Are Tech IPOs Back in Fashion?

2017 ipos

Much has been made of the slowdown in tech IPOs in recent years, but that trend appears to be changing in 2017. Of course, there are a few mega-companies that continue to sit on the sidelines (AirBnB, Uber, DropBox, I'm looking at you!) but I think we will continue to see improvements in 2017 and 2018. Perhaps not as strong as the record number of IPOs of 2014, but likely enough to reverse the declining trend from 2015 and 2016.

Early this year we saw IPOs from the likes of Snap, Mulesoft, Aleryx, Okta, Cloudera among others. Other than Snap, which was rather over-hyped, most of the others had very good returns for their investors and are continuing to trade above their IPO price. And overall multiples for tech companies on NASDAQ and NYSE are holding steady. I'm especially encouraged by the performance of B2B software companies Mulesoft, Okta and Cloudera. Mulesoft now has a market cap over $3b and Cloudera and Okta look likely to cross that threshold later this year based on their steady growth and increasing efficiency. It looks like B2B stocks are once again in fashion.

My expectation is we'll see a bit of an IPO slowdown during the summer and then a significant uptick in the fall. For B2B SaaS companies getting to $100m or beyond in annual recurring revenue (ARR), this will be an interesting time.


Duo Security More Than Doubles in 2016

Duo-arr-growth-chart

I'm very proud to see how much Duo Security has continue to grow. In 2016 we more than doubled Annual Recurring Revenue (ARR) year over year, finishing at $73m and becoming cash-flow positive for the year. I've been a part of several high growth companies including MySQL and Zendesk, but Duo is the fastest growing and most efficient.

We've also announced our new Duo Beyond offering, which adds even more capabilities to go beyond traditional two-factor authentication. Hopefully 2017 continues to be an excellent year for SaaS security companies.


Hark: The Software Paradox

Hark

Stephen O'Grady at RedMonk has launched a new Podcast called Hark. In his second episode, he and Agile programming guru Kent Beck have a thoughtful discussion around the ideas in O'Grady's book "The Software Paradox."  Even though software is "eating the world" and become more widespread and strategic, its economic value appears to be declining rapidly. Certainly, we've seen a shift in the industry from traditional on-premise software commercialization to distribution models like open source, and software-as-a-service, with vastly different business models.

Simply put, the software industry is undergoing a significant disruption that is reshaping the economics of the industry and rendering older "tried and true" business models obsolete. And at a level that strikes closer to home for many, it's also reshaping employment models and careers. Although the parallels are not perfect, the software industry is going through a transformation much like the publishing industry or the music industry. (And we all know how well that turned out for writers and musicians!)

I would argue this has transformation has been going on for at least ten years already since the emergence of successful open source companies. In the early days of MySQL, Marten Mickos regularly talked about how his goal was to disrupt the database industry taking it from $9 billion in revenue to $3 billion, and then capturing a third of that. While this was possibly more bravado than business plan, it was based on the fact that MySQL was 90% cheaper than Oracle. (And for many, MySQL was 100% cheaper --after all, it was under a GPL license and free for most users.)

While we built a solid business with MySQL, growing it to just short of $100m in revenue and selling it to Sun for $1 billion cash in 2008, the long term impact of MySQL was far higher outside the database industry. MySQL, Linux and other open source infrastructure software spawned thousands of businesses that simply would not have been economically possible under traditional commercial licensing fees. We routinely met founders of companies that said their business was enabled in part because of the dramatically lower cost of building an IT infrastructure. So at least some of the value that MySQL disrupted was captured not by traditional software companies, but by newer companies like Facebook, Google, Skype, Craigslist, Priceline and the like. And many of those businesses also happened to be disruptive, which is why software is eating the world. 

Not surprisingly, there have been very few home runs in the open source business, at least as measured by revenues or exits. Red Hat, JBoss, Pentaho have all been successful as businesses and have had good payouts for their investors. But many more open source projects have had widespread popularity with remarkably little economic value generated. And that is precisely the nature of the Paradox. 

And as Mickos has recently noted "The bad news is: it's almost impossible to make money on open source. The good news: it has happened many times."  But at this point it's hard to say what the future successful models for software commercialization might be, but it's certainly not going to be the traditional on-premise up-front license model. And I don't think open source, in all its various forms, is likely to generate a large number of economic home runs. There are definitely a handful of promising companies like Acquia, CloudEraDataStax, MuleSoftPuppetLabsSugarCRM and the like, but they may be more the exception than the rule. (If I missed other rapidly growing open source companies, let me know in the comments below.)

Likely we will see more divergence over time with more value realized in other forms, whether it's service-based models, cloud-based businesses, advertising, data aggregation or perhaps something as-of-yet to be invented.

It's a fascinating topic with more questions than answers at this point.  And I'm sure we'll see more discussion on this topic at the Monktoberfest conference in October. 

The Hark podcast is available on iTunes, SoundCloud or wherever you get your downloads.


2016: Down Rounds & Layoffs

Nasdaq - Box Twtr Etsy APIC

If you thought 2015 was a rough year for the financial markets, you ain't seen nothin' yet. So far, 2016 has every sign of being a full-on bear market, meaning a 20% or more decline in the major stock markets. 

And no surprise, we've seen a ton of bad news for so-called Unicorns --tech companies valued at over a billion dollars. Unfortunately, many of these companies have failed to build an efficient, profitable business to maintain their lofty valuations. No surprise, companies are seeing their public and private valuations dramatically reduced. Here are a stories that have surfaced in recent months:

The point of all this bad news is that it's not just about one or two companies that have missed the mark. It's a systemic problem. And likely, we are still just seeing the early signs of what may become more common in 2016.

To be sure, there are plenty of strong companies out there whose valuations are well justified. Companies like AtlassianHubspot, New Relic, Zendesk all have efficient business models and disciplined growth. 

But a lot of other wannabes have billion dollar private valuations that are much harder to justify. It could be that the market correction in tech is just an adjustment to valuations that were never warranted in the first place. There are lots of cool apps, devices and services out there, but it doesn't mean they are good businesses. If a company gets to $100 million in revenues and has no clear path to profitability, it's kind of a fool's errand. And many of these companies haven't even gotten that far. 

WSJ stock charts Jan 2016

So what does this mean for startups? Basically the lofty multiples of 2010-2012 are gone. The truly great companies will still command good multiples, but only if they are converging towards profitability. The "growth at all cost" land grab strategy that inspired young companies to burn millions or tens of millions of dollars per month isn't going to be viable in the current climate.

If you're in a company with less than 12 months cash burn, you better make sure management is reducing expenses. If you don't have an increasingly efficient growth story, this is going to be a tough time to raise money, so expect a down round. If you can weather the storm without having to raise additional capital and grow back into your valuation over time, that's not a bad way to operate. 

 

 


So Then I Wrote A Rock Opera

KS photo with titles badge

About two years ago, I moved to Michigan where my wife's family is from. I started working for an Ann Arbor based software company, which has been a lot of fun. But I really missed playing music with my tech buddy Rob, who remained in California.

So the original idea was for us to each write ten songs, then pick the best and record them. But somehow it spun out of control. Why not a concept album? Why not... A ROCK OPERA?

The oddest part about all of this is that neither Rob nor I have ever written songs or recorded before. Our only qualification is a combined 50 years of listening to classic rock. And if we might not hit the heights of The Who's "Tommy" or Greenday's "American Idiot" perhaps we could do better than KISS’s "Music from the Elder."

I mean, how hard could it be? It was, of course, an absurd idea. How could two rookies possibly scale the heights of rockdom? I don’t even think Rob had ever listened to a rock opera before. (I mean who has in recent years, amiright?) But much like a software startup that aims to make the world a better place, the audacity of our goal inspired us.

Next thing you know I’m recording some creepy bass riffs in GarageBand and overlaying drums and guitars. Our first song, “The Creeper,” was the embodiment of an evil surveillance government. And it sparked the whole story: 50 years of winter, a dystopian future, rock music is illegal, yada yada yada. This is pretty much the plot of every rock opera. But it's a darn good one.

The Creeper

Since Rob and I were in different cities, we did most of the collaboration over the interweb using Skype, iMessage, and Box for sharing files. (Box is the official cloud content management system of leading rock operas everywhere, don’t ya know?) Every few months I'd get back to California, goad Rob into singing or recording some guitar parts, and then continue editing in GarageBand.

As positive as I’d try to be during these recording sessions (“That was great, Rob. But let’s do one more take…”) the next day I’d listen to what we’d recorded and I’d be overwhelmed by a feeling of hopelessness. I had this vision in my head of an epic rock opera but all I had was a handful of recordings of two guys failing. This feeling of hopelessness occurred at least as often as the feeling of elation throughout the entire course of the project.

They say every startup is a rollercoaster ride of extreme highs and lows. That matches my feeling on writing a rock opera. Whether it was writing melodies, drafting lyrics, recording solos, mixing, or working on videos, there were countless times where I thought the most expedient solution was to delete all the files and give up. There’s no blueprint (or at least none I could find) on “The 7 Steps to Writing a Rock Opera.”

Every time I faced this situation, I simply moved on to another part of the project. If one song proved to be a dead-end, there’s no reason I couldn’t make progress elsewhere. When I put something aside for a few days or weeks and came back to it, I had a kind of unwarranted optimism: maybe I can improve this. A leap of faith was required at every milestone. I wasn’t aiming for perfection, but a more basic: can I make this suck less?

I won’t say that the work was easy. It takes many more hours to edit a song than it takes to record it. But I found that by gradually chipping away at something I could improve it. Often the results were surprising: a song I’d given up on now sounded pretty cool. Better than I hoped for. In my book, brute force perseverance is an under-rated skill.

Rob and I brought a startup attitude to the project: just keep working at it and lets see how far we can get. Lyrics got written, story lines developed, solos recorded and re-recorded. Occasionally we’d share songs with our beta testers. Their feedback was often the only motivation we needed to keep on going. And we did all this while holding down full-time jobs and family obligations.

Lyrics to “Self-Made man” got written at 5am at O'Hare waiting for a flight to New York. I finished the first rough recording at 9pm in my hotel.

Other songs were written weekends, evenings, on airplanes. If Rob had recorded his solos in a more timely fashion I might have stopped writing new songs. But eventually we got to 20 songs and I wondered: what the hell happened here? We’ve actually written a rock opera!

But there was one thing missing. All the songs were pretty basic: me and Rob with bass, guitar, drums and a few keyboard parts and a couple of friends adding vocals. It wasn’t quite grand enough. Then I came across an interesting item on Kickstarter: the $99 orchestra. Wait —what? Yep, for $99 per minute, we could get a 30 piece symphony orchestra to record one of our songs. For another $100 they’d create the score. I sure as hell didn’t have a score for them. I’m just a 3 chord rock guy.

We had one song where I’d weaved together multiple guitar parts that Rob and I had recorded separately. It epitomized our collaboration on the project. It was just some overdriven guitar parts, but in my mind it always sounded like a symphony: I heard strings, horns, piccolos. I don’t know what instruments are in an actual 30 piece orchestra, but it must be something like that, right?

So, long story short, we got the Western European Symphony Orchestra to record it. And we got to watch a live video stream of the recording. It felt pretty amazing to hear someone else’s interpretation of our music.

So we finally put the album up on Kickstarter after Thanksgiving, partly to defray the final mixing costs and partly to develop an audience. It was fully funded fairly quickly (never underestimate the power of email to VCs, especially if you helped them make a lot of money.) The project runs until December 23 11pm eastern if you want to get in on it. Kickstarter prohibits raising money for charity, so since we’ve hit our goal we’ll either mix some bonus instrumental tracks or get some videos made. Either that or we’ll spend the money on hookers and blow.

In the mean time, I've also added "Rock Opera" as a skill on my Linkedin profile. I hope you'll read this and agree it's a skill worth having.

Update: The music and Libretto are now available for free download at www.rock-opera.com

Zack Urlocker is a software executive living his rock and roll fantasy in Ann Arbor, Michigan. This story was originally published on Linkedin Pulse.


Silicon Valley Overheated?

Silicon valley lightbulb

Don't Worry - Winter Is Coming

There's been quite a bit of press recently about whether there's a tech bubble or not. Certainly, things are overheated in the valley. Traffic is out of control, competition for talent is fierce and there are definitely some companies with billion dollar valuations that seem, well, a little suspect. If HBO's series "Silicon Valley" is meant to be a satire of the worst in tech, it's remarkably close to the truth in some areas. I think the show is funny, but almost every farcical element in that show seems way too close for comfort.

One of the things newcomers to the industry forget is that, like most sectors, tech is a cyclical industry. There are boom times when stocks seem to just go up and there's unlimited demand for IPOs and then, well there's the opposite. That's what happened in the early 1980s, more severely in 2001 and again in 2008. There have been a couple minor corrections to sky-high SaaS valuations in 2014 and 2015, but nothing like we saw in earlier downturns.

The companies I work with all seem to be in good shape. They've got plenty of dry powder, having raised money in the last 12 months and generally are increasing their efficiency in terms of customer acquisition costs, cash position, etc. But for companies that have less than 12 months of runway, there could be problems. Like, a going-out-of-business problems. As is occasionally reported by new CEOs who run out of money, there's this tricky thing called "burn rate."  Which basically means, you should make more money than you spend. Really, it's not that complicated. 

When you build a company, you can't just optimize for growth at all costs. Otherwise, those costs can easily exceed what you're bringing in. And when the piper changes his tune and VCs and Wall Street decide to no longer value money losing companies quite as optimistically as those that are generating cash, it can lead to some pretty ugly situations. Just take a look at the downfall of GetSatisfaction, Fab, Zirtual or even Good Technology, which managed an exit, but at less than half it's billion dollar valuation.

GoodTechnology was around for almost 20 years and raised $290 million (!) over six rounds. The company talked about doing an IPO back in 2013. They filed for an IPO in 2014 and then amended it in 2015. Sadly, their growth started to decline while losses continued to mount. They lost $95m on revenues of $158m in revenue in 2014 leaving them just 7 months of runway in 2015.

Good-financials

Presumably Good couldn't raise more money and couldn't do an IPO in the current market. So they got acquired by Blackberry, a struggling company if there ever was one. While some of the investors and execs will have made money, I doubt the rank-and-file employees got much out of it.

It was probably lucky for Good that they didn't complete their IPO. While strong SaaS performers like Hubspot, Zendesk, New Relic have done well with steady growth in their revenues and share price, there's an increasing number of tech companies trading well below their IPO price including Alibaba, Apigee, Box, Castlight Health, Etsy, Twitter and others.

Bill Gurley from Benchmark Capital has been a particularly strong voice reminding startups that "Winter is coming"; valuations are being compressed and CEOs need to make sure they have a path to profitability.  Words to live (or die) by.