Okta came out of the gate strong today in its Wall Street debut, attracting the type of institutional investors CEO Todd McKinnon says should be around for the long haul. This IPO comes at a time when Wall Street appears ready to embrace enterprise technology companies.
Okta set its price yesterday at $17 a share, raising at least $187 million. The firm could raise more if its underwriters trigger their ability to buy more shares at the original IPO price, which seems like a no-brainer, given Okta’s strong first-day performance.
Okta is a cloud identity management company that helps large companies’ users connect securely to cloud services, while easing the burden of signing into multiple applications. The unicorn is a pure cloud company with a classic subscription model, an approach that seems to be finally well understood by public market investors.
It’s been quite a year so far for enterprise IPOs, as Okta joins Alteryx and MuleSoft in going public, with Cloudera (which filed a week ago) and Yext on deck.
McKinnon said with the dearth of IPOs last year, he felt like there was pent-up public market demand for new offerings, something that worked in his favor. But it was more than that. The CEO also noted that institutional investors came ready to play in his company’s IPO, and they had done their homework regarding the state of cloud technology.
“What was interesting was the number of high-quality long-term mutual funds that were interested,” McKinnon told TechCrunch. “It’s a testament to what we’ve done and the knowledge of this model, the cloud in general and why we are important to that story long term,” he said.
McKinnon admitted that portfolio managers’ high-level knowledge of the cloud took him somewhat by surprise. Perhaps that’s because nearly everyone in the business world today uses one cloud application or another. It’s hard to avoid Office 365, G Suite, Salesforce, Box, Workday and the other large cloud services.
Certainly managing identity is paramount to that story, and a technology that crosses every cloud service. It’s imperative to ensure that only an authorized individual can sign into a particular service. Yet you also need to make it simple enough to access multiple applications without putting undo hardship on the user — and McKinnon found in conversations with potential investors, as cloud users themselves, that this was clearly understood.
Loading the bases
That Okta had a solid first day result shouldn’t have come as an incredible surprise. Companies that raise their IPO range pre-debut shows that there is enough demand for their shares in the market, allowing them to raise the price without putting at risk the number of shares they had hoped to sell.
By pricing at the upper-end of its extended range, Okta made the point all the more obvious.
Jason Lemkin, a well-known SaaS venture capitalist, told TechCrunch that one reason for Okta’s popularity today was that its growth “is insane,” and that the company has “the full package.”
What Lemkin saw was a company growing around 15 percent over its last two reported sequential quarters, a pace of growth that many other companies at Okta’s age (founded in 2009) and scale (nine-figure revenue) would kill for.
Growing revenue quickly in combination with falling losses is a potent mix — and one that points to (eventual) profits.
Bringing it home
While Okta had a great debut, it doesn’t necessarily follow that all subsequent enterprise-facing IPOs will have a similarly stellar performance. What today’s IPO does show is that the market is welcoming for enterprise-facing cloud companies, especially if their financials look positive. If not, then Lemkin justifiably wonders if they can do as well.
Gene Munster, a former Apple analyst turned venture capitalist, thinks even the poorer-performing companies could do well under the correct market conditions. Speaking yesterday on TechCrunch’s Equity podcast, Munster indicated that the shift that took place through 2016, which saw the value of enterprise-facing revenues increase, will hold, as long as public-market investors continue to covet “visibility.”
Visibility in this case means predictability; companies that sell products on a recurring basis, as SaaS firms do, often have very predictable growth. That consistency helps investors place bets with more confidence, allowing for slightly richer valuations than other companies with similar revenue figures, but non-recurring sales, could command.
Asked if the technology IPO market was in fact as strong as some observers view it to be, Munster said that he believes it is for now, but that could change for some public market investors if Congress fails to enact tax reform.
If that happens, IPOs could slow. No one wants to go public in a hurricane.
Outside events out of a company’s control, such as last night’s missile attack in Syria, can have an impact on an IPO happening the following day. In the end, the market took a long-term view of the company instead of focusing on the current news cycle.
Okta closed at a lofty $23.51 a share with a market cap of $2.13 billion, perhaps giving one more data point that it’s shaping up to be a good year for enterprise tech IPOs.