SAN FRANCISCO, Oct. 29 — When Jim Clark started Shutterfly, the online photo printing service, in December 1999, a 2-megapixel digital camera could set you back $800, investor enthusiasm for e-commerce was soaring and the words “Internet” and “bust” were rarely used in the same sentence.
For his part, Mr. Clark had something of a Midas reputation when it came to technology investing, having started Silicon Graphics, Netscape and Healtheon.
But what was expected to be a sprint at the peak of the dot-com boom turned into a marathon — one in which Shutterfly, at times, appeared to be faltering. Late last month, the company finally crossed a finish line of sorts when it became one of just a few e-commerce companies to go public since the dot-com bust.
While the offering may have enriched Mr. Clark and other early Shutterfly backers, it has been a money-loser so far for most who bought into it. And it has not brightened the decidedly downbeat mood of venture investors, whose fortunes depend on a healthy market for public offerings.
Shutterfly’s shares had a brief run-up after their market debut on Sept. 29, but since then they have dropped to $13.35, or 11 percent below the offering price of $15.
“It’s been an extremely difficult I.P.O. market this entire year,” said Mark G. Heesen, president of the National Venture Capital Association, noting that only 37 venture-backed companies had gone public through the end of the third quarter. “Then you see something like Shutterfly, which a lot of people were excited about, but has not performed as well as we were expecting.”
Mr. Heesen cautioned that “one I.P.O. does not make a trend,” and he noted that eHealth and other companies that have gone public recently had done well. But he said there were no indications of a pickup in the overall market for initial offerings.
Citing restrictions imposed by securities regulators, Shutterfly declined to comment or make Mr. Clark, who is chairman, available for an interview. The company is scheduled to report earnings on Nov. 7.
While seven years is not an unusual amount of time for a venture-backed firm to go from start to public offering, the pace was often much quicker back in 1999. Coming in at the tail end of the boom, Shutterfly had no choice but to take its time — and weather some difficult periods.
“It’s been a long process,” said George Zachary, one of the original investors in Shutterfly. Attracting customers “was slower and consumed more money than we would have liked,” he added.
Mr. Zachary, formerly a partner at Mohr Davidow Ventures, the second-largest investor in Shutterfly after Mr. Clark, is now a partner at Charles River Ventures and no longer sits on Shutterfly’s board.
Shutterfly has been profitable for three years, but it is facing a digital photography market that is much different from when it started. Mr. Clark promised at the start that Shutterfly would usher in a revolution in digital imaging, and seven years later, there is no question that digital technology has revolutionized the world of photography. But Shutterfly appears to be more a product of the revolution than its standard-bearer.
Shutterfly’s two main competitors in online photo printing, Ofoto and Snapfish, have been acquired by Kodak and Hewlett-Packard, respectively. (The Ofoto service was renamed Kodak EasyShare Gallery.) These deep-pocketed patrons have challenged Shutterfly on price, hurting its profit margins.
Meanwhile, a large new crop of Internet companies is capitalizing on the explosion of digital images taken not just with cameras but also with cellphones. Most of these companies, which include Photobucket, ImageShack, Slide and Flickr, which was acquired by Yahoo last year, emphasize online sharing over printing.
Tapping a younger generation of consumers for whom photography has become a form of online self-expression, often as part of blogs or social networking sites like MySpace, they have, in some cases, dwarfed Shutterfly’s audience.
“The competitive landscape is very crowded,” said Sam Snyder, a research analyst at Renaissance Capital, an independent research firm that runs a mutual fund focusing on initial offerings. Shutterfly “has huge competitors breathing down its neck, undercutting it on price,” he said.
Early last year, the standard price of a 4-by-6 print was around 29 cents. Today, they cost 19 cents at Shutterfly, 15 cents at Kodak and 12 cents at Snapfish, though volume discounts are available.
Shutterfly was founded by Dan Baum and Eva Manolis, who had been engineering managers at Silicon Graphics. After receiving financing from Mr. Clark and Mr. Zachary, another Silicon Graphics alumnus, the fledgling company moved into a modest office suite above a Jenny Craig Weight Loss Center in Menlo Park, Calif.
The humble surroundings apparently did not impress representatives from major photo-printing equipment firms like Fuji and Konica, whom the company was courting. “They didn’t know whether to take us seriously or not,” said Mr. Baum, who is now an executive at Adobe.
Still, Shutterfly managed to obtain the hardware it needed, and by the time it was ready to open its virtual doors it had moved to new headquarters in Redwood City, Calif., where it is still based.
Coincidentally, the company was started the same day as Ofoto, which counted James Barksdale, the former chief executive of Netscape and therefore a business partner of Mr. Clark, among its investors.
“Ofoto and Shutterfly were like two identical petri dishes,” said James Joaquin, the former chief executive of Ofoto. He said that the shorthand for the rivalry between the two companies was “Clark vs. Bark.”
There were many similarities between the two — not just the features on their Web sites but also their enthusiastic embrace of the Internet boom’s get-big-fast mantra. That meant giving stuff away. Ofoto promised 100 free prints to its first million customers, a promotion valued at tens of millions of dollars. For its part, Shutterfly was giving away 85 percent of its prints by mid-2000.
The collapse of the Nasdaq, and the demise of e-commerce pioneers like eToys, Kozmo, Webvan and others, changed all that. “When we got into the postbubble, things really tightened,” Mr. Baum said. “It was tough. Fortunately, we had a real business.”
Still, by early 2001, the company was forced to cut a quarter of its work force, and kept having to go back to investors, including Mr. Clark, for more money. The extra rounds of financing continued even after the company turned its first annual profit in 2003.
By the time it was ready to go public, Shutterfly had received nearly $90 million in financing, and Mr. Clark owned 40.3 percent of the company, according to regulatory filings. Mr. Clark’s share has dropped to 30.4 percent since the public offering. His stake is valued at about $96 million.
Mr. Clark has moved to South Florida, where he has started a real estate development company with Tom Jermoluk, another Shutterfly investor and the former chief executive of the failed broadband company Excite@Home. Forbes recently estimated Mr. Clark’s wealth at $1.1 billion.
Shutterfly, which is now led by Jeffrey T. Housenbold, its fourth chief executive, has said it plans to use some of the proceeds from its $87 million offering to expand its printing and production operations. As 4-by-6 prints have increasingly become a low-margin commodity, the company has focused on selling more lucrative products, like customized calendars, greeting cards, photo books, mugs and mouse pads. The company now calls itself an “Internet-based social expression and personal publishing service.”
“Shutterfly’s specialty is a very robust catalog of photo gifts and merchandise,” said Alan Bullock, an analyst at InfoTrends, a market research firm.
Recent partnerships that Shutterfly announced with Scholastic Media and HIT Entertainment emphasize the merchandise business, Mr. Bullock said. The deals allow customers to place their own pictures — or more likely those of their toddlers — in books alongside well-known characters like Thomas the Tank Engine or Clifford the Big Red Dog. The books start at $35.
Shutterfly said it has sold about 370 million prints since its inception and has stored a billion photos in its online archives. Its sales grew to $83.9 million in 2005, up from $54.5 million the year before, while net income reached $28.9 million. Without a tax benefit of $24.1 million, profit for 2005 would have been $4.8 million. Shutterfly, whose sales peak in the fourth quarter, reported losses of $3.7 million in the first six months of this year.
Shutterfly’s growth rate shows that customers like its products. The bigger challenge for the company may be whether it can stay profitable by staking out a position as the premium brand in a cutthroat market.
“It’s a tough story to sell,” Mr. Synder said.
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