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Dharmesh Thakker, Danel Dayan  |  November 4, 2019
Looking to Shake Those WeWork-Induced IPO Doldrums? Look Up—Into the Cloud

If you’re a late-stage tech company under pressure from your investors to go public sometime soon, you (and your investors) might be freaking out right now. How can we stage an IPO when Uber’s stock is still down around 25% from its offering price, you might wonder? And when Postmates just delayed its deal, and WeWork grapples with an embarrassing financial bailout instead of an expected public offering?

My message is, fear not—at least if you’re a certain type of B2B cloud company. I say this because even though some prominent consumer IPOs have tanked lately, the public debuts of many enterprise-focused companies that sell their products through the cloud have shined, and they offer lessons to other late-stage tech companies hoping to test the public markets, even in these uncertain times.

Zoom, the video- and audio-conferencing colossus that leverages the cloud, has seen its share price nearly double since its IPO. Cloud-native security outfit CrowdStrike’s shares are up more than 50%, while those of cloud-monitoring service Datadog, which went public last month, have risen nearly 29%. And of course some of the big B2B tech IPOs from 2017 are still soaring: Shares of open-source database company MongoDB and cloud-software provider Okta have both more than quintupled. (Shares of one of the other best performing IPOs of the year, faux-beef producer Beyond Meat, has more than tripled but hey, there’s no predicting vegetarians.)

The winning tech companies all have a few things in common—namely, cloud-based or developer-focused business models that acquire customers quickly; a stable customer base; and a path to profitability, if they’re not making money already. All these companies are riding some pretty large-scale trends in how technology is built and deployed across big and small organizations today, and I think these trends are here to stay. So if you’re hoping to follow in the footsteps of these newly public companies, and create a recession-friendly, IPO-ready business model, here are five tips.

1. Index yourself to cloud infrastructure and developer-adoption cycles. Right now, organizations globally are spending an increasing amount of money on cloud infrastructure—so your company should be delivering products in the cloud too. Microsoft Azure, part of the Microsoft’s cloud division, is growing at nearly 60% and Amazon Web Services, which just reported quarterly revenue of $9 billion, is growing at 35%. Despite these impressive figures, overall adoption of cloud infrastructure still represents less than 10% of the $705 billion IT market, according to Goldman Sachs, but cloud is growing at a pace we’ve almost never seen before.

The world’s 23 million software developers represent an influential crowd for adopting new technologies, but new “low-code” and “no-code” software models that are more accessible to non-technical workers could expand the pool even more, turning the 800 million-plus information workers worldwide (per Forrester) into developers, too. Both cloud infrastructure and developer-focused software represent significant opportunities for startups. Your company’s growth rate five to 10 years after an IPO can be enhanced significantly, in my view, by indexing to these two trends.

Case in point – consider Zoom and CrowdStrike,  both companies that are trading at double-digit multiples of forward revenue and multi-billion-dollar valuations, according to CapIQ. Zoom’s video and audio-conferencing technology has leveraged cloud-infrastructure and bottoms-up adoption to knock Cisco’s WebEx systems out of many accounts, for instance, while CrowdStrike has replaced many old-school anti-virus products from large companies like Symantec with its cloud-native and AI-focused endpoint security product.

2. Efficient customer acquisition translates to quicker payback periods. Old-school enterprise technology from legacy vendors like Oracle and Cisco used to be sold through big, multi-year license agreements. Armies of well-paid salespeople worked hard at these companies and others to land those “big fish” accounts worth millions, or even hundreds of millions, of dollars. And once that bulky software was installed inside an organization, it was tough to rip out.

Today’s most prominent enterprise companies are doing things a different way: Often, developers inside large organizations first buy companies’ products with their own credit cards or use free (at least initially) open-source software. Once the products prove their value and spread virally inside organizations, they start getting the attention of CIOs with big budgets, who generally then buy them through subscription agreements. This produces a string of recurring revenue for the software vendor. It also translates to a significantly lower payback period, as the product does all the initial selling and enterprise CIOs “pull” the product in rather than responding to expensive sales and marketing campaigns. MongoDB, for example had 30 million downloads of its freemium technology at the time of its 2017 IPO, more than one per every one of the world’s 23 million developers, and only 4,300 paying customers. Datadog, similarly has a freemium product to drive bottoms-up demand; the payback period for its product was just eight months at the time of its IPO, according to publicly available financial information.

3. High-quality customers translate to significant net-dollar retention: Acquiring customers using bottoms-up, high-velocity sales techniques does not mean you have to compromise on the quality of the customers you’re attracting. Most Fortune 5000 companies in the midst of digital transformation are, in fact, leading the charge with cloud-first models, creating an efficient go-to-market model for software vendors trying to sell to them. Once companies “wedge in” to these large customers, their low, usage-based pricing; adjacent products; and expansion to other departments inside the large company can create a significant “net dollar retention”. This refers to additional dollars spent beyond the original purchase at the time a customer renews its subscription. For example, companies like CrowdStrike, Zoom, Alteryx and others have an NDR of 133% or higher, according to public securities filings, which correlates to a high enterprise valuation.

4. Related to this: Set a goal of having a high lifetime-value-to-CAC ratio. This ratio measures how a customer’s lifetime value to you sits in relation to the cost of acquiring that customer. A high ratio is good because it means customers are sticking with your product for a long time, making your sales and marketing investments worthwhile. If customers churn too quickly—which is easier than ever today, with so many tech products being delivered as easily cancellable subscription services—the ratio is lower. A low ratio is a signal you need to retool some aspects of your go-to-market strategy or make your product better.

Security firm CrowdStrike, as an example, has roughly a 5X lifetime-value-to-CAC ratio, based on our analysis of data from publicly available financial information. Bottoms-up sales pioneer Atlassian’s ratio, based on similarly sourced data, is also around 5X, while Cloudera—a B2B-focused company with relatively high sales and marketing costs and slower growth that has struggled in the public markets—is 0.7X.

5. Establish a viable path to profitability. One thing that’s hurt the reputations of companies like Uber on Wall Street is that they are burning a ton of money. The ride-hailing giant burned through $920 million in just its second quarter earlier this year. (Its overall quarterly net loss was actually much larger, at $5.24 billion, though that included a large amount of stock-based compensation to employees related to the company’s IPO.) Zoom, by contrast, was actually making money when it went public. Companies such as Twilio and Okta are also on track for profitability in the coming quarters or years, according to comments on recent earnings conference calls; Twilio said it expected to return “to a modest level of non-GAAP profitability” in the fourth quarter.

Wall Street still knows a solid business when it sees one—and today, thankfully, not all pre-IPO businesses are hemorrhaging cash and incurring bankers’ ire. If you can index your business to the cloud, open-source, and/or developer-centric, bottoms-up business models, you can find receptive investors in the public markets, and you might build a nice, sustainable business to boot.

This article originally appeared on Forbes.

The information contained herein is based solely on the opinions of Dharmesh Thakker and Danel Dayan and nothing should be construed as investment advice. This material is provided for informational purposes, and it is not, and may not be relied on in any manner as, legal, tax or investment advice or as an offer to sell or a solicitation of an offer to buy an interest in any fund or investment vehicle managed by Battery Ventures or any other Battery entity.

This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and is for educational purposes. The anecdotal examples throughout are intended for an audience of entrepreneurs in their attempt to build their businesses and not recommendations or endorsements of any particular business.

Content obtained from third-party sources, although believed to be reliable, has not been independently verified as to its accuracy or completeness and cannot be guaranteed. Battery Ventures has no obligation to update, modify or amend the content of this post nor notify its readers in the event that any information, opinion, projection, forecast or estimate included, changes or subsequently becomes inaccurate.

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