If you’re a late-stage tech company under pressure from your investors to go public sometime soon, you (and your investors) might be freaking out right now. How can we stage an IPO when Uber’s stock is still down around 25% from its offering price, you might wonder? And when Postmates just delayed its deal, and WeWork grapples with an embarrassing financial bailout instead of an expected public offering…
My message is, fear not—at least if you’re a certain type of B2B cloud company. I say this because even though some prominent consumer IPOs have tanked lately, the public debuts of many enterprise-focused companies that sell their products through the cloud have shined, and they offer lessons to other late-stage tech companies hoping to test the public markets, even in these uncertain times.
Zoom, the video- and audio-conferencing colossus that leverages the cloud, has seen its share price nearly double since its IPO. Cloud-native security outfit CrowdStrike’s shares are up more than 50%, while those of cloud-monitoring service Datadog, which went public last month, have risen nearly 29%. And of course some of the big B2B tech IPOs from 2017 are still soaring: Shares of open-source database company MongoDB and cloud-software provider Okta have both more than quintupled. (Shares of one of the other best performing IPOs of the year, faux-beef producer Beyond Meat, has more than tripled but hey, there’s no predicting vegetarians.)
The winning tech companies all have a few things in common—namely, cloud-based or developer-focused business models that acquire customers quickly; a stable customer base; and a path to profitability, if they’re not making money already. All these companies are riding some pretty large-scale trends in how technology is built and deployed across big and small organizations today, and I think these trends are here to stay. So if you’re hoping to follow in the footsteps of these newly public companies, and create a recession-friendly, IPO-ready business model, here are five tips.
1. Index yourself to cloud infrastructure and developer-adoption cycles. Right now, organizations globally are spending an increasing amount of money on cloud infrastructure—so your company should be delivering products in the cloud too. Microsoft Azure, part of the Microsoft’s cloud division, is growing at nearly 60% and Amazon Web Services, which just reported quarterly revenue of $9 billion, is growing at 35%. Despite these impressive figures, overall adoption of cloud infrastructure still represents less than 10% of the $705 billion IT market, according to Goldman Sachs, but cloud is growing at a pace we’ve almost never seen before.
The world’s 23 million software developers represent an influential crowd for adopting new technologies, but new “low-code” and “no-code” software models that are more accessible to non-technical workers could expand the pool even more, turning the 800 million-plus information workers worldwide (per Forrester) into developers, too. Both cloud infrastructure and developer-focused software represent significant opportunities for startups. Your company’s growth rate five to 10 years after an IPO can be enhanced significantly, in my view, by indexing to these two trends.
Case in point – consider Zoom and CrowdStrike, both companies that are trading at double-digit multiples of forward revenue and multi-billion-dollar valuations, according to CapIQ. Zoom’s video and audio-conferencing technology has leveraged cloud-infrastructure and bottoms-up adoption to knock Cisco’s WebEx systems out of many accounts, for instance, while CrowdStrike has replaced many old-school anti-virus products from large companies like Symantec with its cloud-native and AI-focused endpoint security product.
2. Efficient customer acquisition translates to quicker payback periods. Old-school enterprise technology from legacy vendors like Oracle and Cisco used to be sold through big, multi-year license agreements. Armies of well-paid salespeople worked hard at these companies and others to land those “big fish” accounts worth millions, or even hundreds of millions, of dollars. And once that bulky software was installed inside an organization, it was tough to rip out.
Today’s most prominent enterprise companies are doing things a different way: Often, developers inside large organizations first buy companies’ products with their own credit cards or use free (at least initially) open-source software. Once the products prove their value and spread virally inside organizations, they start getting the attention of CIOs with big budgets, who generally then buy them through subscription agreements. This produces a string of recurring revenue for the software vendor. It also translates to a significantly lower payback period, as the product does all the initial selling and enterprise CIOs “pull” the product in rather than responding to expensive sales and marketing campaigns. MongoDB, for example had 30 million downloads of its freemium technology at the time of its 2017 IPO, more than one per every one of the world’s 23 million developers, and only 4,300 paying customers. Datadog, similarly has a freemium product to drive bottoms-up demand; the payback period for its product was just eight months at the time of its IPO, according to…
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