Inside the Globoforce IPO: The Impact on the Companies Focused on HR and HCM

In the enterprise technology industry, the most noteworthy IPO of the year so far is one that didn’t happen — Globoforce. As a category leader in rewards and recognition, its IPO was anticipated to be a landmark moment — the first major publicly traded company in the category. However, when the company abruptly postponed its IPO on March 20 citing unfavorable market conditions, many people in enterprise technology circles were confused. We believe it’s important to explain what’s going on at all levels, and we hope that this analysis will bring some clarity and sanity to the discourse. Want to learn more? Download the full Industry Bulletin from The Starr Conspiracy Intelligence Unit.

We believe that a lack of understanding in the broader market could create collateral damage in enterprise technology companies that focus on HR and HCM. But that shouldn’t be the case. There are many good companies with solid fundamentals and real solutions that create value for customers who understand how the market works and operate accordingly. If you look at two of the bellwethers of the market — Cornerstone OnDemand and Workday — their stock price growth trajectories are aligned with the broader NYSE and NASDAQ indexes over the past 12 months. And even though LinkedIn’s stock price has seen a gradual slide since September, its stock price is up over the past 12 months.

Do you think there’s investment fatigue in HR technology? Think again. In 2013, human capital management technology startups grabbed $600 million across 208 deals, according to CB Insights. Money continues to flow into this market, in part because the payday doesn’t necessarily have to come after an IPO — 67 percent of tech exits in 2013 went to early stage startups. However, the IPO remains the goal for many companies, and operating at a loss will be the reality for these companies.

How does this impact enterprise technology companies focused on HR/HCM? It would be easy for companies across the industry to dismiss the Globoforce situation as a one-off and not relevant to them. After all, rewards and recognition is a different thing, right? And HR technology is one of the hottest segments of enterprise software — solving real business problems for real clients and producing real revenue. So, what’s the problem?

The problem is belief. There’s a need for faith when investing in a fast-growth cloud-based technology company. Even though many people in the industry dismissed Globoforce’s comment about unfavorable market conditions as spin, the reality is that many investors don’t get the growth model, and the market is so crowded that investors don’t always take the time to fairly evaluate complex business models. In enterprise software, expect more pressure for publicly traded cloud companies to turn a profit. Even salesforce.com — the company that started it all in the cloud — is feeling the heat and is on track to post a profit for the first time this year with an assist from non-GAAP accounting. Don’t underestimate the gravity of the moment. Many of the most highly sought-after investors — the long-term institutional funds — are sitting on the sidelines for now, waiting to see what happens. Leaving the market to the short-sellers and hedge funds won’t be a positive in the near term.

For our industry, now isn’t the time to just go whistling past the graveyard and pretend nothing’s going on. There’s a need to educate both investors and buyers. There is a lot of value in HR/HCM technology to be created for them both. We believe in recognition as a category. It’s one of several exciting innovative areas, such as wellness and casual learning, that have a greater potential to increase employee engagement and effectiveness than traditional HCM approaches. Investors need to understand these businesses so they can truly evaluate them. Buyers need to understand how they work so they can know what they’re buying. Understanding and clarity can go a long way toward turning around this crisis of confidence and prevent it from becoming a true crisis.

Want to learn more? Download the full Industry Bulletin from The Starr Conspiracy Intelligence Unit.