Valuing ExactTarget a hit-or-miss exercise

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ExactTarget Inc. hasn’t made a penny since 2008. But since early 2009, the estimated value of its shares has more than doubled—from $9.34 to $19.17.

That’s one of the intriguing statements in the marketing-software company’s Nov. 23 preliminary prospectus outlining plans to raise $100 million in an initial public offering.

The filing says the increase in appraised value, based on third-party valuations, reflects a broad range of positive developments, including signing on new clients, increasing revenue and making acquisitions that position ExactTarget for overseas growth. The company has aggressively pushed beyond its roots as an e-mail marketer to allow clients to build relationships with customers via mobile, social media and websites.

The latest per-share valuation, multiplied by the 28 million shares outstanding, gives the company an overall value of $537 million. Private companies trade at a discount to public companies, given their lack of liquidity. So as a public company, ExactTarget could be worth substantially more.

But let’s take time out for a reality check. Appraisals of private companies are inherently dicey. That’s especially true if they’re not making money, since valuations often are calculated as a multiple of earnings, said John Reed, president of David A. Noyes & Co.’s Investment Banking Group.

That helps explain why it’s not unusual to see companies’ shares skyrocket or plummet immediately after they go public. Reed called valuing a firm like ExactTarget, which has sacrificed profits to fund tens of millions of dollars in R&D, “alchemy.”

Perhaps so. But even in this choppy stock market, investors have been willing to pay up for technology companies with impressive market positions—even if they’re nowhere near turning a profit. Such was the case with locally based Angie’s List, the online provider of consumer reviews, which went public in November at $13 a share.

The stock now trades for $16.75 a share, giving Angie’s List a market value of $882 million. Never mind that the company has lost $129 million since the beginning of 2006, including $43 million through the first nine months of this year.

But even with all their uncertainties, valuations of private companies aren’t built out of thin air. One common practice is to look at what the shares of publicly traded competitors are fetching—an exercise that no doubt imbues ExactTarget’s venture capitalist owners with confidence.

One of its top rivals, California-based Responsys, went public in March and now has a market value of $401 million—or 4.1 times the $98 million in sales it recorded so far this year. Massachusetts-based Constant Contact, an e-mail marketer targeting smaller customers that ExactTarget focuses on, went public in 2007 and now has a market value of $755 million, or 4.8 times the $157 million in sales it’s had through the first three quarters.

Applying a similar multiple, 4.4 times, to ExactTarget’s $148 million in revenue this year yields a market value of $651 million—which would put the firm among Indianapolis’ 15 most-valuable public companies.

Yet what really has investors excited about companies in this sector isn’t today’s revenue. It’s the expectation that they’ll be growing at an explosive rate years into the future.

But how fast, and how certain, is that growth? Ultimately, investors will be going with their gut when they assess ExactTarget’s IPO. Which is why even the most optimistic ExactTarget insiders will feel at least a little unease the morning the stock starts trading—and the market decides what the company’s really worth.

Compton on sidelines

The name of angel investor Bob Compton, the longtime chairman of ExactTarget and a key figure in the development of the 11-year-old company, doesn’t appear anywhere in ExactTarget’s 140-page IPO filing.

It turns out that Compton, a prominent funder of many Indianapolis technology companies, stepped down from the board when he moved from Memphis to Washington, D.C., more than a year ago.

“Bob’s years of active involvement were critical to ExactTarget’s success—from his personal investments, to helping with strategy, to raising capital, to mentoring our management team,” company spokesman Mitch Frazier said.

Compton added: “I am still a meaningful shareholder in ExactTarget and think very highly of the company.”•

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