SuccessFactors joins the rush for the (IPO) exit
There's some excellent analysis of the SuccessFactors filing from two Enterprise Irregulars: Jason Corsello posted his thoughts on Friday, and fellow ZDNet blogger Josh Greenbaum added his own thoughtful questions yesterday. What I'd like to do, as I did when NetSuite filed its S1, is comment on the possible reasons for the timing of the IPO.
Compared to NetSuite, the financials declared by SuccessFactors seem to put the company at a much earlier phase in its evolution. Revenue last year was $32.5 million, less than half of NetSuite's $67.2 million. But SuccessFactors is spending as if it were NetSuite's size: it spent $32.3 million — 99% of revenues — on sales and marketing. Its hosting and professional services amounted to 56% of revenues. Add in other costs, and SuccessFactors spent almost exactly twice as much as it brought in.
The payback for that spending, though, was year-on-year revenue growth of 150%, slowing in the first quarter of 2007 to 128%. NetSuite hasn't seen growth rates as high since its revenues were in the low teens, three to four years ago. SuccessFactors' growth performance is more comparable to Salesforce.com when it was at a similar revenue figure (two years before its own IPO); but SuccessFactors is spending more to do it.
The only trouble with the SuccessFactors growth rate is that it's not been sustained over a length of time. There was a glitch in 2005, which grew just 27% over the prior year, whereas 2004 posted 148% growth. Average the three years together and you still arrive at a handsome 100% compound annual growth rate; but if you drew a graph of the figures you'd have trouble extrapolating a clear trend.
This is why I feel that SuccessFactors is going for IPO earlier than it originally planned. I think the company had been targeting a 2008 timeslot, which would have given it more time to establish a clear trend — and also to tighten up some of the lax financial controls Josh Greenbaum highlights in his blog posting.
I suspect there are two credible reasons why SuccessFactors has decided to go early, and both probably played a part in the decision.
- Risk of the IPO window closing. Investors are currently more willing to back unproven ventures than they've been at any time since the days of the dot-com boom. But how long will they stay so sanguine, especially against a backcloth of nervousness over the subprime loans crisis? There's a lot to be said for going public while you can.
- Recognizing the cost of expansion. It's becoming increasingly clear that acquiring SaaS customers is costly, especially among larger enterprises. But the pay-as-you-go subscription model means it takes much longer to recoup that cost. So vendors that aim to outgrow their competitors and seize the lead position in their market need deep pockets — sometimes deeper than VC funding alone can fill. It looks as though SuccessFactors has decided the only way to get the funding it needs to maintain its current stellar growth rate is via an IPO.
The problem with going so early of course is that public shareholders don't always have the nerve to hold on while losses mount up. But one of the interesting things about this IPO is that SuccessFactors looks likely to be billed as a poster child of SaaS and thus will get measured (as I myself have measured it) against Salesforce.com and NetSuite rather than against its more sedate competitors in the people management arena. It's easy to forget that there are already several public companies that deliver people management software as a service, including Taleo, Workstream, Kenexa, Ultimate Software and ADP.