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.


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. 

 

 


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.


Open Source Enigma Project

Open Friggin' Enigma

The wild and crazy guys over at S&T Geotronics, James Sanderson and Marc Tessier, have decided to go full tilt with a Kickstarter version of their DIY Open Enigma Project.  For those who missed the fanfare last year, they were featured on Instructables showing how to build an Arduino-based encryption machine that works exactly like a WWII era Enigma.  You know, the thing that Alan friggin' Turing and his team at Bletchley Park cracked to  bring an end to WWII?  Yeah, that Enigma.  

The Enigma was also featured in the aptly-titled novel "Enigma" by Robert Harris and the film starring Kate Winslet and some people I've never heard of.  That film was produced by Mick "code-breaker" Jagger.  Yeah, that Mick Jagger... By the way, Jagger owns his own personal friggin' Enigma machine.  How cool is that?  

The Enigma Machine (and it's cracking) remains one of the most significant breakthroughs in computing.  And Turing is considered one of the fathers of modern computing as well as a brilliant mathematician, logician, code-breaker and... wait for it.... world class marathon runner. (I kid you not, the guy ran a 2:46 marathon, coming in 5th in an Olympic qualifying round.  Take that Nazi scum!)

But unless you happen to have a spare $208,137 lying around to throw at a Christie's auction, the closest you're ever gonna get to an Enigma machine is to view Mick Jagger's Enigma sealed behind glass at Bletchley Park.  I've been there, it's fantastic.  But it's also heavily guarded.  Just sayin'. 

Enigma kitNow with the Open Enigma Project, you can get a working, life-size replica of the Enigma and be a part of computing history.  You can sponsor the Kickstarter project for as little as $5 (cheapskate), or if you're a DIY hardware hacker, for $250 you get a bag of electronic stuff you can assemble. 

Or if you're a software person who wouldn't know which way to plug in a soldering iron, then you can get a fully assembled kit (without a case) for $300.  And if you want the whole enchilada including the genuine wooden case, it's $600.  Executives, VCs, rock stars and others can splurge for even higher levels to help make this project a reality. 

This is literally a once-in-a-lifetime opportunity to get a working Enigma replica.  And that is some cool cyber-encrypting steampunk goodness!  You can plug the Open Enigma into your PC via USB port and run some kind of crazy distributed big data bitcoin-mining NoSQL social media photo sharing site on it.  

All the hardware and software is open source so you can compute all you want on your desk, put it behind glass or run a marathon with it.  Just like Alan Turing would have done.


Ellison Buys Hawaiian Island

Lanai

Yes, it's true, Oracle CEO Larry Ellison has bought 98% of the Hawaiian Island of Lanai for $500m.  The island was previously owned by David Murdock who bought Dole in 1985.  The island has 3,200 residents, two luxury resorts, two golf courses and is 88,000 acres (141 square miles) in size. 

Here are some alternate headlines & subheads

Ellison Buys Island of Lanai
Declares Bill & Melinda Gates Marriage to be in Violation of Oracle Terms of Service

Says "What Island?  I only wanted a closed off veranda.  Doesn't anyone listen to me?"

Thanks Safra Catz for Really Screwing Customers in Q4

Praises Gates & Buffet for Curing that Malaria Thing

Cost less than Buddy Media Anyways

Plans on Burying 3 Tons of Obsolete Sun Hardware

SAP Announces Intent to Acquire Alcatraz for $600m

Tells 3,200 Residents to Get Cracking on Oracle 12i

Bans Open Source Software

Still Angry About Getting Outbid on Yammer 

To be Renamed LarryLand

Reminds Facebook Millionaires Not To Be Too Flashy

Passes Law Banning Rival Marc Benioff From Ever Wearing Hawaiian Shirts Again

Expresses Enthusiasm for Pineapples and Local Super Skunk


GigaOm Net:Work Conference - Dec 9

Network-2010-logo

I only recently found out about GigaOm's upcoming Net:Work conference.  It's held December 9 at UCSF Mission Bay conference center.  While the name of the conference is a bit ambiguous, the actual area of focus is very clear: how will we collaborate in the 21st century?  

The impact of smartphones, tablet computing, social networks, Software-as-a-Service and Cloud computing is just starting.  As a result, I think there are tremendous opportunities for startup companies to disrupt existing markets with more modern, lightweight applications that foster collaboration inside the company as well as with partners, vendors, consultants and customers.  

Companies that can more effectively tap into talent within their organization and across traditional boundaries may end up having a significant competitive advantage.  Instead of the traditional top-down view of management edicts flowing from HQ to employees and field offices, you now have the potential to develop, test and refine ideas from any part of the company or community regardless of location.  

That was the approach we took at MySQL and it worked very well with employees distributed in more than 40 countries, 90% of whom worked from their homes.  We also had a huge community of users we could tap into that contributed tremendous value to the company.  Even though we had primitive tools for collaboration (IRC, Skype, Forums, Wikis, conference calls, mailing lists etc), we always operated with a global perspective. This enabled us to develop great talent regardless of location.  Managing a distributed organization is not easy, but you get some amazing benefits if you do it right.

Speakers at the conference include Marc Benioff (Salesforce.com), Dave Hersh (Jive), Maynard Webb (LiveOps), Tom Kelly (Moxie Software), Doug Solomon (IDEO), Zach Nelson (NetSuite), Aaron Levie (Box.net), Ross Mayfield (SocialText) and more.

Also, thanks to Skip Hilton of GigaOm, there's a 50% off registration coupon: HILTONNETWORK50


MySQL Sunday at Oracle Open World

Oracle_mysql_hq
  

Looks like Oracle is continuing to invest heavily in MySQL and the storage engine eco-system.  They've announced a full MySQL Sunday at the upcoming Oracle Open World Sunday September 19, in San Francisco.  Registration is only $75 which is a bargoon.  I expect this will be bigger than any MySQL conference held to date.  And there's also the JavaOne developer conference and the rest of the Oracle Open World show.

Ok, technically things actually start at noon, but knowing the MySQL crowd, I am sure there will be parties that go well past midnight.  Helan gar!


Piper Jaffray on the Cloud

Piper Jaffray has published a 300+ page study on the cloud computing industry based on a recent survey undertaken of 100 CIOs. Bottom line, cloud computing is expected to grow significantly over the next five years. 

    Survey respondents expect the mix of cloud computing to escalate strongly to 13.5% in five years. This equates to a five-year CAGR of 19.2%, or 23.9% when we also incorporate IDC’s forecast that total software budgets will grow 4.7% annually. In other words, software spending will grow gradually in the next five years, but the mix of spend allocated to cloud-based applications will likely surge rapidly. Another way to think about the data is that the Cloud Computing market is expected to grow five times as fast as the broader software market: 23.9% vs. 4.7%.

If anything, I think the prediction is conservative and the impact could be much larger in magnitude when mainstream adoption occurs.  But the risk is that adoption takes longer, just as it did for open source software.  And as the report indicates, open source is powering much of the cloud computing that's going on:

    The next-generation Cloud Computing data centers are NOT running Microsoft Windows; they are increasingly leveraging the compelling economics of open source components. For example, the data centers powering Amazon, Google, and salesforce.com all run on Linux and other open source technologies. In fact, Red Hat’s operating system and the MySQL database are key components to many of the leading-edge Clouds being developed today. 

Why is this occurring? Because open source leverages a global community development process which results in a product that evolves rapidly, provides transparency into the source code dynamics, and surpasses other products in terms of security and reliability – all at a lower total cost of ownership (TCO) than traditional offerings.


Future of Open Source Survey 2010

Survey_results

As usual, Michael Skok of North Bridge ventures will be presenting the results of the annual Future of Open Source survey at this year's OSBC conference, March 17-18 in San Francisco.  This is a great opportunity to weigh in and provide your perspective on some important business questions. Here are the 2009 Results as reported by Ostatic.


Scott McNealy's Final Goodbye

Mcnealy_javaone
 

I met Scott McNealy several times over the last year in customer meetings and to talk about Sun's open source strategy.  He's a class act all the way.  He sent out his final email to Sun employees and partners earlier today. 

Here's an excerpt:    

    While it was never the primary vision to be acquired by Oracle, it was always an interesting option. And this huge event is upon us now. Let’s all embrace it with all of the enthusiasm and class and talent that we have to offer.

    This combination has the potential to put Sun, its people, and its technology at the center of yet another industry and game changing inflection point. The opportunity is well documented and articulated by Larry and the Oracle folks. Not much I can add on this score. This is a very powerful merger. And way better than some of the alternatives we were facing...

    So, to be honest, this is not a note this founder wants to write. Sun in my mind should have been the great and surviving consolidator. But I love the market economy and capitalism more than I love my company. And I sure “hope” America regains its love affair with capitalism. And except for the auto industry, financial industry, health care, and some other places (I digress), the invisible hand is doing its thing quite efficiently. So I am more than willing to accept this outcome. And my hat is off to one of the greatest capitalists I have ever met, Larry Ellison. He will do well with the assets that Sun brings to Oracle...

    Oracle is getting a crown jewel of the technology industry. They will do great things with Sun. Do your best to support them and keep the Sun spirit alive and well in the industry. Our children will be better for it...

    My best to all of you, and remember: Kick butt and have fun!

You can read the entire letter over at CNet.