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April 16, 2021
If you've listened to a podcast in the last decade, then you've probably heard of Squarespace. In January 2021, the website-building platform confidentially submitted paperwork to the SEC to initiate its public offering. The S-1 became publicly available on April 16, confirming that Squarespace would go public via direct listing on the New York Stock Exchange.
Squarespace will join Roblox, Palantir and Coinbase in opting for a direct listing, which has become an increasingly popular IPO method over the last year. A date has yet to be set for the trading debut.
What does Squarespace do?
Squarespace helps small and medium-sized businesses and individuals make, host and manage websites. The platform is intended to simplify the process of getting a website up and running: Users choose from a menu of general templates and customize their site using drag-and-drop design functionality. Once subscribers publish their website, Squarespace will help them with operational tasks such as managing ecommerce sales and expanding a target audience through SEO.
Squarespace has grown its customer base steadily over the years, ending 2020 with 3.7 million unique subscribers. This represented a 22.5% increase relative to the subscriber count at the end of 2019. The pandemic has also helped bolster demand for Squarespace's platform, particularly as many restaurants have had to accommodate a rise in online orders. To expand the range of services for restaurants, Squarespace acquired restaurant CRM platform Tock at the end of March in a deal worth over $400 million.
Squarespace generated $621 million in revenue for 2020, representing a 28% increase from the $485 million in revenue it generated in 2019. Revenue growth tracks closely with subscription growth, though Squarespace has focused on growing ARPU by expanding its range of services. Still, subscription revenue accounts for the vast majority of total revenue: 96% in 2019 and 94% in 2020. The remaining revenue primarily came from fees generated from ecommerce partnerships with payment processors.
Squarespace first became profitable in 2016. It generated $30.6 million in net income for 2020, a steep decline from the $58.2 million generated in 2019.
The decline in profit between 2019 and 2020 coincides with an increase in expenses. For instance, Squarespace increased its marketing and sales spend more than 40% between 2019 and 2020, which the company says came in response to "accelerating trends in the amount of time and money consumers are spending online during the COVID-19 pandemic." Likewise, research and product development costs increased 56% between 2019 and 2020. Overall in 2020, marketing and sales accounted for the largest share of operating expenses (54%), followed by research and product development (35%) and general and administrative expenses (11%).
What could go wrong?
Founded in 2003, Squarespace has been around a long time by internet standards, and has demonstrated consistent user and revenue growth over the years. Still, as the saying goes: Past performance does not guarantee future success.
Three themes stand out from the Squarespace S-1: steep competition, the potential for rising costs associated with this competition and the emergence of new product categories.
There is significant competition in the website-hosting and -building space, as evidenced by Squarespace's considerable sales and marketing spend.
- Direct competitors include Wix.com, GoDaddy, WordPress and Weebly, which all offer website-hosting and -building services to small businesses and individuals.
- Squarespace writes that this industry is "evolving and highly fragmented" and it expects competition to "intensify in the future as existing and new competitors introduce new solutions or enhance existing solutions."
Due to this intense competition, Squarespace emphasizes the need to continually innovate and spend more to attract and retain customers.
- The S-1 draws attention to the mobile commerce space as an area where innovation will be needed to stay ahead of the competition, since "commerce transacted over mobile devices continues to grow more rapidly than desktop transactions."
- Even if Squarespace successfully fends off competitors, there's a chance that it will become significantly less profitable in the process. For instance, Squarespace calls out the possibility that competitors bid up the price on search terms that it uses to drive traffic to its site, which could result in increased marketing costs and decreased traffic.
- Fierce competition also means Squarespace has less flexibility to charge customers higher subscription fees. "As competitors introduce new solutions, we may be unable to attract new customers at the price or based on the pricing models we currently use, and we may be required to reduce prices," the company writes.
Finally, competition isn't just limited to other general website-building platforms. Some of the fastest-growing competitors specialize in catering to only one customer segment within Squarespace's existing subscriber base.
- Substack is a prominent example of this phenomenon. While writers and bloggers represent a fraction of Squarespace's total subscriber base, it's possible that they will be lured away to a competitor that specializes in catering to their needs. Substack has grown considerably in the past year in part because it has tailored its product to writers and independent journalists, adding services such as Substack Pro, which provides advances to writers, and the Defender service, which offers legal aid.
- Similarly, restaurants have numerous channels available to sell their food online. Squarespace's offering with Tock faces competition from delivery services such as Uber Eats, DoorDash and Grubhub, along with other restaurant CRM services such as TouchBistro and Toast.
- Squarespace writes that the competition may intensify "as established companies in other market segments or geographic regions expand into our market segments or geographic regions."
Who gets rich?
Squarespace has divided its shares into Class A and Class B. Class B shareholders are given the right to convert their Class B common stock into one share of Class A stock at any time, though Class B receives 10 votes per share for every one vote entitled to Class A stock.
This setup makes it difficult to say precisely which entities will own Squarespace when it makes its trading debut. As of March 31, 2021, the largest institutional shareholders included Accel, General Atlantic and Index Ventures. Squarespace CEO and founder Anthony Casalena was the largest individual shareholder and controlled 68% of the total voting rights.
What people are saying
- "The social networks continue to try and monopolize users' time and attention, which means sending them to Facebook Pages instead of Squarespace sites and to Twitter profiles instead of Substack blogs. Without that audience, independent publishers and website owners don't have a chance. So they're striking out for the middle ground, to find a way for everyone to have a home online that doesn't rely on the whims of a tech giant, while reckoning with the fact that the tech giants effectively run the online world." —David Pierce wrote in a November 2020 article on Protocol, which features an interview with Casalena.
- "Disappointed that Squarespace didn't specify in its direct listing prospectus how much of its marketing costs are from podcast ads." —Jordan Novet, a tech reporter at CNBC, mused in a tweet.