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.
How could market conditions be more favorable than right now? We’re seeing the best IPO market in 15 years, and enterprise technology companies that focus on HR and HCM — such as Workday and Cornerstone OnDemand — have been among the market’s hottest IPOs recently for a reason. These are fast-growth companies that address a significant market need. Demand for integrated, cloud-based HR and HCM solutions is growing rapidly as businesses see the benefits and value these technologies create — reducing risk and cost, increasing efficiency and agility, and making it easier to attract, retain, develop, and engage talent. Depending on whose numbers you cite, the total addressable market for HR/HCM technologies is $14 billion to $24 billion. However, IDC expects the market size for recognition solutions alone to reach $32 billion by 2016. And TSCIU actually believes the total addressable market is much higher for both.
To see how explosive the possibilities are within the HR technology industry, look at another recent IPO: Castlight Health, an enterprise cloud company focused on healthcare pricing transparency. It saw its stock price surge from $16 a share to nearly $40 —giving a company that posted $13 million in revenue last year a market cap of more than $3 billion. As a result, the Castlight Health IPO had some market watchers dropping the “bubble” word.
Now, fast-forward one week: Globoforce withdraws its IPO and one director of a venture capital research firm said in The Boston Globe that the news is evidence that the markets haven’t gone haywire. “Investors are still looking at financials, still evaluating company by company.”
So, what’s going on? Irrational exuberance? A canary in the coal mine for a cloud tech bubble burst? Or did the market suddenly get religion on investment fundamentals?
At The Starr Conspiracy Intelligence Unit, we believe that market conditions have changed. We see lots of confusion in the market about how enterprise software companies in the cloud grow and that some analysts don’t get it. We fear this issue could become larger than Globoforce and have an impact on solid companies that have innovative approaches and technology that address real business problems that need solutions. Case in point: Even Workday — which has seen 440 percent revenue growth over the past two years — has seen its stock take a beating since mid-February (down 17 percent). Cornerstone OnDemand’s stock is down almost 25 percent over the same period.
We don’t believe there is a bubble, and we don’t believe that HR technology companies are operating in defiance of good corporate governance. They are operating within the established market dynamics of enterprise software. You’ll see this line in a lot of SEC filings for cloud software companies: "We have a history of cumulative losses, and we do not expect to be profitable for the foreseeable future." Just because you see that line in an S-1 — and you will for every SaaS-based company — it doesn’t necessarily mean “no clue how to be profitable.” Most of the time it means “we want to grow and win this category because the payoff is worth it.” Unfortunately, this lack of understanding could create negative ripples for launching IPOs, raising capital, and closing deals. We believe that this issue is bigger than the Globoforce IPO and the recognition category. This is about the growth prospects for the entire HR technology category.
What happened with the Globoforce IPO?
Back in November, Globoforce said in an SEC filing that it set pricing for its IPO at $75 million. On March 17, the company’s SEC filing said that it was trying to raise $79 million (4.4 million shares at $16 to $18 a share). On March 20, the company announced in an SEC filing that it scaled back its offering plan to $57 million, with fewer shares offered (3.8 million) at a lower price range ($14 to $15 a share). Then, late in the evening of March 20, it announced that it was deferring its IPO. A newspaper article has since indicated that the company is now looking at an end-of-year time frame for an IPO.
We believe that on one level, what happened with Globoforce is simple: It’s difficult to understand Globoforce’s business model, and investors don’t invest in companies they don’t understand. Globoforce declined to comment for this analysis, but we did talk to many executives, investors, and thought leaders in the category about the IPO and HR technology.
Based on these conversations and our own analysis, we believe there are three primary reasons for the postponement:
- The billing model for rewards and recognition companies in general is difficult to understand and can easily cause confusion.
- Globoforce’s S-1 filing reflects too much risk — it’s operating at a loss and has too much revenue tied up in a handful of clients — and could be clearer in a few areas.
- Globoforce positions itself as a technology company but looks more like a traditional rewards company.
While we believe a successful IPO would have been good for the rewards and recognition category, we’re more concerned that the resulting confusion could have a negative impact on market opportunities for companies in this category, as well as other HR technology companies. We fear a backlash due in part to the fact that there is a lack of understanding about a fundamental market reality in enterprise software.
Want to learn more? Download the full Industry Bulletin from The Starr Conspiracy Intelligence Unit.