Lured by the promise of red-hot valuations and the chance to run their own companies, the CEOs of many tech startups are resisting the urge to cash out through a sale and are opting to go public instead.
Four sources familiar with the matter said recently that over the past year several tech startups, including cybersecurity company FireEye Inc, big data company Cloudera and cloud storage firm Box, rejected buyout bids in favor of initial public offerings in the future.
FireEye, which went public in September and had revenue of $61.6 million in the first half of 2013, saw its stock rise 80% in its market debut and is now worth nearly $5 billion. Cisco Systems Inc had offered to buy the company before the IPO for $2 billion to $3 billion, the sources said. FireEye and Cisco declined to comment.
Similarly, Cloudera rebuffed a buyout offer from IBM, while Box rejected a $500 million takeover bid a few years ago from cloud-computing software maker Citrix Systems Inc, according to sources close to the matter.
Both the startups are still private and have revenue well below $1 billion.
Cloudera, IBM, Box and Citrix declined comment.
Sumit Agarwal, co-founder of small security startup Shape Security, said he had rejected a buyout offer for his company as well and was eyeing an IPO as an option.
“Large companies are where innovation goes to die,” Agarwal said. “Although acquisition is a very common path for successful startups, with rare exceptions going public is vastly more desirable.”
Market conditions are ideal now for tech startups to hold out. The S&P 500 Information Tech index is up 17% year-to-date. Investor demand for tech IPOs is high, valuations are rich and it is easier for startups to go public, thanks to regulations such as the JOBS Act.
Signed into law in April last year, the act lets small businesses skirt some expensive securities regulations in their initial years and has been used widely by startups, including microblogging site Twitter, which filed for a public listing under the JOBS Act and launched its IPO in early November, raising $2.1 billion.
The number of venture-backed IPOs has reached 67 through the end of October, according to data from Thomson Reuters (publisher of VCJ). The number of IPOs has already surpassed the 48 VC-backed IPOs in 2012, and is on pace to exceed the 74 that went public in 2010.
Meanwhile, merger and acquisition deals in the sector by contrast are at about the same level they were in 2008, totalling $80 billion worth of transactions in 2008 and $79.6 billion so far this year.
Gabor Garai, who heads the private equity and venture capital practice at the law firm Foley & Lardner LLP, said he expects proportionally more IPOs than M&As this year than in recent years.
Some companies are content to be sold. Security software company Sourcefire and data storage firm Whiptail agreed to be bought by Cisco. IBM bought Softlayer and Trusteer earlier this year.
Source: REUTERS/Brendan McDermid
The rush to an IPO comes with its own risks. Groupon Inc rejected a $6 billion buyout offer from Google Inc in late 2010, hoping it would be valued at more than $20 billion in public markets. Instead the company struggled with a crumbling share price and gradual erosion of its daily-deals business after going public. It fired co-founder and CEO Andrew Mason in February this year and now has a market value of $6.4 billion. Groupon had declined to comment on the matter.
In mid-November, Snapchat, a rapidly growing messaging service, recently spurned an all-cash acquisition offer from Facebook for close to $3 billion or more, according to people briefed on the matter. As VCJ went to press in late November, it was not yet dtermined if Snapchat’s supposed rejection of an acquisition offer would set the stage for a public offering.
Risks also exist for investors. During the dot-com crash of 2000, many companies without viable business models or even cash flows quickly burned through their IPO proceeds and vanished, leaving investors holding the bill.
Reena Aggarwal, an IPO expert at Georgetown University’s McDounough School of Business, urged caution but said that unlike the dot-com bubble, this time around tech startups had actual revenue and not just clicks.
Bankers, lawyers and industry executives said the interest in going public is growing as a new crop of entrepreneurs who want to build their own large companies comes of age.
“With the success we have seen over the past years with very young founders, be it Google, Facebook, LinkedIn or Groupon, there is some peer validation in going public,” said Buz Walters, head of Bank of America Merrill Lynch’s venture coverage group.
Enterprise software maker Hortonworks, for example, was built with an IPO in mind and has made it clear to potential buyers that it is not for sale, said CEO Rob Bearden.
“When you’re leading a market transformation that will soon impact half of the world’s data, there is no time for M&A distraction,” Bearden said in an interview. “We will arrive at several key milestones along this journey, one of which will likely be an IPO.”
Hortonworks, which will have about $100 million in revenue this year, is aiming for an IPO in 2015, though according to two people familiar with the matter, it may come as early as late next year.
Some bet on having it both ways. Marketing software company Eloqua went public in August 2012, raising $92 million, and agreed to be bought by Oracle five months later for $871 million.
Nicola Leske is a reporter for Reuters News in New York.
A version of this story first appeared on affiliate news service Reuters.com. It was edited by VCJ and includes additional information.