Is the bar lower for a tech IPO?

I am not sure if you saw the news, but Salary.com recently filed for an IPO to raise up to $50 million. On the book is Thomas Weisel Partners, William Blair, Needham, Pacific Crest, and Wachovia. According to the S-1 filing:

Salary.com is a leading provider of on-demand compensation management solutions. Our comprehensive on-demand software applications are integrated with our proprietary data sets to automate the essential elements of our customers’ compensation management processes….

In addition to our on-demand enterprise software offerings, we also provide a series of applications through our website, which allows us to deliver salary management comparison and analysis tools to individuals and small businesses on a cost-effective, real-time basis…

We offer our solutions principally on an annual or multi-year subscription basis. Our direct sales group markets and sells our solutions primarily using the telephone and web-based demonstrations. From the introduction of our solutions in 2000 through September 30, 2006, our enterprise subscriber base has grown to approximately 1,500 companies who spend from $2,000 to more than $100,000 annually, including companies such as Wal-Mart, Home Depot, Procter & Gamble, Merrill Lynch, UPS and Cisco Systems. We also sell to both individual consumers and smaller businesses through our Salary.com website.

From April 2001 through June 30, 2006, we achieved 21 consecutive quarters of revenue growth. During the years ended March 31, 2004, 2005 and 2006, we achieved positive operating cash flows of $0.3 million, $0.9 million and $1.8 million, respectively, and used $0.7 million of cash in the three months ended June 30, 2006. During these periods, we have consistently incurred operating losses, including $0.8 million for 2004, $1.9 million for 2005, $3.0 million for 2006 and $0.8 million for the three months ended June 30, 2006. As of June 30, 2006, we had an accumulated deficit of $21.8 million.

I would usually put IPO filings in the nonevent category but as I dug deeper into the company and financial performance, it did raise some interesting questions for me.  First and foremost, the traditional rule of thumb that most investment bankers have quoted me in the last couple of years was that in order to go public a company needs to have an annual run-rate of $40-50mm of revenue and a couple quarters of profitability.  While the Salary.com numbers are strong (read the S-1 here), they are not close to those metrics.  In fact, during the last 3 fiscal years for the company, it did $6.4mm, $10mm, and then $15mm in revenue.  The trailing twelve month number is closer to $20mm in revenue.  While slightly cash flow the company is not GAAP profitable.  So the natural question for me is to ask whether or not the barrier for a private company to go public is much lower today and whether or not this will signal an ongoing trend in the future.  This is obviously relevant for a number of reasons.  Outside of a few outliers, most of the returns generated for VCs have been from M&A transactions.  If the IPO markets open up again, it would give investors and entrepreneurs another option to create value.  Using a back of the napkin analysis, most companies sell about 20% of their stock to the public, so one could assume that Salary.com is valued at around $200mm pre-money implying a 10x multiple on trailing twelve month revenue.  I must say that sounds quite appealing.  Anyway, we should all watch this company as it goes through its paces because if it does well, it could open the door for plenty of other companies like it.  There must clearly be an appetite from the institutional money managers who are looking for more upside from rapidly growing small cap companies.  By the way, one other interesting point about Salary.com is that is an on-demand application play with some web-based advertising thrown into the mix.  It is also mostly a subscription-based business which means it has a highly predictable revenue stream which is great for forecasting future performance.  Finally, the company only raised $5mm of VC dollars so it is highly capital efficient.  If you read from the S-1 above, most of the sales are generated through the telephone or through web-based demos, all of the traits for a nice frictionless sale and great business model.

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