All those technology startups avoiding IPOs like the plague -- and putting off potentially painful reality -- now have a new champion to justify clinging to the land of unicorns.
AppDynamics Inc., a startup whose software helps companies pinpoint hiccups with their websites, was set to become the first significant IPO of 2017, which many experts think will bring a much-needed end to a two-year scarcity of new tech listings.
Roughly 24 hours before AppDynamics was set to sell its first batch of public stock at a valuation of $2 billion or so, bigfoot Cisco Systems Inc. swooped in with a buzzer-beater purchase offer that snatched it from the IPO market. Cisco's offer was at a healthy markup of $3.7 billion, which includes existing AppDynamics stock awards.
It's hard to ignore a sale that values AppDynamics at about 18 times the company's revenue in the past 12 months. For comparison, Facebook trades at 15 times trailing 12-month sales, and AppDynamics' publicly traded peer, New Relic Inc., as of Tuesday was valued at 8 times trailing 12-month sales. (One rich sale price lifts all boats. New Relic shares were 11 percent higher Wednesday morning on news of the AppDynamics deal.)
I'll acknowledge that AppDynamics is a real company with real technology that could be extremely valuable to Cisco. A doubling of valuation was apparently the price needed to take AppDynamics off the IPO table, and Cisco, with its $71 billion in cash and investments, doesn't care about outlandish multiples.
The sale also renders moot some qualities that weren't ideal for AppDynamics' start of life as a public company. Like many young tech companies that grew up in the years when startups had easy access to cash, AppDynamics had a messy capital structure and lack of financial discipline. Like many young software companies, AppDynamics has fast-growing revenue but no profits, even though software companies tend to have gross margins north of 70 percent and have to try pretty hard to be unprofitable.
The company also reached to get a headline valuation of $1.9 billion a year ago -- and the bill for that decision was coming due. If AppDynamics had gone public at less than the $1.9 billion equity value from a late 2015 private stock sale, it would have owed those investors more shares to make up the difference. Those types of investor protections have become commonplace in recent years and helped startup valuations to balloon beyond those of comparable public companies. AppDynamics employees hired in the last year were issued equity valued at $12.48 a share or higher -- not so far off the $12 to $14 price that AppDynamics expected to sell its stock in the IPO.
Still, AppDynamics most likely would have been a fine public company, just as New Relic is a fine public company even though it hit the public markets with a discount to its valuation. Until Wednesday's bump on the AppDynamics sale news, New Relic's stock price was essentially flat from the first day it ended trading after its 2014 IPO. The question is how long it would have taken AppDynamics to significantly and sustainably increase its pre-IPO valuation.
But it's not a stellar message to send to other richly valued private tech companies that may not be able to go public today at their current valuations: Run the company however you like. Stretch valuations beyond reason. It could all work out fine. Someday your prince may come in the form of a rich tech company with a hunger for sales growth, cash burning in its pocket and dreams of a Trump tax break raining even more in the future.
Public market reality is boring. It's more fun to keep living in the mythical land of unicorns.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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