Analysis: Do software firms need the capital markets to grow? Today these guys are happier being private.
From private to public was once how firms developed and grew. But now the option is to go back and forth from public to private to public via shareholder action or trade sales.
But it seems that every other software CEO I speak to these days has little or no interest in the capital markets.
No-one wants to say it too bluntly but the message is that the way markets operate are of little value to a company that has a strong customer base, cash flow and even in some cases, profitability.
The software companies I’ve spoken with include enterprise integration firm Tibco, a $1bn privately held software outfit which was private, went public and was taken private again but doesn’t rule out being public again at some point.
Murray Rode, Tibco Software CEO told me: "Take a step back and think strategically, a US public company is under a lot of quarterly pressure, being private is a nice change of pace."
As the CEO put it, it is hard to scale to $1bn, but being private makes it easier to scale beyond that.
"For a firm in enterprise integration such as Tibco there are a couple of advantages to being private. One common thing in all tech companies – and good for our sector – is this notion of not being so focused on the quarterly metric and being able to take a longer term view of investment. Basically we have one investor to consider with the strategy. This allows us to be more nimble. And for the new things we’re doing such as subscription based pricing it is good to be private. It is more complex as a public company."
"I don’t know exactly why but getting to $1bn in revenues is a really important milestone. Look at the history of software companies, It is hard to get there and hard to grow past that. So being private allows us to navigate those changes because you start to scale up how you operate and how you go to market. Not that being a public firm doesn’t have advantages and I’d be happy if Tibco was again a public company at some point in the future."
Another public to private firm is data integration firm Informatica. CEO Anil Chakravarthy completed a $5.3bn deal to go private in 2015. One of the reasons for Informatica was a different type of investor and the relationship that brought.
He told CBR: "Right now we’re the largest integration provider for the Salesforce ecosystem. We move more than twice as much data on Salesforce as the next provider – over 2 billion records per month."
Informatica is about data integration, in this case with Salesforce and its clouds.
"We integrate with every Salesforce cloud, all of them," says Chakravarthy. "We are a major partner in the established Salesforce clouds and in the new initiatives. Last year it was analytics and this year (2015) it is the main IOT launch. We used to be a public company and we just went private. We were taken by a couple of private equity firms and as part of that Salesforce Ventures became a strategic investor in the company, they bought an equity stake in Informatica."
Another firm to emphasise that its R&D was best executed under private money was the boss at network and cloud security firm ZScaler, which includes Google as an investor.
Jay Chaudhry, CEO said: "Is being public a destination? No it is a step in the journey. Many companies go public because they need funds to scale. Many go public because VCs have put in money and they want a return and they need to get their money out. ZScaler doesn’t have any of those pressures. Public helps the brand, large firms feel more comfortable doing business with public companies because all the numbers are out there. The employees are shareholders and have easy liquidity. But it is a step."
"The biggest advantage of staying private is you don’t have to be short term focused on earnings, I think that’s why rushing and going out to the public market, before you’ve figured out your business model and your growth plans is really hard."
Software companies, even small ones require commitment to succeed. The fast pace of technology innovation means that firms need roadmaps but these roads need vehicles controlled by risk takers who can see beyond the next curve – they need investors not speculators.
Market fluctuations happen. There are all sorts of reasons that companies choose to float. Seed investors have sold out at second round, second moves to third and then private money and management see a chance to make a killing on the markets.
Every prospectus from a software company says one reason for going public is investment in its core technology, its core IP.
Software needs investment to develop, test, to bring to general availability, to scale and support but there are questions over whether public money is nowadays always the best route.
Part II – The Case for floating a software company
Here’s an alternative perspective to why software companies float from George O’Connor, the senior software and systems analyst at capital markets firm Panmure Gordon, .
"There are many advantages for software companies in gaining plc status. The first must be the ability to raise funds on an on-going basis and have a valuation (ie share price) which can be used to reward staff. Due to the rigours involved in gaining, and retaining, a listing, the software company will be able to demonstrate due diligence, good governance and transparency to its customers. In turn procurement officers have an inbuilt bias in favour of plcs.
Whilst a listing gives founders and staff an ability to ‘take money off the table’ – in truth this advantage is equally shared with a trade sale, VC or private equity shareholders. Post the listing the software company will communicate with its stakeholders (investors, customers, channel, technology partners and staff) on a regular basis and this will become engrained in the corporate culture. The downside is that the increased transparency means that the good, bad and just plain ugly will all be in the public domain.
The increase status coupled with the public share ownership means that plcs gets bought and sold. For example last year UK LSE ‘lost’ Innovation Group, Anite, Advanced Computer Software, Telecity and Phoenix IT to name a few, to trade buyers. I have dealt with a number of companies who use the list to create a bigger industry profile in order to wrinkle out a trade buyer. Remember also that plc investors are a different breed to private company investors and will look for different things – so a software company should see that through its life cycle at different times different investors will be more suitable.
Finally how does valuation work? Whilst a trade sale will lock in a valuation at a particular point in time a listing allows the valuation to grow, but can sink, over time. This ability remains a key reason why companies chose to remain on the market."