J. Bryan Scott

So far, most news I’ve seen on OpenTable’s IPO fails to analyze the company, instead myopically focusing on the boldness of going public in this market.

But this is a fair point. It’s very peculiar that a company needing only $40 million would file for IPO during a credit crunch. Further, OpenTable is backed by three venture firms including the top-tier Benchmark Capital (partner: Bill Gurley), and the company is running at break-even. Life-support capital seems an unlikely motive. Dare I say this might be a sustainable company?

Digging deeper, I found a killer platform currently disguised as a service. OpenTable has installed its touchscreen reservation system in 8,788 restaurants in North America (nearly 1-in-3 of the 30,000 addressable) with a YOY growth rate of 29%. The system is a proprietary hardware+software device that interfaces in real time with OpenTable’s website. From the site, diners reserve tables at no additional charge. The restaurant guarantees a customer, and the diner guarantees a place to eat. It’s a win-win.

OpenTable lists pen & paper reservation systems as its primary competitor. Remember the word processor vs. typewriter? We know that ending. Consumer-facing applications aside, OpenTable alleviates a major pain point among restaurants (through the Electronic Reservation Book or ERB) and sells a proprietary product with a wide and growing moat. Better yet: restaurateurs are highly self-referencing, meaning that local markets develop like wildfire through word-of-mouth.

And at an average cost per diner seated of $0.69 (see table below), restaurant owners can easily gauge ROI. This may be the most riskless, cost effective, and predictable CPA advertising available to restaurants today. After all, how much closer to revenue can you get than a customer sitting at a table in your restaurant? This is brilliant, and only OpenTable can do it.

But I see reservations as just the first of many applications to be built on this unique restaurant platform. Check history, billing, and standardized menus are just a few that come to mind. Verified (the reviewer actually ate there) restaurant reviews already launched last year. Deep, seamless integration with the platform makes these applications far better than any set of strung-together, third-party services. Each of these applications will either generate revenue or augment the customer experience.

OpenTable should dominate the reservation-taking restaurant vertical for a long time to come. Similar to Microsoft, they can reap the rewards of being an entrenched platform, albeit serving a much smaller market. More cautiously, it’s not inconceivable that OpenTable could expand with similar success into similar verticals. I’ll be watching OpenTable closely. As an investor, I dream of companies like this. Pending an attractive valuation, I’m a buyer of OpenTable at IPO (at reasonable valuation, of course).

More points that get me excited about OpenTable:
-Great management with experience managing restaurants + internet co’s
-Average price points seem very compelling (see table below)
-SaaS model that customers and Wall Street favor (higher Price/Sales)
-Both Subscription and Reservation Revenue growth outpaced installed restaurant growth

Disclaimer: This is my personal opinion and should not be construed as investment advice. Always consult an investment advisor before making investment decisions.