By Nicola Leske
NEW YORK Oct 30 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 last month and had revenue of
$61.6 million in the first half of 2013, saw its stock rise 80
percent 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 from
cloud-computing software maker Citrix Systems Inc,
according to those 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
Market conditions are ideal now for tech startups to hold
out. The S&P 500 Information Tech index is up 17 percent 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 Jumpstart Our Business Startups, or
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.
Microblogging site Twitter, for example, recently filed for a
public listing under the JOBS Act, with the prospect of a market
value of up to $11 billion.
The number of U.S. technology IPOs increased to 30 in 2012
from a low of 3 in 2008. This year there have been 26 IPOs so
far, according to Thomson Reuters data. 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
REVENUE, NOT JUST CLICKS
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.
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.
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
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