WorkDay vs. Facebook: Lessons from a Successful IPO

I rarely write about public markets because you are likely to end up offending somebody J However I thought I will take time to write down a few thoughts from a conversation I had last week with a several private equity investors about the characteristics of the monster Workday IPO compared with previous public offerings of other software companies such as Facebook, Groupon or Zynga.

For the ones of you not familiar with the topic, a few days ago, enterprise software firm Workday debuted in public market with an initial offer at $28 per share. During the day, the price raised 72% closing at an astonishing $48.05 per share making the biggest IPO since Facebook. Comparing this phenomenal success with the week and unstable public offerings of predecessor software companies have made a lot of people reflect in some aspects that are still relevant in public markets. Here are a few I consider important.

• Focus on real revenue: Workday business model is to sale HR software to enterprises and by last January posted $134M in sales and a solid recurrent revenue model. Even the revenue number might seem small compared to companies like Zynga or Facebook, the IPO price was also very conservative and according to the company growth path with real customer and not based on artificial market share.
• A clear path to profitability: I have a strong bias against companies going public without having turned a profit. However, in the case of Workday, even without being profitable,  the company offers a clear customer acquisition and revenue models that make investors very confident.
• Wall Street Matters: Like it or not, when comes to public offerings the influence and help of Wall Street remains very relevant. Facebook’s IPO was sort of dismissive of Wall Street’s process and the result was a very unstable public offering. Workday worked diligently with Wall Street to structure a very solid public offering that can be sustained over time.
• Secondary Markets can hurt: One of the aspects that hurt Facebook’s and Zynga’s public offering was all the noise inherited from the secondary market on which shares were trading at fairly high valuations without any input from the public markets. Workday was very cautious when came to handle secondary market offerings and it didn’t affect their initial public offering.

 

When Comes to Enterprise Software Markets Old and Hot is Better Than New and Hot

A few days ago, I blogged about the tangible benefits an enterprise software startup can experience by operating in a competitive market. While competition is certainly good, it can take different shapes or forms depending on the characteristics of the target market. Probably two of the most distinctive types of competition an enterprise software startup can experience are determined by the maturity of the specific markets related to the product.

While is always sexy and exciting to try to provide interesting solutions in brand new markets, an enterprise software startup stands significant better chances of being successful and differentiating from its competitors by operating in an established market going through a transformational process.

Let me try to explain….

Any new hot enterprise software market will, by definition, produce an initial number of that will not only provide software solutions in the space but will also influence the direction of the market. In a new enterprise software market, any startup will face the challenge of competing against new and innovative companies, convince customers about the relevance of the new market and the value proposition of their new enterprise software product.

Despite of the fact that any new enterprise software market produces early adopters, most enterprises are typically cautious when investing in a new technology space. Traditionally, enterprises acquire technologies based on customer references, analyst researches and all sorts of other elements of a well-established industry segment but that are really hard to establish in a new and emerging technology market. From the competitive standpoint, there are no legacy players in a new market; every solution is, by definition, innovative and customer will make decisions based on a somewhat immature understanding of that specific industry segment. All those factors combined make the task of competing in a new enterprise software market an incredible challenge for most startups. The good news is that the rules apply to every player in the space and typically the best team-product-execution combinations will end up dominating that market.

We can find a current example of this phenomenon in the enterprise big data technology space. While big data is one of the hottest enterprise software trends, the space is overly crowded and there are no clear dominant players. Customers are really confused in terms of which technologies to adopt startups are fighting really hard to standup in a large group of innovative technologies and solutions.

Contrary to playing in a new and hot enterprise software market, I firmly believe that enterprise software startups have better chances of succeeding when tackling a well-established market going through a transformational process. A classic example of this model could be the emergence of the CRM online space with players such as Salesforce.com or SugarCRM a few years ago. From a competitive standpoint, the CRM online players were mostly battling against the traditional on-premise CRM vendors such as Siebel, PeopleSoft, etc. In that sense, the incumbents were tackling a well-established market with customers that clearly understood the value proposition and capabilities of CRM technologies but that needed a simpler and more effective delivery model.

In a well-established enterprise software market, startups have the opportunity to differentiate themselves against the legacy technologies in the space; they have access to a mature customer based and they can build on the experiences of the previous market leaders.

As an enterprise software startup, it is important to clearly understand if you are playing in a brand new market or in an existing market going through a metamorphosis. Regardless of the scenario, competition in the enterprise software space is always brutal. However, if you are playing in a hot and large market, sometimes old is better than new 😉