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Innovation Economy

Two big Boston startups prepare to go public

Wayfair co-founders Niraj Shah and Steve Conine.

Wayfair

Wayfair co-founders Niraj Shah and Steve Conine.

Lots of successful Boston companies are in businesses that are tough to comprehend, like ones that crank out signal processing chips or develop gene therapies.

But if you’ve ever shopped for furniture, or if you maintain a blog to promote your business, you’re a prospective customer for two of Boston’s fastest-growing startups, Wayfair and HubSpot. Both companies are expected to go public this year, and while one sells home decor and the other helps businesses attract customers and close sales, they’ve got a lot in common.

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Wayfair and HubSpot were both started in the aftermath of the dot-com boom, in 2002 and 2006, respectively. Both had founders who met on university campuses: Wayfair’s Steve Conine and Niraj Shah went to Cornell University together, and Brian Halligan and Dharmesh Shah of HubSpot took some of the same courses at MIT’s Sloan School of Management.

And importantly, the founders of both companies had had a taste of success earlier. The Wayfair duo had started a website development firm in Boston, Spinners Inc., and sold it in 1998 for $10 million to iXL Enterprises. Dharmesh Shah had been a cofounder of Pyramid Digital Solutions, which created online tools for the managers of retirement plans. It was sold in 2005 to SunGard Business Systems for an undisclosed amount.

“Given that these founders already made some decent money and had sold companies, it feels like they’re in it this time for a much bigger outcome,” says Scott Savitz, founder of the Boston venture capital firm Data Point Capital. “It’s a different thing than when you’re building your first business on your credit card.” Wayfair had revenue of $913 million last year; HubSpot, $77 million.

Both companies understood earlier than most the power Google was having on the world of business. In 2002, the year Wayfair was founded, Google surpassed Yahoo as the search engine of choice for Internet users. Wayfair’s founders understood how to design sites that would show up prominently when people searched Google; their first site, RacksAndStands.com, which sold items like stereo cabinets and TV stands that were tough to find in retail stores, booked its first revenue within 24 hours of its launch. HubSpot helped teach businesses how to blog and add useful content to their websites that would help all those Google searchers discover their services.

But the HubSpot founders were instinctively better marketers than the guys at Wayfair, who initially named their company CSN Stores, a mash-up of their initials. Halligan and Dharmesh Shah coined the term “inbound marketing” to describe the way customers were discovering businesses through online searches (as opposed to responding to “outbound marketing” like junk mail or TV ads). They wrote a book with that title, and started an annual conference that brings more than 5,000 people to Boston each summer.

Even as Conine and Niraj Shah were figuring out how to get consumers to purchase bulky and hard-to-ship items like suitcases and bedroom sets online, though, they were doing it with a sprawling network of about 200 separate sites: Luggage.com and BedroomFurniture.com, for instance. It wasn’t until 2011 that they acknowledged that they needed to create a single brand that might pop to mind when consumers thought about buying something for their homes — a 21st century Crate & Barrel. That year, they took their first outside funding, a whopping $165 million, and changed the company’s name.

Both Wayfair and HubSpot have raised money from some notable investors. In Wayfair’s case, Spark Capital, the firm that backed Twitter and Oculus VR, wrote a big check. HubSpot has raised money from Google Ventures and Sequoia Capital, which has previously invested in Apple, Atari, Cisco, and YouTube.

And both companies are unique in the Boston ecosystem. Wayfair is the biggest e-commerce company we’ve ever seen locally, with 1,600 employees and ads that regularly run on television. And HubSpot is an enterprise software company that has figured out how to talk about new customer acquisition in a way that isn’t a total snooze-fest. (Halligan is coauthor of another book called “Marketing Lessons from the Grateful Dead.”)

HubSpot CEO Halligan says his company is focused on enabling the “Amazonification of your marketing.” What does that mean? In the same way Amazon displays a different selection of products based on what you’ve bought and looked at in the past, HubSpot wants to help businesses make their websites and e-mail marketing messages “more contextualized and personalized.” But HubSpot will face tough competition from much bigger players like Oracle and Salesforce.com, as well as newly public companies like Marketo.

Amazon comes up when people talk about Wayfair, too. Unlike Amazon, Wayfair doesn’t stock most of the merchandise it sells in its own warehouses; instead, items are shipped directly from the manufacturers. “Anyone in e-commerce has to ask themselves the Amazon question: Can they kill us overnight?” says Alex Finkelstein, an investor at Spark Capital and Wayfair board member. “But you can’t stock 500 different couches in 75 different colors in a warehouse. That’s why Wayfair is so interesting.”

But Matt Lauzon, an entrepreneur who previously cofounded the jewelry site Gemvara, says that while Wayfair has figured out how to deliver a consistent experience to buyers even though it doesn’t control all its inventory, “my guess is what they think about when they think about competitive threats is how to compete with Amazon.”

Niraj Shah and a Wayfair public relations representative responded to questions via e-mail, but declined to grant an interview for this story. At a conference last summer, Niraj Shah said that Wayfair wanted to increase the awareness of its brand and the level of repeat sales to previous customers before going public. “It’s hard to be a publicly traded online retailer without a certain level of awareness,” he said. He and HubSpot’s Halligan have both deflected questions about specific timing of IPOs.

It’s not a slam dunk that both companies will wind up going public. There are plausible acquirers for each firm, and the stock markets have been skittish this year. “The markets may be getting a little more selective about which companies can go public,” says Peter Falvey of Falvey Partners, a Boston investment banking firm.

Though Wayfair and HubSpot have been growing up just a few miles away from one another, the four founders don’t know each other very well. But they share the same goal.

“We want to build a big public company, an anchor company in Boston,” says Halligan, who grew up in Westwood. “Wayfair is definitely one, and hopefully HubSpot can be one. We want to bring Boston back.”

Scott Kirsner can be reached at kirsner@pobox.com. Follow him on Twitter @ScottKirsner and on betaboston.com.
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