Shares in DocuSign and Smartsheet soared after the two business software companies went public on Friday.
DocuSign, which specializes in software for signing documents digitally, was up 37% in its first day of trading to $39.73. Meanwhile, Smartsheet, which sells software to manage business tasks, rose 30% to $19.55.
The two IPOs are part of a recent trend of enterprise software companies going public after drought of several years.
Just last Friday, the Dell Technologies subsidiary company Pivotal went public, while workplace software and online storage company Dropbox held its IPO in late March. Zuora, which sells software for companies to manage their own subscription services and payment plans, also went public in April.
DocuSign CEO Dan Springer said that more enterprise companies are going public now because several took big funding rounds over the past few years to help them grow their businesses to the point where they would be ready to IPO. It’s also likely that startups’ venture capitalists and other investors were urging them to go public so they could generate returns.
This new wave of enterprise companies, although they focus on different types of software and services, all have one thing in common: they are unprofitable.
DocuSign, for example, lost $115.4 million on sales of $381.5 million during the year ending Jan. 31. Likewise, Smartsheet’s revenue for its latest year was $111 million, while it lost $49.1 million.
Wall Street investors, however, appear to be unphased by unprofitable technology companies as long as their finances indicate that they are rapidly growing. DocuSign’s overall sales jumped 52% year-over-year while Smartsheet’s sales skyrocketed 66%.
Smartsheet CEO Mark Mader believes that cloud software companies like Salesforce (CRM) and Workday that have built businesses that sell recurring subscriptions instead of collecting one-time payments have paved the way for businesses like his. These types of companies require years of investment and big customer rolls before they eventually make money through recurring payments.
Wall Street investors “are really understanding the dynamics of building a subscription businesses,” Mader said. “The ‘smart money’ understands that model.”
That said, enterprise software companies face a huge challenge in retaining customers that can cancel after they pay their last monthly or yearly bill, which Smartsheet acknowledges in its regulatory filing. Additionally, both Smartsheet and DocuSign face fast-growing competitors like Adobe, Microsoft, and Google.
DocuSign’s Springer conceded that Adobe’s competing electronic signature business is a challenge, but he believes that DocuSign’s biggest test is convincing companies to forgo paper documents in favor of their digital counterparts.
“Instead of thinking who we are looking at attacking, we look at attacking paper,” Springer said.
For Mader, going public and the publicity it brings will help improve the company’s ability to win more customers. Also, an IPO gives the company more legitimacy.
“Do you want to be a real company or do you want to keep plodding along as a private company?” Mader said about Smartsheet’s IPO decision.
Will Mader miss being a privately held startup that doesn’t have to deal with demanding Wall Street investors and extra public scrutiny each quarter?
“Two words—hell no,” Mader said. The executive acknowledged the fact that most startups fail and that it took years of hard work and luck to finally go public.
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“Do you know how low the odds are?” Mader said about the chances of a startup surviving. “You really have to have an appreciation for the present day.”