It’s been a fairly busy Q1 for cloud or Enterprise Software investors in the Private Tech Growth asset class. In late January, AppDynamics was expected to be a bellwether for tech IPOs but was acquired by Cisco for $3.9 billion just hours before pricing its IPO. On March 17, MuleSoft began trading as a public company with a starting market cap of $2.5 billion; it raised more than $250 million. Last week, Alteryx’s IPO raised $125 million with a public valuation now approaching unicorn status. Also last week, both Okta and Yext launched their IPO roadshows with trading to begin as early as next week. Then on Friday, Cloudera filed its first public S-1 on the last day of first quarter. On the other hand, there has been just one Consumer Internet IPO – Snap – during Q1. Granted that was big, but the score is lopsided.
At the end of 90 days, it's Enterprise Software 6, Consumer Internet 1. We actually think this is a sign of things to come in 2017 as mega consumer Internet unicorns will likely wait until 2018. Even more Enterprise Software companies will pursue IPOs in the next several months because they are in favor right now with public market investors.
Okta Is a Pure Cloud Unicorn with Sustainable Financials
Okta is an eight-year-old, San Francisco company with close to 1,000 employees. IT teams at companies like Adobe, LinkedIn, WorkDay and many more use Okta for standardizing new employee onboarding, single sign-on, password reset and employee termination. Okta’s software technology is available in the cloud. That means it is accessible from a laptop, mobile phone or connected device. Okta has five core offerings including Single Sign On and Lifecycle Management with pricing listed on their website in the range of $1-4/month/user. Okta’s tech partners include AWS, Service Now, MuleSoft and more. Almost 3,000 customers ranging from big enterprises to rapidly growing startups continue to fuel its subscription-based revenue model.
Microsoft is the 5,000-lb gorilla in the Identity Management space. But, the growing complexity and inter-connected nature of enterprise apps, the proliferation of Internet-connected devices, and the growing importance of cyber security clearly increases the need for an independent, cloud software vendors such as Okta. Effectively, we think Okta occupies an increasingly strategic spot inside its customers’ technology footprints.
From a financial standpoint, Okta exhibits some of the same attractive characteristics as Mulesoft – recurring revenues, high gross margin, high customer retention rates. At the high-end of the IPO pricing range at $15, OKTA’s enterprise value of roughly $1.4 billion implies a roughly 9x LTM Revenues which represents a slight discount to recent Enterprise Software IPOs priced in the 10-12x range. Okta’s top line is growing faster than recent Enterprise Software IPOs but is also burning cash.
Private Valuations Holding Up in Public Markets
AppDynamics’ final S-1 pricing (prior to acquisition) implied a 10% premium above its Series F round in December 2015. Snap’s initial pricing range implied a “flat round.” However, the IPO price came at a 20% premium above Snap’s May 2016 Series F round. MuleSoft’s IPO valuation of approximately $2.2 billion is about 45% above its Series G private round in May 2015. Both Okta and Yext are benefitting from the market’s tailwind on their roadshows this week. Their latest S-1 pricing implies a premium of roughly 20% and 60% respectively, versus their most recent private funding rounds.
Expect More Unicorns in the Cloud
Heading into 2017, our year-end 2016 Investor Sentiment Survey highlighted a clear bias among investors toward Enterprise Software companies. The majority of the 600 accredited individual and institutional investors in our survey indicated a preference toward the long-term prospects of Enterprise Software companies. We continue to see the affinity for Enterprise Software companies in 2017. While large and successful consumer-oriented unicorns continue to get the bulk of media attention, the unglamorous Enterprise Cloud companies are the engines of the Private Tech Growth asset class. These past 90 days have provided encouraging signs that other such workhorses in the cloud will deliver returns over the longer-term.
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