenue model that drives itself with advertisers placing the bids themselves and not through an ad force from GoTo.com. Market and software driven.

Those features led GoTo.com to post $1.4 million revenue for the quarter ending March 31, 1999. Losses for the quarter were $7.4 million.

GoTo.com wants 5 million shares at $12 through underwriters led by DLJ.

With 44 million shares outstanding after the offering that implies GoTo.com seeks a $520 million market capitalization, or what I estimate is 93x annualized revenue, on the high side in my opinion, especially given the Internet stock market weakness lately. Internet stocks are down 35% since mid-April.

On the other hand, search firms in the past have gone on to much higher valuations if we look at the history of everything from Infoseek to Yahoo.

To which the argument could be made that search is over-saturated, is there room for more? Search in the first-generation is over, but that turned them all into companies valued at several billion dollars along the way.

GoTo.com is not in that league yet nor may it ever get there, however. Clearly there is some work to be done before GoTo.com can be considered in the same breath as a Lycos or even a HotBot. Especially since GoTo.com is not an Internet media company as Yahoo is, for example.

There's also an abundance of the use of the term "Go" in rival Web firms including Go2Net (NASDAQ:GNET) and Disney/Infoseek's Go.com. Indeed, GoTo.com and Go.com have a court battle over a design logo since both logos use a green light with a yellow border.

On the plus side, GoTo.com has grown from nothing to being a fairly high-traffic service (#28 in April according to MediaMetrix with 4.4 million unique monthly users) by being aggressive. Its syndication network lets Web sites use its simple search box and has 40,000 networked now. Each gets paid for bringing in a searcher, by the search result.

Advertisers pay for that result click. Performance-based ad sales. Searchers also come in via licensed search that keeps searchers on third-party Web sites.

The downside to letting the market decide what your ad rates are, combined with getting paid for only actual results is that it makes revenue flow at the mercy 100% of the marketplace. GoTo.com doesn't establish a rate card per se. On the upside, ad rates are market-driven by capitalism. Buyers bidding for top slots, top slots selling to top buyers.

On the other hand, only those that pay the highest amount get returned, meaning that if a Web site hasn't paid GoTo.com the most then the search may not come up at all or near the top, even if that is the searcher was looking for. How does the searcher know the result is relevant?

For example, a search for "Microsoft" returned an ad for CompSource, not the company run by Bill Gates. In fact, Microsoft's Web site was #37 on the search results, after all the paid advertisers above it. Now that means two things 1) Microsoft hasn't paid to play here and 2) the searcher may not get what they want, only the highest buyer for their attention (which ought to be Microsoft with its $20 billion cash but it isn't).

idealab owns about 30% after the IPO; venture firm Draper Fisher Jurvetson owns 10.8% pro forma; Moore Capital 14%; Global Retail Partners, L.P. 4.7%.

If you're searching for how investors may find GoTo.com I see it in line with recent Internet IPOs that have done well first day but the triple-digit runs are probably gone for any Internet IPO for now. GoTo.com's first day? Could be $18 to low $20s per share. We'll see once the IPO light on this one goes green.


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