The hunt for growth is on

The news that GSI Commerce has acquired private shopping club Rue La La for $350m has put the small but excitable world of European shopping clubs and their investors into a tizzy.  The concept of members-only short-duration sales online was a European invention, and the largest players in the category remain European -- a rare exception to US dominance of Internet business models.  And yet the first shot of M&A was fired within the US.

This deal gives some comfort to the many European VCs who have placed bets with vendors over here.  One of the big unknowns they all faced at the time of their investment is what the ultimate capital markets value of these businesses would be.  The pessimistic view is that these are lowish gross margin businesses that would eventually trade like mature online retailers of branded goods, eg around 1x revenues.  Amazon's acquisition of Zappos for just under or just over 1x revenues (depending on whether you net off returns) earlier this year seemed to confirm this view. (If you like transaction forensics is your cup of tea, here is a good analysis of the Amazon/Zappos deal).

But this view does not take account of the extraordinary growth rates the buying clubs are experiencing.  Rue La La is on an annualised revenue run-rate (based on Q3) of $112m, and is said to be forecasting $230m revenues next year.  This resembles the 2006-2007 trajectory of market leader Vente-Privee, and puts Rue La La only slightly ahead of the runners-up in Europe, including BuyVIP and Brands4Friends.  So now we know what growth is worth in this market: over 3x run-rate revenues.

This reflect a broader trend in the technology and Internet markets as the US emerges from recession and the rest of the world muddles through it.  Growth is at a premium, and the tech industry -- cash-rich as it is relative to other industries -- will increasingly seek to convert cash into growth.  Cisco's recent acquisition of security managed services firm ScanSafe for $183m is another prime example.  Scansafe's revenues in 2008 were said to be just $23m, but supposedly doubling year on year.

For a venture capital industry hungry for exits from aging portfolios this is a spot of good news.  But clearly it is those companies that can return to growth quickest in the recovery who will be first in line.

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