Strong debuts in the initial public offerings of two business software companies on Friday underscored a pattern in the market: While consumer companies like Facebook Inc get the buzz, enterprise companies are racking up most of the market gains. IPOs Tableau Software Inc and Marketo Inc both soared more than 50 percent in their first day of trading.
Brethren enterprise companies, which sell services to businesses rather than individuals, have risen 37 percent, on average, in the two years since their IPOs, compared with 13 percent for consumer companies, according to market data firm Ipreo. The companies are being buoyed by new technologies like mobile and so-called "cloud" computing, trends that are creating tremendous business opportunities for young enterprise firms, investors say, leading them to grab market share from incumbents like Oracle Corp and SAP AG.
"If there is disruptive technology that provides a return on investment, companies will buy it," says Paul Deninger, senior managing director at investment advisory firm Evercore Partners Inc. The frenzy kicked off last year with the IPO for Splunk Inc, an analytics company that doubled its IPO price of $17 on the first day of trading.
Strong IPOs followed from firewall security company Palo Alto Networks Inc and human resources software company Workday Inc. Big acquisitions have also gotten the attention of investors, like the $689 million sale of social media marketing company Buddy Media to software company Salesforce.com Inc.
Other hot enterprise companies that are still private include data-storing company Nimble Storage, which raised $41 million last September from venture capitalists; software-services firm Cloudera, which raised $65 million in December; and cloud-storage company Box, which raised $150 million last year. Tableau, which raised $254 million in its IPO after increasing both the price range and shares offered, saw its stock soar nearly 54 percent after opening on Friday. Marketo jumped 55 percent as it raised $79 million.
Partly, disappointment over underperforming IPOs from consumer Internet companies like Groupon Inc, Zynga Inc and Facebook has helped stoke excitement about the enterprise start-ups. "There was a rush to enterprise companies to compensate," says Keval Desai of venture firm InterWest Partners, an early backer of Marketo.
But it's about more than a backlash against consumer companies, according to investors. "The thing about enterprise is as long as it works, it will proliferate through more organisations," says Tim Curry, a partner at law firm Jones Day who works with technology companies. "It's not affected by the whims or caprices of consumers. If it works, companies will continue to buy it."
One of the biggest reasons for the enthusiasm involves the cloud, or the ability to access data on the Internet from remote servers rather than from their own computers in house - and the savings and flexibility that come with it. As a result, companies do not need to maintain their own software applications and data services, instead buying them on a fee-based, short-term basis. That shift has created big opportunities for start-ups.
"We're finding a tremendous amount of innovation," says Kevin Spain of Emergence Capital Partners, an investor in red-hot cloud-storage startup Box and others. "Innovation across multiple fronts - product innovation, business applications, new markets, new verticals." Ironically, some enterprise companies, particularly in software, are becoming much more like consumer companies than their predecessors.
Individuals within a corporation start using the software for free without getting managers or information-technology departments involved. Once a business reaches a critical mass of users, the enterprise company can start charging for the product. That's how Box reached 150,000 business clients and a valuation upwards of $1 billion, and how Yammer reached 200,000 organisations and was worth $1.2 billion by the time Microsoft Corp bought it last year. Yammer's acquisition illustrates another reason investors like enterprise companies: the rich non-IPO return on investment that bankers have come to call "the M&A parachute."
Other examples of big companies trying to buy expertise in disruptive technologies include SAP's acquisition of cloud-based SuccessFactors for $3.4 billion in cash in December 2011 and Oracle's acquisition of cloud-based rival Taleo Corp for about $1.9 billion in February last year.
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