By Glenn Solomon
The successful public market debut of Workday (WDAY) this past week was breathtaking. The initial filing range of $21 - $24 was raised to $24 -$26 while the company was marketing on its roadshow. The IPO was ultimately priced at $28, and amazingly closed on its first day at $48.69, up 74 percent from the IPO price and up 116 percent from the mid-point of the initial filing range. As I've discussed earlier, hot IPOs don't always perform well in the months and quarters after pricing, but public investors believe in Workday enough to have priced it at over a $7 billion valuation.
Although most entrepreneurs don't have the benefit of having started one of the most successful enterprise software companies earlier in life like Workday's co-founders, David Duffield and Aneel Bhusri, did at PeopleSoft, there are several relevant lessons from Workday's IPO for all aspiring entrepreneurs. Here are three:
In their post-IPO interviews, Duffield and Bhusri said they believed the investment bankers did a great job pricing the offering, even though it popped in the aftermarket, because they stuck to the company's intrinsic value. Duffield and Bhusri didn't push the bankers to price the IPO up at the price the market was willing to pay. Instead they chose to set the deal at a price they feel they can justify based on the company's current prospects and metrics. Although by pricing this way they raised less money, they clearly like this trade-off. Regardless of what gyrations the stock price encounters over the coming months, Duffield and Bhusri believe they can continue to grow Workday from its IPO price, hence rewarding and attracting patient IPO investors.
When fundraising, too often we see entrepreneurs opt to "let the market decide" the price. When demand is high, this approach can lead to bubble-like valuations. These super high prices limit dilution in the short term but can cause challenges over time, especially if a company is unable to sustain the froth. A few seasoned entrepreneurs have approached us recently with a clearly defined valuation maximum. This has forced GGV and other venture firms to differentiate on factors other than price and, by taking froth out of the equation, has ensured the entrepreneur feels comfortable he or she can drive to a higher price in ensuing rounds. Like Workday, these entrepreneurs want to see their investors profit from their investment, which, I'd argue, is a great starting point for a good relationship with your VCs.
Great Growth With Margin Improvement
Unlike some of the fast-growth tech IPOs of the past few years that have had trouble in the aftermarket, such as Groupon (GRPN) and Zynga (ZNGA), Workday makes a very strong case that its business model is getting better even while its growing over 100 percent annually. Each of R&D, Sales & Marketing and G&A as a percent of revenue are all steadily declining. So, while the company is investing rapidly for growth, investors are confident that predictable profitability is on its way. Despite the grow-at-all-costs venture environment prevailing today, entrepreneurs would do well to remember that, in the long run, public investors care about profits and reward business models that get more profitable with increased scale.
Size of the Opportunity
Workday compellingly argues it can become a very large company over time given the enormity of its market potential. Although the company may be best known for its human resources management solution, Workday has been growing its suite over time, and its mix of early customers suggests the software will appeal to companies across many industries. As a result, public investors are paying less attention to Workday's size today and instead are more focused on the size Workday will achieve over time.
Commonly, entrepreneurs fall into the trap of believing that achieving $100 million in revenue is the key to an IPO. Rather, as we see with Workday, reaching the $100 million milestone is far less important than having a sizable addressable market to grow into for many years after an IPO. Entrepreneurs who focus on building big businesses in large markets that can continue to grow rapidly well past the $100 million revenue threshold have a great chance to achieve public market success like Workday.
Investors are certainly excited about Workday. Duffield and Bhusri have done an amazing job building Workday to where it is today, and investors are betting the best is yet to come for the company. Entrepreneurs should learn from Workday's success.
Note: Glenn Solomon joined GGV Capital as a Partner in the Menlo Park office in 2006. Glenn led GGV's investments in Pandora, Focus, SuccessFactors, Isilon and QuinStreet, helping the latter three through the initial public offering process. You can find him on Twitter @glennsolomon.