Klaviyo’s $738m War Chest

TLDR:

The manic acquirer

Klaviyo Odyssey to $60B

LBAB Community - The Manic Acquirer

As I've had more time to analyze my acquisition process, I’ve noticed how manic I am throughout it.

I've come to realize I need to hold 2 completely opposite ideas/states in my head at the same time.

I need to think about the biz with:

1. Unbridled Optimism and excitement

2. Staunch skepticism

1)  I need to be able to get unreasonably excited about an idea to actually acquire it.

2 words: suspending disbelief. 

I know that operating this biz is going to be like HALO jumping into a perfect storm. I know it’s going to be 10 years of getting punched in the face, but I need to believe in the outcome so much that the concussions will be worth it.

I noticed that I've wasted my time the past 2 years looking at deals where I'm excited about an idea/play/concept about the biz or the financials, but I'm not actually excited about the biz itself.

I've come to realize these decisions are so massive from a financial and time commitment POV that every LOI we submit needs to be either a “HELL YEAH!!!!” or an “Absolutely not.” There’s no in between.

Every deal, project, you name it, needs to go through that lens.

2) I need to be an absolute skeptic.

I need to believe: 

• These people are gonna f*** me over in every way possible.

• This business is going to implode tomorrow and everything is going to go wrong.

The paranoia that grasps you as a founder is the same all operators face. It’s me against the world and while some of the greatest highs might happen in my biz today, every day, I’m fighting off 1k things that could kill it.

And when you acquire, it’s 2k things because you are basically the organ that has been implanted in a foreign body on top of all the usual suspects.

The toughest part:

Finding the balance between unbridled optimism and radical skepticism is where the truth actually lies.

Right now I’m only a Pawrent, but this feels like being a parent.

You need to be so unbelievably excited and encouraged about the future and so painfully concerned about every small thing potentially harming your child today that putting up with all the pain, terror, and discomfort becomes an afterthought.

You need to ensure it survives long enough that it actually lives to see that incredibly exciting future.

It's a fascinating psychological experience. And something I've been more aware of with every deal in our process. 

I essentially need to ride the entire roller coaster of this biz’s life story before hopping onto the tracks.

I'm sure when I do this 50 times (or, heck, probably 5), it will feel less manic. But I hope that I always think of it as a roller coaster. 

It’s what makes this game thrilling.

Now let’s dive into everyone’s favorite ESP and favorite ESP to hate… Klaviyo. And their 2023 earnings.

Let’s Examine This Biz

Note: NOTHING that follows is investing or financial advice, just my own analysis.

Klaviyo, Shopify’s favorite ESP, is struggling in the public markets because what made it famous is now every investors’ greatest concern. 

Can it step out of the shadows of its Shopi-daddy?

Trading at $24.18/share with a $6.3B market cap, -28% since its IPO last fall. They’re getting punished for having solid, but not great financials. Public investors want their socks blown off.

Not the performance you want to see. But also not beating the drumb Wall st wants to see right now.

Financial Summary

*$306m is from Stock Based Compensation (SBC) due to the IPO. 

TLDR Analysis: Lean, Mean Operating Machine

• Revenue outgrew COGS, leading to fat Gross Margins.

• Way overspent on every level of OPEX.

• So incredibly cash efficient.

Klaviyo is growing into its public market shoes with strong fundamentals. Its OPEX is high, but it’s balanced out with a strong growth story. After adding $345m onto the books with the IPO fundraise, Klaviyo is in a super strong position.

Let’s Analyze This Biz!

We aren’t going to buy this biz, but if we took some shares and wanted to sway the board the 3 steps they should take.

1) Going All In. Again.

Klaviyo is basically operating at break even and pushing all of their chips back on the table. They raised $345.2m at IPO and “lost” $308m in 2023.

I don’t believe in adjusting any numbers, but this truly is a 1x expense. The biz isn’t going to go public any time soon.

Where’s all that growth going?

• R&D (+152% YoY)

• G&A (+138% YoY)

• Sales & Marketing (+82% YoY)

They aggressively grew headcount in the “market growth” roles. They have a lot of Product to sell + build.

What most bizs see as a major milestone + an opportunity to take some chips off the table, Klaviyo saw as a large-scale fundraising round to slam their foot harder on the gas pedal.

They announced 2 new massive markets (Restaurants & Wellness), and everyone + their mother is launching an Email offering, but this feels like they are preparing for an invasion of a much larger market.

Takeaway: IPOs aren’t the end of the journey, but when the game really begins.

2) Klaviyo is picking up what Shop is putting down

Klaviyo’s fastest growing customer segments are also its most valuable. $50k+ ARR  bizs (+80% YoY). No surprise Shopify’s focus is dictating their direction.

Everyone can bark all they want that Klaviyo is just proxy Shop stock… And they’re probably right because that’s the most value-accretive strategy Klaviyo can currently play. 

@ $6B, Klaviyo is still the barnacle on Shopify’s ($100B) whale. Being Shop’s #1 Email app as Shop charts the $100B -> $1T path with be the fastest/most profitable growth lever they have. 

If Klaviyo can 10x along Shop’s path, they will become a $60B biz without any of their other product lines or markets working out.

Everyone always sees IPOs as big exit moments as the time to diversify, but if you know a market is going to get more valuable, your job every single time is to stack your chips and go all in where they create the most value. A good portion of the time that’s reinvesting it into what’s already working. 

In other words, keep riding the whale.

As long as Shop’s primary focus is the Ent march, so must Klaviyo’s. The mutually beneficial sales pitch of:

• Mid-Ent Brands migrate to Shopify and default to Klaviyo.

• Mid-Ent Brands migrate to Shopify FOR Klaviyo’s features (👈happens more than you think).

When you find a partner you can build your life around, don’t chase greener grass and mess up a great thing.

Takeaway: Klaviyo + Shopify = 🤝🤝🤝

3) To Be Horizontal or Vertical?

Klaviyo has decided it’s going to be a horizontal, not a vertical, SaaS player. To break down the SaaShead language:

All bizs need to decide whether their unfair advantage is going to be playing in:

• 1 market DEEPLY or 

• Multiple markets with a rich feature set

The best ex of this was Mailchimp vs. Klaviyo 10 years ago.

1. Horizontal SaaS player: Mailchimp. Built for any biz + use case.

2. Vertical SaaS player: Klaviyo. Only Ecom (heavily concentrated in Shopify) with incredibly similar use cases.

Klaviyo dominated the Shopify market because of how much Shopify grew in that decade. That growing customer base required an incredibly specific tool. 

10 years ago the fastest way to build a $1B app was to clone a Horizontal SaaS app for Shopify:

• Reviews: Bazaarvoice -> Yotpo

• Subscription: Stripe -> Recharge

• Support: Zendesk -> Gorgias

• Fulfillment: Classic 3PLs -> ShipBob

• SMS: Twilio -> Attentive

• Returns: Happy Returns -> Loop

But now the question Klaviyo is asking itself (Aka the question public market analysts are hurling at them): @ 10% of Shopify’s Total customer base and 61% of the Plus market, is there enough growth left in the Shopify ecosystem for a public market SaaS?

I obviously believe there is, but that’s “too risky” of a bet for a public biz that just IPO’d and needs to convince investors their narrative is all about growth. So, Klaviyo is going to experiment with the Horizontal game. 

They’ve already launched:

• Klaviyo for Wellness

• Klaviyo for Restaurants (Attentive has been in this space for years)

The Roadmap (My Speculation):

• Klaviyo for Hotels

• Klaviyo for Airlines

• Klaviyo for Mechanics

• Klaviyo for Live Events

• Klaviyo for any physical world purchase you could buy online

This will be a long, expensive journey to find market #2 that will be as/more valuable as market #1. And let me be clear. Market #2 is out there. But… 

1. How many side quests will Klaviyo need to pursue to find it?

2. Could they have just made the eCom offering better for the same growth?

3. How much is home base at risk by making new markets the focus?

The decision has been made, and they’re already plowing full steam ahead here. And now that they’re a public biz, they need to report on quarterly progress which prefers activity to long-term building (aka patience). 

I’m not the CEO, and maybe Klaviyo was always meant to sling pilates, but this to me feels like when you’re stuck in traffic and you take the local detour that takes just as long, but it feels better to be driving the whole time.

Klaviyo will end up in the same place but have to drive a lot more to get there. Vs. cranking some music, open the windows and ride out the bumper to bumper traffic.

Takeaway: Know your TAM. Dominate it. Only then Expand.

Final Thought

This biz is preparing for something. I don’t know what, but they’re building an incredibly strong balance sheet. This is past the point of a break in case of emergency fund amount of cash.

They have $738m in Cash & Equivalents and only $130m in Liabilities. This could be a classic building-the-war-chest play, but it feels like something greater is being prepared behind the scenes.

Klaviyo didn’t need to IPO last year. If you look at their L3  Net Losses:

• 2021: -$79.3m

• 2022: -$49.1m

• 2023: -$308m (-$2m without the SBC)

Klaviyo was already basically breakeven with $400m+ in the bank. They have 7x their liability in cash on hand and are growing their best in their most profitable category (50k+ stores). 

Klaviyo is incredibly strategic with how they fundraise and when. They raised $400m Series B, but that was well into the biz and they only spent $15m of it.

Yes, they:

• Provided liquidity for investors/employees

• Bumped their brand recognition by being public

• Added $345m in fresh cash to the books

But they don’t need the money. For a biz that is famously non-acquisitive, growing well, and fresh to the public markets, it’ll be interesting to see what they do next.

🧠 The Takeaways

Klaviyo is a good biz but is spreading itself thin with too many focuses. They may crush a new category, but they’ll have to navigate a graveyard of others to get there.

1. Klaviyo saw their IPO as an opportunity to press harder on the gas pedal.

2. Shopify’s best growth = Klaviyo’s best growth

3. Klaviyo wants to be a horizontal SaaS biz. Repeating the cycle it disrupted to become 👑.