A few great bloggers in the human capital space have already done a good job analyzing the SuccessFactors S1 filing. Two of these include:
There is not much left to say (and I don't know nearly as much about the SuccessFactors business as these bloggers do) but I'll weigh in with a little different perspective.
- Human Capitalist: SuccessFactors IPO - My Take and What It Means for HCM
- TO’B HR Blog: SuccessFactors IPO??? I’m going short
First, the background.
Lets compare the S1 filing of Ultimate Software to SuccessFactors. I realize there are a lot of differences between the operations of these companies and the circumstances of their IPOs, but there are also a lot of similarities - like net losses. Ultimate Software went public in 1998 at $9 per share. Their current share price is $30. Not a bad run. When reading their S1 from 1998 , I see they had revenues of $17.5 million and losses of $16 million. Like SuccessFactors, they were losing almost as much money as they were making at the time of their IPO filings. In 2006, Ultimate Software had revenues of $115 million with net income of $4 million. So a lot can change, and SuccessFactors will now have the capital to make these changes.
- SuccessFactors has filed for an IPO with expectations to raise up to $125 million.
- Key investors include Greylock (32.3 percent stake), TP Ventures (20.1 percent), Cardinal Ventures ( 9.2 percent), Canaan Partners (7.6 percent), Emergence Capital Partners (6.7 percent) and Granite Global Ventures (5.3 percent).
- SuccessFactors has $10 million of venture debt currently outstanding from Lighthouse Capital Partners (according to Lighthouse's web site, they've loaned SuccessFactors over $45 million too date. Is this true?).
- SuccessFactors had revenues of about $35 million in 2006 with a net loss of $32 million. This year, they lost $12.6 million during the quarter ended March 31 on revenues of $12.4 million.
Which leads me to the Use of Proceeds, a little section of an S1 that describes how a company intends to use the money they raise. Here is what IPO Home has to say about the Use of Proceeds section: "Investors should read this section to find out whether the company plans to use the money it raises in the IPO for capital investment (good) or to pay off insiders (bad)".
SuccessFactors has the usual jargon in their Use of Proceeds section about using the offering to "increase public awareness" of the company, "create a public market for our common stock and facilitate our future access to the public equity markets", etc. But they also say a portion of the net proceeds (about $10 million) will be used to "repay in full the principal and accrued interest on our outstanding indebtedness". This is not a great use of proceeds but quite common. They go on to say that the remaining net proceeds of this offering will be used for "general corporate purposes and working capital, including potential investments in technologies, applications, software or assets, and acquisition of companies, that complement our business".
So my take? I don't think SuccessFactors has much of a choice. They need money and they need it fast. And with the amount of hands (private investors) already in the pot I don't think raising another round of money was a realistic option. Quite the opposite - these people want their money. Nor was borrowing more money a realistic option. In fact, they will use some of the IPO proceeds to pay off debt. There is a lot to like about SuccessFactors ( a lot to dislike to) and I think most of us in the industry were surprised at the amount of money SuccessFactors was losing - especially considering they've been in business since 2001. Taleo (who went public a few years ago) was founded in 1999 and in 2000 had a net lost of $12 million from revenues of $2 million. But by 2004 when they filed for their IPO, they had a loss of $8 million from revenues of nearly $59 million. Ideally, you like to see the losses decrease as a percent of revenue by the time of an IPO - and especially by your fifth year of operations. The SuccessFactors IPO boils down to necessity and the desire of early investor to get their payday. The management of Success Factors faces an enormous amount of challenges - and soon to be shareholder responsibilities. I wish them luck and hope they can succeed. It will be good for the industry.
Posted by Mark Willaman