The Big Bang for the Buck Theory: Capital Efficient IPOs

There’s a reason software reigns as the most popular sector for venture capital. It’s an industry in which, properly managed, investors can get the most bang for their buck.

That certainly seems to be the case when looking at venture-backed companies that have gone public this year. Out of 10 companies with the highest valuations relative to invested capital, most were pure-play software companies, and all have software-driven business models.

At the top of the list for capital efficient IPOs is next-generation firewall developer Palo Alto Networks. Though the company actually raised a sizeable amount of venture capital—$64 million, to be precise—its July offering delivered an enormous return on that investment.

As of August, the company was valued at about $4 billion. Its three largest venture backers—Greylock Partners, Sequoia Capital and Globespan Capital Partners—own just over half of outstanding shares.

The next four VC-backed IPOs ranked highest for capital efficiency were all business software providers. They include ServiceNow, a provider of cloud-based IT management software; Guidewire Software, which markets applications to insurance companies; Splunk, an analytics provider; and Bazaarvoice, which makes marketing software. Each has a market capitalization of more than 30 times the investment.

In the accompanying table, we look at 10 of the most capital efficient IPOs of 2012, zooming in on business model, backers, venture dollars invested, and public valuations. As an added twist, we rank them according to which has the highest valuation relative to venture dollars invested.

These aren’t necessarily the deals in which venture capitalists made the most money (though some of them certainly make that ranking, too). However, it does indicate which companies were able to generate the most bang, or value, from the least amount of bucks, or capital invested.

Photo: ServiceNow executives ring the opening bell in celebration of their company’s IPO at the New York Stock Exchange, June 29, 2012. ServiceNow is one of the more capital efficient VC-backed exits in the past year. Photo by Ben Hider, Reuters.