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WorkDay vs. Facebook: Lessons from a Successful IPO

23 Oct

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.
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Posted by on October 23, 2012 in Uncategorized

 

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