It’s common for startups to be publicly cagey about their exit strategy, even when they envision a very clear path. Not Host Analytics.
The company, a vendor of enterprise performance management (EPM) systems, “can say with confidence” that it’s “directly on a path to an IPO,” says CFO Ian Charles, who puts the likely timeframe for the offering at about two years from now.
What Host Analytics must do to achieve an initial public offering is, though, different from what may have been the case for IPO-minded software companies just a couple of years ago. “In years past you could potentially go public with a $25 million revenue base,” Charles notes. “That certainly isn’t doable today.”
The company doesn’t share its revenue numbers, but there are signs of solid growth. It has acquired about $80 million in venture funding and has more than 700 customers, including such familiar names as the Boston Red Sox, FitBit, La-Z-Boy, the Mayo Clinic, NPR, OpenTable, TOMS Shoes, and True Value.
Most importantly, there is massive opportunity for future growth. According to Host Analytics, less than 5% of the EPM market has been penetrated by cloud-based providers like Host, Anaplan, and Adaptive Insights or cloud versions of the on-premises software sold by market leaders SAP, IBM, and Oracle.
But, Charles adds, while growth is important, it’s no longer the key to an IPO. “You have to balance growth with profitability,” he says. “You can’t just go out and spend hundreds of millions of dollars anymore. A few years ago, large premiums were given to enterprise valuations based just on large growth [numbers]. Today you have to grow the business smartly, with a focus on unit economics and customer success.”
To be sure, says Charles, profitability doesn’t necessarily generate a premium for valuation purposes if it’s not backed by growth. But, he asks, “would you rather grow at 100% year-over-year and lose 60% of operating margin, or grow at 10% and make 60% of operating margin?”
Charles attributes a good portion of the company’s success to date to its use of a wide variety of cloud-based systems, including Salesforce, Marketo, NetSuite, Captora, Financial Force, and Exact Equity.
And, of course, Host Analytics uses its own enterprise performance management system. The finance team looks at 114 separate key performance indicators on a weekly basis, but Charles claims the team is half the size that would be expected for a company its size, with accounting, forecasting, and reporting completely automated.
“When you eliminate Excel and replace it with purpose-built financial applications, you create a workflow that takes less time, makes fewer errors, and requires fewer people to perform,” he says.
Because the company uses only cloud systems, the same holds true for its marketing, services, engineering, and sales teams, according to Charles.
He says that from an operational standpoint, going public won’t require the finance department to do anything differently from what it’s doing now. “Finance is not a game of home runs, where one decision or one deal makes or breaks you,” he observes. “It’s a game of singles, of managing things properly in small increments.”
That doesn’t mean he’s taking the prospect of an IPO lightly. “Going public is not easy or inexpensive,” says Charles, who took digital media company RMG Networks public in 2013. “It has long-lasting implications for the business, its systems, its people, and the skill sets needed.”
Host’s EPM product, which includes modules for planning, consolidation, modeling, and reporting, is designed for use by complex organizations and those in fast-growth mode. “A relatively basic business that’s not growing rapidly shouldn’t be a customer of the product,” says Charles. “There’s plenty of business that we walk away from, because they’re not suited for the product’s complexity.”
That’s important not only because the customer wouldn’t be getting its money’s worth, but because it would lead to greater customer churn for Host Analytics. Churn, which is the sworn enemy of all cloud-based software companies, “starts at inception [of a customer deal],” Charles says. “We can find a lot of bad customers that will be set up to fail and will churn at some point, whether in one, two, or three years.”
He finds it interesting that for the first time in his career, he’s the CFO of a company that uses its own product. That brings him into frequent contact with finance chiefs of prospective clients.
“I find myself in front of customers much more often than I have in prior roles,” he says. “For many of the larger deals, they want that CFO-to-CFO connection.”
Most often, Charles adds, they want to know how Host Analytics is using the product itself and how it’s extracting value from it. “In the SaaS category, many of those customers operate businesses that look very much like Host Analytics,” he says.