Nextdoor SPAC Investor Deck: Scale and User Engagement

Nextdoor to Become Publicly Traded via SPAC Merger

The trend of companies going public through special purpose acquisition companies (SPACs) persists, with the social networking platform Nextdoor announcing its plans to enter the public market. This will be achieved through a merger with Khosla Ventures Acquisition Co. II, a blank-check company.

Transaction Details and Funding

The merger is projected to yield gross proceeds of approximately $686 million for Nextdoor. This figure includes a $270 million private investment in public equity (PIPE) funded by various investment groups.

These funding sources encompass existing Nextdoor investors, such as Tiger Global, Nextdoor’s CEO Sarah Friar, and Khosla Ventures themselves.

Venture Capital and SPAC Deals

Interestingly, Khosla Ventures was not previously listed as an investor in Nextdoor according to data from Crunchbase and PitchBook. This demonstrates that even SPACs affiliated with venture capital firms actively seek investment opportunities beyond their existing portfolios.

Company Valuation

According to a press release from Nextdoor, the transaction establishes a pro forma equity valuation of around $4.3 billion for the company.

This represents a significant increase from its last private valuation of $2.17 billion in a Series H funding round in late 2019, which raised $170 million at a $2 billion pre-money valuation.

Analyzing the Investor Deck

To understand the investment opportunity, a review of Nextdoor’s investor deck is essential.

The deck provides a transparent overview of the company’s financial performance, both historically and with future projections. Unlike many SPAC presentations, this one avoids excessive embellishment.

Key Observations

Generally, Nextdoor’s investor deck offers a realistic assessment of the company’s position and potential. The typical criticisms leveled at SPAC charts are largely inapplicable in this case.

A detailed examination of the deck will follow to provide further insights.

Nextdoor’s SPAC Proposal Analysis

This analysis will proceed by examining the investor deck in the order the slides were originally presented, to fully grasp the company’s valuation rationale, both present and projected.

The presentation begins by highlighting that Nextdoor boasts 27 million weekly active users – referred to internally as “neighbors” – and asserts that approximately one in three U.S. households utilizes the platform. This establishes the core argument: Nextdoor possesses significant scale.

Several slides later, Nextdoor articulates its core mission: “To foster a more compassionate world where every individual has a dependable neighborhood.” While perspectives like those found on @BestOfNextdoor might challenge the coherence of this statement, it’s crucial to acknowledge it. The company genuinely aims to connect people.

However, it acknowledges it cannot dictate user behavior, as evidenced by past experiences. The prevalence of negative interactions on Nextdoor, a widely recognized phenomenon, is a direct consequence of the platform’s expansive reach.

Supporting its active user numbers, Nextdoor presents its user retention data, visualized as follows:

It’s important to note that these figures represent monthly active users, differing from the weekly active user count initially cited. Consequently, the metrics are less stringent. A user is considered active if they “initiated a session or opened a content email within the past 30 days.” The precision of this metric is open to interpretation.

The company’s valuation argument continues by noting that user activity increases as platform adoption grows within a given neighborhood. While intuitively obvious, it’s beneficial to see this expectation validated by data.

Nextdoor further contends that its user base differs from those of other social networks, exhibiting activity levels comparable to Twitter, though lower than major U.S. platforms like Facebook, Snap, and Instagram.

The rationale behind categorizing Nextdoor alongside other social networks is as follows:

This illustrates the potential for increased monetization as the user base expands. The company suggests that, similar to Snap, average revenue per user (ARPU) can grow over time, and a larger user base, like Twitter’s, can facilitate this growth.

How does Nextdoor intend to expand its user base to realize these projected benefits? The subsequent slide outlines its strategy:

Contact synchronization and sharing features are presented as standard expectations. The introduction of guides, video content, and Q&A functionalities offers slightly more innovation, though none represent groundbreaking advancements.

The presentation then proposes a scenario where users engage with multiple neighborhoods, such as their residential and work locations. This could potentially enhance engagement, but the extent to which individuals desire involvement in numerous local networks remains uncertain.

Nevertheless, Nextdoor estimates a “4.5x increase in reach by achieving global penetration levels consistent with its established U.S. neighborhoods.” Currently, the company reports 45 million households as users, with 37 million in the U.S. and 8 million internationally. It believes an additional 158 million households can be reached by attaining 65% penetration in existing markets. Furthermore, it identifies another 109 million households as potential opportunities in future market expansions.

Thus far, Nextdoor has asserted its substantial size, the loyalty of its users, the uniqueness of its user base compared to other platforms, its capacity for improved monetization, and its potential for user base expansion.

While expanding its user base may broaden its overall audience, Nextdoor’s primary proposition centers on its success in achieving its current scale and its commitment to replicating that success in the future.

Following a review of the leadership team, the presentation shifts to financial considerations.

Evaluating Nextdoor as a Business Opportunity

Let's assess the viability of Nextdoor as a business venture. The following outlines the company’s core monetization strategy as presented to potential investors:

In simpler terms, the company emphasizes the uniqueness of its service, the retention of its user base, and the principle that product quality improves with increased utilization. They also highlight multiple avenues for increasing revenue per user, acknowledging that some of these methods are easily replicable, and that there remains untapped revenue potential in international markets.

Next, let’s examine the presented data. Fortunately, the charts provided are well-constructed and present a clear picture, unlike those often found in SPAC presentations.

Consider the following visual representation:

This data represents historical performance, ensuring its factual basis.

Observations reveal an 8 million increase in verified users from Q1 2020 to Q1 2021, representing approximately 15% growth. Weekly active users increased by 3 million, or 12%, during the same period. Furthermore, Average Revenue Per User (ARPU) saw a rise of just over $1, equating to roughly 29% growth year-over-year.

Therefore, the company demonstrated the greatest success in boosting ARPU, followed by verified user acquisition, and lastly, in increasing engaged user numbers over the past year.

Now, let's turn to the future projections:

It’s important to note the projected deceleration in revenue growth, disregarding the stylistic arrow. Nextdoor anticipates a slowing growth rate, with a decrease of 5 percentage points in 2021 and 4 percentage points in 2022, following a 13 percentage point decline from 62% in 2019 to 49% in 2020. This trend is significant.

Nextdoor also reports a 31% ARPU growth in Q1, an acceleration from the Q4 2020 rate. This is a positive indicator, suggesting the company may not need to drastically increase its user base to achieve its growth targets, provided ARPU growth remains consistent as the total user base expands.

The company’s detailed performance breakdown is presented below:

The 2020 ARPU growth should be viewed with some caution. Considering the impact of the pandemic on the advertising market, this is understandable. Despite this, Nextdoor still achieved 49% revenue growth in 2020, starting from a $83 million revenue base in 2019, which is a commendable achievement.

However, future projections present challenges. Operating expenses are not expected to fall below 142% of revenue by 2022, indicating a prolonged path to profitability. The company also anticipates increased net losses this year, with no improvement projected for 2022.

Adjusted EBITDA is expected to remain flat at -$50 million this year, with only a modest improvement to -$45 million in 2022. This translates to over $10 million in quarterly adjusted losses for the foreseeable future. Investors should recognize that they are investing in growth, not immediate profits.

This leads us to the company’s second flywheel model, which expands upon the initial, more focused version:

The core concept is that user acquisition drives improved monetization, which strengthens relationships with revenue partners, enabling further investment in product development and expansion. This, in turn, increases reach and engagement, restarting the cycle.

These flywheel diagrams are a common feature in investor presentations, though their substantive value is often limited. They may serve as a signal of shared understanding between the company and its investors.

Ultimately, Nextdoor positions itself as a social network, a model that has proven successful in the past.

However, with moderate user growth anticipated, investors must carefully weigh expectations for revenue growth, balancing ARPU expansion with net user acquisition. At a $4.3 billion valuation, Nextdoor trades at a 24x forward revenue multiple, or approximately $156 per weekly active user as of Q1 2021. Investment decisions should be made with these factors in mind.