Wellness startup Mindbody isn’t the cure for this ailing IPO market

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It’s the outcome that anyone who hosts a party dreads: Despite inviting all the cool kids, none of them show up. It turns out a better party is being thrown somewhere else. A few guests trickle in, but most of them turn out to be the ones you kind of hoped wouldn’t show up, not the ones that can take the party to the next level.

That must be how it feels to be a Wall Street investment banker underwriting tech IPOs in 2015. The real party is raging over there in private markets where companies like Uber, Xiaomi and Snapchat are imbibing intoxicating valuations. And on the public stock exchanges? It’s an empty dance floor.

Slowly, a few more companies are wandering into the IPO queue. Up next is Fitbit, the maker of wearable activity trackers that is profitable today but faces a challenging future, and Mindbody, which offers a cloud-based platform for small businesses in the wellness industry.

Like Fitbit, Mindbody is riding a growing health trend among consumers. And like Fitbit, the company is an early leader in an emerging niche, although one that has quickly become so competitive that its continued success is by no means a sure thing. Unlike Fitbit, Mindbody has a history of losses and may be going public now because its cash levels are running low.

Mindbody said Monday it would sell 7.2 million shares between $ 13 a share and $ 15 a share in an offering that is likely to come next week. At the middle of the range, Mindbody would raise $ 100 million, or $ 115 million if it also sells the over-allotment option reserved for higher demand.

And demand for tech IPOs this year has been healthy, largely because of the scarcity of the supply. Many IPOs have seen first-day pops that allow investors to cash out quickly if they wish but that inevitably lead to weeks if not months of slow, steady declines. Mindbody may not be an exception to this trend. Mostly, it may have trouble keeping investors happy in the months after it goes public.

The company has smaller revenues than most of the recent tech companies that have gone public: $ 70 million in 2014. While that’s notably higher than the dozens of IPOs in the late 90s that went public with less than $ 20 million in revenue, it’s also significantly lower than, say, Fitbit’s $ 745 million revenue in 2014.

While still small, Mindbody’s revenue growth is slowing: from 52-percent growth in 2013 to 44 percent last year to 42 percent growth in the first quarter of 2015. Meanwhile, the growth of Mindbody’s operating expenses is accelerating – from 88 percent of revenue in 2013 to 91 percent last year and 95 percent in the first quarter of 2015. As a result, operating losses are expanding faster than revenues.

This is worrisome on the face of it, but even more so when you consider how competitive the market is for cloud-based services for small businesses. Mindbody’s subscribers are yoga studios, personal trainers, health spas, beauty salons and other so-called wellness companies. But the barriers to entry are low and there are already plenty of similar companies competing in the area.

Mindbody has a competitive edge in its Mindbody Connect app which lets consumers find companies through reviews, see profiles on providers, check schedules and book appointments. The idea is that network effects will draw in both providers and consumers, but with only 42,000 providers and 24 million consumers it’s not clear network effects have kicked in. Connect only lists studios that are paying subscribers – a free service like Yelp lists many more and has more consumers writing reviews.

On top of this, Mindbody layers on other services for its subscribers, such as staff management software, payment services, consulting and conferences. But some of these services aren’t specific to the wellness industry and involve competition with better-financed enterprise-cloud companies. In payments, for example, Square, Intuit and others are gunning to offer point-of-sales technology for small businesses.

None of that means that Mindbody can’t hold on to its strong market position, especially as it expands abroad and into corporate wellness programs. But here’s the catch. All that expansion and marketing requires cash – and Mindbody has been burning through it. Operating cash flows rose from a negative $ 8 million in 2013 to negative $ 18 million in 2014. In the first three months of 2015, Mindbody’s cash flow was negative $ 6.5 million.

The company is increasing cash burn as it grows, and it needs to find new funding. After raising $ 35 million in 2012 and another $ 50 million in 2014, Mindbody had $ 22 million in cash at the end of March – about enough to get it through the year at the current cash burn rate. The $ 100 million raised from the IPO could sustain it long enough that operating cash flow turns positive and the operations can support itself. Yet this also feels like an IPO with a timer on it – raising cash in a hurry despite the generous market for private rounds.

MindBody begins its IPO prospectus by declaring that “Our vision is to leverage technology to improve the wellness of the world.” Which sounds noble enough, but it could also describe the mission of every biotech company, every medical device maker, every health-care software company, every manufacturer of gym equipment, anyone who’s made an app that plays soothing white noise or sounds of crashing waves, and even the company that made the Shake Weight.

High-minded rhetoric aside, Mindbody doesn’t come across as a particularly special IPO candidate. It’s not just losing money in a competitive industry, it’s burning cash to get to an uncertain future. But it’s one of the few tech companies to go public this year, and a cloud-based startup serving the wellness industry to boot. So investors may well give it a celebratory greeting.

And Mindbody’s underwriters will have to keep wondering why the more interesting companies aren’t coming to the IPO party they’re trying to get started.

PandoDaily

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