We just got a chance to look at the presentation that the Nextdoor team assembled for the purposes of pitching its proposed SPAC IPO to investors. So we figured we would do a follow-up piece to our earlier post, with extra attention to some of the details that Nextdoor has shared.
We believe Nextdoor is an increasing component of the local, digital social landscape. And it can have an important role to play going forward. Given that, we thought it would be worthwhile to explore the prospectus for the benefit of our readers. So here it goes.
The Seven Bullets that Define Nextdoor
In the first couple of pages of the presentation, the company makes these key points as their business thesis. We’ll take a look at each one.
- Network effects with online and offline connections are unique. Our view is that this isn’t really a very unique aspect of Nextdoor. Many online experiences have a supporting and/or corresponding offline experience.
- Each social link is highly valuable because most commerce is local. We do agree that most commerce is local; that may mean 2 miles or 20 miles depending on the geography but local is a key denominator.
- Robust current digital advertising market, future new revenue models. We agree the digital advertising market is large and growing. Our biggest concern is the challenge of insinuating a large ad model into what’s been a consumer-driven experience without harming the consumer experience along the way.
- Many vectors for sustained revenue growth. We’re not sure what those vectors of sustained growth are – perhaps there’s a paid member model lurking but we’re not really sure if that will fly.
- High barrier to entry: network difficult and time-consuming to build. For sure this is a challenge to anyone trying to build the size and scale that Nextdoor has built over the last 13 years.
- Only digital neighborhood network: purpose-driven and authentic. If the company can hold to these values it can use this as a differentiator. However, that may be easier said than done.
- Proven team: set up for acceleration and execution. We agree that given the current leadership lineup, the team has the right logos next to their names to be winners at Nextdoor. But the question remains, can Nextdoor evolve into the advertising machine the prospectus suggests it can?
We are also wary of the company’s ability to deliver on its mission statement. “To cultivate a kinder world where everyone has a neighborhood they can rely on”. There is a lot of virtue in this statement. And a lot of wishful thinking.
Neighborhoods often seem to attract like-minded individuals. As such, we tend to move to places, to neighborhoods, that we expect will produce kind experiences. We do not think Nextdoor alone can create a kinder world. People have to do it themselves.
The Nextdoor Flywheel
In the next section, the company highlights its “flywheel” so to speak. Nextdoor describes it in the following way.
Real people. Presumably, the people are real, but we can’t help wonder if someone won’t push bots into the experience at some point.
Hyperlocal proximity. Yes, Nextdoor is local and as it gets members and coverage, it becomes increasingly local or hyperlocal. We’re just not sure what “hyper” local really means in the Nextdoor context.
Trusted information. This is perhaps the attribute that we question the most. With very light moderation, members can post almost anything.
Local perspective. This is certainly a nice-sounding characteristic. Though we’re not entirely sure what it means.
Instant distribution. We assume this means that an advertiser can quickly reach its desired audience. But this assumes the audience is engaging.
How Engaged is “Engaged”?
The company indicates that after 24 months, 50% of members remain engaged. The company’s fine print definition of engaged members are those “who have started a session or opened a content email over the trailing 30 days.” There is no acknowledgment of a member tapping an email from Nextdoor and simply looking at the headline and swiping forward.
The company also says an engaged member is someone who started a session. OK, was that a 5-second or 5-minute session? The company calls out this metric to argue it has solved the product-market fit and that they experience “enduring neighbor retention”. Here’s our question. Is their definition of “engaged” really a true measure of engagement?
One of the most interesting charts in the presentation focuses on how the company believes it can expand its engagement with more “use cases”. The company believes that members will add additional neighborhoods to their “feed”.
With most users currently follow the neighborhood where “I live” the company hopes to add more neighborhoods, some of which are compelling. Others not as much. For example, where “My Mum lives”, “I own a business”, and “I want to spend the summer”. Going even further, Nextdoor adds the following. Where “I used to live”, “I want to move”, “I volunteer”, and “I own a vacation home”.
We’d expect some traction for “My Mum lives” and “I own a business”. We would expect less traction for “I used to live” and “I volunteer”.
A Growing International Audience
Drilling even further into the “audience” potential, the company currently counts some 45 million “claimed” households. Among these, 82% or 37 million are in the United States. A claimed household must “have at least one Current Verified Member (CVM) at the residence.”
Interestingly, the company aspires to add 158 million “claimed” households as its next opportunity. And then another 109 as a future opportunity. The majority of these will come from international markets. Meanwhile, the U.S. segment will account for just 40%, compared to 82% today. This suggests the company’s core audience or household growth will be outside of the U.S.
What’s important about Nextdoor’s aggressive push into non-U.S. markets is that it cites the growth in digital media as an important driver and opportunity. The company points to a digital advertising TAM of $355 billion today growing to $607 billion by 2024, according to eMarketer. The U.S. portion of that figure is 40% in 2020 and 43% in 2024.
One thing we know about the media market is that the U.S. is vastly larger on a per capita basis. To the tune of about 10X. So while the company points to its aggressive member or user growth outside of the U.S., it is chasing a relatively smaller digital media opportunity.
Can Nextdoor Get There?
There are additional slides in the presentation that are worthwhile evaluating. The areas we focused on in this post relate to the company’s expectations around its “audience” growth and its relationship to digital media. While we are enthusiastic about how the company has built a very interesting local community network, we are wary of the challenges that lie ahead for the company.
Yelp is similar to Nextdoor in that it had to insert a monetization model into a highly developed consumer engagement model. Yelp was founded in 2004 and today it generates about $1 billion in annual revenue from local digital advertising in the U.S. And the company is valued at $2.8 billion. Nextdoor, by contrast, was founded in 2011 and generated $123 million in 2020 with expectations to grow to $250 million by 2022. And yet it boasts a significantly higher $4.3 billion valuation.
We’re eager to see Nextdoor go public and achieve its lofty goals. But we’re not fully convinced there’s an easy pathway to get there. However, we doubt we’d have predicted Facebook would grow from roughly $5 billion in annual revenue when it went public in 2012 to $86 billion last year. So we stand ready to be proven wrong by Nextdoor’s very capable leadership.