I recently wrote an article about how companies need to tighten their belts as time are tough and are likely to remain that way for some time. Well it seems that well known US portal site Zillow is feeling the pressure and on Friday announced that they would be laying off 25% of their work force.
On the company's blog, Rich Barton, the CEO, said "This was an incredibly painful decision for me and the leadership team, but, in the end, we concluded that we had no choice but to securely batten down the hatches as we sail into a major economic storm.
The unprecedented economic events that are playing out on a global stage began in our own industry and have made a prolonged recession likely, in our judgment. We are a young company that is not yet making a profit. Despite having sizeable cash reserves, we deemed the responsible course was to meaningfully reduce expenses, so that Zillow emerges from the other side of the recession in a very strong position, even if the recession lasts many years."
This move for Zillow is not unexpected. In a recent article on CNET, Rafe Needleman identified 11 companies; that may be in trouble as the financial crisis drags on. What was interesting is that the only property portal site he identifed was Zillow. This is what he said:
"The real-estate site's revenue model is advertising. Real estate and bank advertising. Unless the real-estate research site starts charging for foreclosure listings, I don't see it doing too well in a hunkered-down economy, in which people are trying to hold on to their homes for dear life, not upgrade."
If you look a little more closely at Zillow, you can understand why they would be laying off staff in an effort to reduce costs. The site is rumoured to have revenues around the US$10m per annum. To generate these revenues they have around 160 employees. Therefore, the total costs of the business are likely to be around $20m per annum leading to a cash burn of around $10m pr annum.
Although they have raised signifincant cash based on aggressive valuations (a reported US$87m had been raised by September 2007), they must now be starting to churn through that cash and given the current market conditions, they would find it challenging to raise any more money.
Is there any future for Zillow?
Now they claim to have 5.4m UV's in September 2008, up 42% on September 2007. In addition, with traffic like this, they probably deliver signifiant page impressions and therefore ad impressions. Now with numbers like this, they should be delivering significantly more revenue. The majority of revenues in this market are likely to come from finance companies and from real estate agents. Now finance companies have significant challenges and are unlileky to be investing significantly in generating consumer sales of their products.
The other challenge is serving the real estate market. This is a very hands on sales and therefore having a significant sales force is important for driving revneue growth. Therefore if you lay off 25% of your staff, you maybe laying off some sales people or at least some people in revenue generating roles. This will affect your ability to maintain revenue growth. If you are laying off technology and back office people, then you are probably affecting the future development of your products.
Either way, it will be challenging for Zillow to generate enough revenue any time soom to reach profitability let alone enough profitability to justify the valuations at which it has raised revenues.