Give credit to Niraj Shah and Steve Conine as entrepreneurs who managed to grow a business from humble beginnings and eventually take it public. But that’s only part of the story.
Shah and Conine are the founders of Wayfair Inc., the Boston company that’s on track to sell well more than $1 billion of furniture and home decor items online this year. Wayfair got a warm reception when it went public last week, raising more than $300 million. I can’t remember the last time a Massachusetts IPO raised that kind of money.
As you would expect, the Wayfair stock offering made Shah and Conine wealthy men. Each cofounder owns $677 million of Wayfair stock, based on Monday’s closing price.
But here’s where the story of Wayfair and its founders really becomes something rare: They’ve managed to retain absolute control over a venture now valued at more than $3 billion. Founders of tech businesses usually see their ownership diluted over time by venture capital firms and public stockholders who provide the money necessary to build a big company.
Wayfair has raised lots of cash since it was created 12 years ago in Conine’s South End home, pulling in more than $650 million from venture capitalists and public investors. But Shah and Conine still control nearly 57 percent of the voting power among Wayfair’s owners. They aren’t just the final word in business matters at the company. They are the only voices that count on big questions.
For a comparison, consider another hot local technology IPO expected to hit the market this week: HubSpot Inc., where founders Brian Halligan and Dharmesh Shah will retain just 11 percent of the voting power when their Cambridge marketing software company goes public.
So how did Shah and Conine keep control of the business they built? They declined to talk to me, so we’re not going to hear this firsthand.
But looking at the business, Wayfair’s furniture retailing operation isn’t as simple as it seems.
The founders started small with oddball categories (their first e-commerce site was racksandstands.com), but their technology allowed them to pass orders on to vendors, who shipped products directly to customers.
Thanks to its order routing and shipping system — eventually established with thousands of vendors — Wayfair did not need to keep huge amounts of inventory at its own warehouses. That dramatically reduced the amount of capital Wayfair needed to grow.
In fact, Wayfair established a profitable track record and grew annual sales to $500 million by the time Shah and Conine arranged the company’s first round of venture funding. They were bargaining from a position of rare strength when those terms were set.
“What they were solving was an engineering problem,” said Alex Finkelstein, a general partner at Spark Capital and a Wayfair director. “If you have seven million items on your website and the order gets routed out directly to a manufacturer and ends up in your house two days later without going through a warehouse, that’s not a simple problem to solve.
“They were quietly the innovators of doing this in the United States. That’s really why they were able to get so big without raising money,” Finkelstein said.
Shah and Conine have another, less commendable advantage when it comes to counting stockholder votes.
Their shares — and those owned by venture investors — count for 10 votes. The shares Wayfair sold to the public get just one vote each.
That kind of dual-class stock system has been around a long time. Wang Laboratories Inc. employed it way back when. Google Inc. and Facebook use it today.
But it stunk back in the days of Wang, and it’s just as antidemocratic today.
Alibaba Inc., the wildly popular Chinese online retailer, went public in the United States two weeks ago using the same kind of voting system.
Initially, Alibaba wanted to list its stock in Hong Kong, but regulators there insist on a one-share, one-vote rule. (The place that attacks democracy protesters with pepper spray maintains higher standards than we do when it comes to shareholder rights.)
The dual-class system at Wayfair does not give the company’s founders an especially effective voting advantage now. But that could change in the years ahead if Wayfair issues millions more one-vote shares to pay for some kind of future expansion.
Shah and Conine built a big, remarkable company from the ground up. And they’re the people who will call the shots for years to come.
Steven Syre is a Globe columnist. He can be reached at firstname.lastname@example.org.