March 2021 is poised to be a very exciting month. We’ve already had the planned IPO for DigitalOcean announced (yes technically end of February), and now we have the announcement that SEMrush has submitted its S-1. Yes, that SEMrush! I don’t know any SEO agency who hasn’t used or is currently using SEMrush.


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S-1

Like the DigitialOcean S-1 we have the some standard details. SEMrush plans its listing on the NYSE under the ticker symbol SEMR. The IPO date and pricing has not yet been set. We should assume a quiet period of 30-90 days. They’ve similarly priced the IPO at $100 million, but that’s just a placeholder. Given revenues of $144+ million, we can expect another very substantially sized offering. Now the fun part, the Risk Factors section. While there is a lot of boilerplate text regarding general market conditions, past performance is not indicative of future performance, yada yada yada, there are a number of factors that should be pointed out:

Our business and operating results will be harmed if our paying customers do not upgrade their premium subscriptions or if they fail to purchase additional products.

Our future financial performance also depends in part on our ability to continue to upgrade paying customers to higher-price point subscriptions and sell additional user licenses, and products and add-ons such as Prowly, Sellerly, and Competitive Intelligence. Conversely, our paying customers may convert to lower-cost or free subscriptions if they do not perceive value in paying for our higher-price point subscriptions, thereby impacting our ability to increase revenue. For example, a paying customer subscribing to our core product through a “Business” subscription may downgrade to the “Guru” subscription if they do not deem the additional features and functionality worth the incremental costs. To expand our relationships with our customers, we must demonstrate to existing paying and free customers that the additional functionality associated with an upgraded subscription outweighs the incremental costs. Our customers’ decisions as to whether to upgrade their subscriptions or not is driven by a number of factors, including customer satisfaction with the security, performance, and reliability of our platform and products, general economic conditions, the price and functionality of our platform and products relative to those of our competitors, and customer reaction to the price for additional products. If our efforts to expand our relationships with our existing paying and free customers are not successful, our revenue growth rate may decline and our business and operating results will be adversely affected.

This is a tricky risk, maybe not so much for SEMrush but existing customers. Will there be pressure to reduce (or not improve) functionality of less profitable plans? Will there be much more aggressive up- and cross-selling?

Our products depend on publicly available and paid third-party data sources, and, if we lose access to data provided by such data sources or the terms and conditions on which we obtain such access become less favorable, our business could suffer.

We have developed our platform, products, and add-ons to rely in part on access to data from third-party sources. The primary sources of third-party data include data collected from third-party websites algorithmically through our proprietary data collection techniques, including web crawling of third-party websites, data purchased from independent third-party data providers, which includes clickstream data, search engine data, online advertising data, and data from social media sources, and reference data that our customers grant us access to, which includes our customers’ website and social media data. We obtain social media data through APIs that connect to social media platform operators, including Facebook, Twitter, Instagram, Pinterest, and LinkedIn. We also collect data from our customers in connection with their use of our platform.

[there are a number of additional paragraphs to this risk]

And

Changes by search engines, social networking sites, and other third-party services to their underlying technology configurations or policies regarding the use of their platforms and/or technologies for commercial purposes, including anti-spam policies, may limit the efficacy of certain of our products, tools, and add-ons and as a result, our business may suffer.

Our online visibility platform is designed to help our customers connect with consumers across a variety of digital channels, search engines, social networking sites, and other third-party services. These services may adapt and change their strategies and policies over time. Search engines typically provide two types of search results, organic (i.e., non-paid) and purchased listings. Organic search results are determined and organized solely by automated criteria set by the search engine, and a ranking level cannot be purchased. Search engines revise their algorithms from time to time in an attempt to optimize their search result listings. Changes to search engine algorithms may diminish the efficacy of certain of our products, tools, and add-ons, and potentially render them obsolete. For example, if a given search engine stopped using backlinks in its ranking algorithm, our customers’ perception of our backlink analytics tool, which enables customers to analyze and monitor the backlink profile of their own and other websites, may be adversely impacted. Similarly, if a search engine ceases to manually penalize or take action against web pages for unnatural backlinks, then our customers may determine that auditing their backlinks is unnecessary which could cause them to devalue our backlink audit tool, which enables companies to check whether malicious websites have links to their sites, or cease using it altogether. In response to these types of changes we may be required to recalibrate our product offerings by reducing prices, discontinuing the affected product, or otherwise. These responses may be costly, may not be effective, and our business may suffer.

Additionally, search engines, social networking sites, and other third-party services typically have terms of service, guidelines, and other policies to which its users are contractually obligated to adhere. For example, Google’s Gmail offering has a spam and abuse policy that prohibits sending spam, distributing viruses, or otherwise abusing the service. Prowly and our link building tool enable our customers to send emails to their desired recipients, such as marketing and affiliate partners, social media influencers, journalists, and bloggers. Our link building tool relies on a direct Gmail integration through which our customers are able to send emails using our platform as if they were sending emails directly from their Gmail account, and our Prowly product involves emails initiated by customers over Prowly servers. Our customers’ actions using either the link building tool or Prowly could be flagged under Google’s spam and abuse policy or in the future such actions may be prohibited by subsequent changes to Google’s policies. Any change to the policies of the third-party services with which our products, tools, and add-ons integrate or interact, or with which our products are intended to be used, including any anti-spam policies, or any actions taken by these third-party service providers under their policies could adversely impact the efficacy and perceived value of our products, tools, and add-ons, and as a result, our business may be harmed.

The above two risk factors cause me the most anxiety. So much of the livelihood and success of SEMrush is wholly reliant upon the success. Legal and regulatory issues for Google or social media could upend how useful SEMrush is, and let’s not forget the potential for “competitive” behavior to significantly reduce access to data.

Industry Ramifications

In the short term this will turn SEMrush into the 100 million pound gorilla for search optimization and content marketing. Popular tools like Ahrefs and Moz will really need to step up their games.

My gut tells me that SEMrush will do a lot of acquisitions in the space to shore up their market position, as well as providing leverage in any negotiations with their upstream data sources. If SEMrush can pay for enhanced data access, that will additionally provide them a competitive advantage to the whichever players are not acquired. I’m also guessing there will be a lot of tweaking of pricing strategies with maybe a super entry level product to facilitate the upsell and cross-sell opportunities. Regardless of what happens the IPO will certainly impact many web agencies.

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