Money Matters

Tech IPOs show the money is in business services

Money Matters
By Richard Waters
Mon, 04, 19

Dropbox was once seen as one of the hottest consumer internet companies, a place where people could store their pictures, music or digital documents and get to them from any device.

Dropbox was once seen as one of the hottest consumer internet companies, a place where people could store their pictures, music or digital documents and get to them from any device.

Not any more. It now describes itself as “a leading global collaboration platform that's transforming the way people work together, from the smallest business to the largest enterprise”.

Much more boring, certainly. But it is a clear sign, for other tech companies blazing a similar trail, of where the most dependable profits are likely to be found.

A year after its IPO, Dropbox is still trying to convince investors that it has made the switch to the business market, and its shares are stuck where they were when it first arrived on Wall Street. By contrast, other online “collaboration” services that were aimed at business users from day one have boomed.

Take Atlassian, a company founded in Australia that has a strong following among software developers: its stock has risen more than fivefold since its 2015 IPO, making it worth the equivalent of three Dropboxes.

For many internet start-ups that don’t achieve the winner-takes-all success of a consumer company like a Google or Facebook, business customers are where the money is. That simple rule has been driving the valuations of many recent tech success stories, and is now evident in the IPO market.

The “consumerisation” of business technology — designing software to emulate the ease of use of consumer products — accounts for the rapid uptake of many of today’s most successful workplace apps. But the best of them have never been in any doubt about where the serious money is to be made.

The long-awaited wave of tech IPOs that has reached Wall Street this year is already bearing this out. Take the two companies that set a price for their shares on Wednesday, and are due to start trading on Thursday.

One, Pinterest, is a household name — at least, if your household includes one of the 250m people who visit the site at least once a month. Pinterest’s IPO has been one of the most anticipated of recent years. But it has not lived up to the hopes of private investors who pumped money into the company two years ago, and its shares have been priced below what they were thought to have been worth back then.

By contrast, Zoom Video Communications is largely unknown to the wider world. As the name suggests, it runs a video conferencing service for business users — a market that, at first glance, might appear to be more than adequately addressed already by older and better known services like Webex (now owned by Cisco) and Polycom (owned by Plantronics).

Like many business services, however, Zoom is benefiting from the surge that comes from translating a well-known business application to the world of cloud computing. That is something that can breathe new life into an old idea, as applications become accessible from more devices and easier to use.

Before the start of trading on Thursday, Zoom was valued at $10.5bn — not far from the $12.6bn valuation of the much better known Pinterest. But unlike Pinterest, Zoom arrives on Wall Street with considerable momentum, after seeing its shares jump nearly tenfold compared to what private market investors paid for them in 2017.

Expectations are now high for Slack, the workplace messaging platform that is expected to come to the market by way of a direct listing in the next few weeks

It is way too early to pass judgment on this year’s headline-grabbing IPOs. That is not least because the ultimate success of an IPO has to be judged over the longer term: Facebook’s shares dropped 50 per cent after it over-reached with its 2012 stock market debut, but that was quickly forgotten when it worked out how to make money from mobile advertising and its shares went on a tear.

That said, the first big tech companies to come to Wall Street this year are starting to suggest a pattern. Like ride-hailing app Lyft before it, Pinterest has raised both large amounts of money ($1.5bn) and high expectations as a private company. It now shows signs of struggling to justify the hopes (at least, at the point that it goes public).

By contrast, smaller and less well-known companies selling to businesses are experiencing a boom. With steady subscription income, the ones that find the right formula can quickly develop dependable revenue streams — something that IPO investors have come to appreciate.

Besides Zoom, they include software company PagerDuty, which experienced a 60 per cent share price jump on the first day of trading after its IPO last week.

Expectations are now high for Slack, the workplace messaging platform that is expected to come to the market by way of a direct listing in the next few weeks.

It is far too early to pass final judgment on this year’s round of tech IPOs. But a pattern may already have been set.