Software IPOs in 2009

In my last post, I concluded that there was correlation between SaaS IPOs and raising venture capital, though causality was undetermined. Logically, taking capital and using it effectively should give a company an advantage over an unfunded rival, and seemingly, increase its chances of an IPO. But from experience, I know the causality works conversely, too. Venture capital funds unrelentingly look for ground-breakingly innovative companies in big markets that have IPO potential, and when they find them, they make an entrepreneur think of all the possibilities that $10 million can help him realize. If the company continues its success, the dinners get fancier, the terms more attractive, and the valuations higher, and capital becomes harder to refuse.

I wanted to see if the SaaS IPO/VC pattern continued in 2009, so I took a look. We only had 6 software IPOs in 2009 (an improvement over 2008), and out of those, 3 were SaaS: Medidata Solutions, OpenTable, and LogMeIn. Solarwinds may have a SaaS offering or two, but most of their software is installed.

Prior to its IPO, Medidata received over $20 million in funding, and a lot of it came from our friends at Insight Venture Partners. LogMeIn raised over $30 million from Intel, Integral Capital, Prism VentureWorks, Polaris, and 3TS, while OpenTable raised over $50 million before IPO, most of it coming from Benchmark and Impact Venture Partners. Even Insight’s second IPO of the year, SolarWinds, raised significant capital (the other investors were Bain and Austin Ventures).

It looks like our pattern holds.

In somewhat unrelated news, the Dow surpassed 10,000 for the first time in a little bit over a year yesterday. Cheers erupted from the NYSE trading floor, but before the delighted delirium dissipated, the Dow had declined to 9,990.

The Dow’s numerical scale is entirely arbitrary, and 10,000 is just a round number (and the smallest five-digit whole and natural number). If the Dow’s numerical index was divided by 3, would they have cheered when it crossed 3,333? Probably not. So why did the money men cheer today? Apparently, most people, at least subconsciously, like round numbers. A study done by R. Glen Donaldson and Harold Kim found that round numbers act as support and resistance barriers. This would suggest that the Dow, now having broken the 10K barrier should keep rising.

With Intel’s and Goldman’s strong quarters, the Dow’s breaking of a psychological barrier, and the NASDAQ’s continued strong performance (70% growth in the last 7 months), we may be seeing a few more SaaS IPOs in the near term. Maybe we’ll see one that hasn’t taken venture capital. That would be interesting.