Domo for Dummies: The startup's bizarro IPO filing is a sign that companies are chasing dumb money and that hard times are coming
- Domo, which filed to go public on Friday, could become a symbol for how tech IPO market has jumped the rails.
- The company is losing more money that its making in revenue and warns that it could hit a cash crunch as soon as August.
- CEO Josh James, who has nearly absolute control over the Domo, has directed business to other firms he owns, including a catering company and an interior design company.
- The prospective IPO comes as the quality of companies filing to go public has declined to lows not seen since the dot-com bust.
Someday we may remember Domo in the same way we remember Pets.com.
Just as the online pet store with the sock-puppet mascot became a marker of the apotheosis for the excesses and ridiculousness of the dot-com era, so too Domo may eventually become one of the symbols for the end of the current era. Because even at a time when the quality of companies heading to the public markets has declined significantly, Domo stands out - and not in a good way.
The data analytics startup on Friday revealed the regulatory documents it filed to go public. Like many other recent tech firms seeking an IPO, Domo is selling a growth story while losing lots of money. Like many of those firms, Domo has a stock structure that gives disproportionate control to its CEO and provisions in its bylaws that will keep him in power even if and as he sells shares.
But Domo is in even worse shape than many of the firms that have preceded it of late. For one thing, it's losing more money than it's posting in revenue - a whopping 63% more last year. Even as it continues to lose lots of money, its growth rate is slowing down. And it's bleeding cash at an alarming rate.
In its last fiscal year, which ended at the end of January, its operating activities consumed $149 million in cash; by comparison, it posted only $108 million in sales for the year. Domo's operations burned through another $37 million in cash in its first quarter, which ended at the end of April; again, that topped its sales for the period, which came in at $32 million.
But here's perhaps a more important number to consider: $72 million. That's the amount of cash the company had left on hand at the end of its first quarter. At its present burn rate, it will blow through that amount before the end of October, when its third quarter comes to a close.
Domo is facing a cash crunch
In fact, Domo itself warned in its IPO registration document that if it doesn't raise funds by August - either through the IPO or some other means - it will be in a cash crunch, an alarming admission for a company seeking to earn the trust and money of potential investors. If it doesn't replenish its coffers by then, Domo will be forced to "begin to implement plans to significantly reduce its expenses," it said in the regulatory filing, including reducing its marketing spending and cutting back on hiring.
"Any of the actions contemplated by the implementation of this plan to significantly reduce operating expenses, if required, could have an adverse impact on the Company's ability to achieve its planned objectives, and thus materially harm the Company's business, operating results and financial condition," the company warned in its IPO registration statement.
But even if it does raise the necessary funds, the company warned it still will likely need more cash in the future, possibly as soon as a year from now.
"While we believe our cash and cash equivalents together with the proceeds of this offering will be sufficient to support our planned operations for at least the next 12 months, [Domo's negative cash flow] and our financial position without additional capital may affect our ability to meet our projected operating obligations under our current forecast," the company said. "Further, in the future, we will likely need to raise additional funds to invest in growth opportunities, to continue product development and sales and marketing efforts, and for other purposes."
Domo's finances may trigger flashbacks to the dot-com era
If you lived through the dot-com era, Domo's financial state and its warnings likely give you flashbacks. There's a good reason for that.
Take Pets.com. Like Domo, at the time of its IPO, it was losing far more money than it was posting in revenue. Like Domo, it was bleeding cash. Like Domo, it warned investor that it would likely need to raise more funds, even after its IPO.
Potential cash crunch and historical precedents aside, there are other reasons for investors to be wary of Domo.
The company reduced its losses in the first quarter, both in absolute terms and relative to its sales. Its first-quarter loss was only 39% bigger than its revenue for the period.
But it seems to have sacrificed growth to narrow its losses. Its revenue growth rate fell from 46% for all of last year to 32% in the first quarter. And the company warned that its growth will likely slow further.
"Our revenue growth rate is expected to decline in future periods due to a number of reasons, which may include the maturation of our business, increase in overall revenue over time, slowing demand for our platform, increasing competition, a decrease in the growth of the markets in which we compete, or if we fail, for any reason, to continue to capitalize on growth opportunities, a decrease in our renewal rates, or a decline in upsells," it said.
CEO James has Domo doing business with other companies he owns
And then there are the governance questions. Like many of its peers, Domo has a dual-class stock structure, where the class of shares held by insiders gets far more votes than the shares that will be held by everyday investors. But in Domo's case, its super-powered Class A shares have even more power than comparable classes of stock at other companies.
Its Class A shares, which are entirely controlled by CEO Joshua James, get 40 votes per share, instead of the typical 10 votes per share. That gives James 92% of the voting power at Domo. Although it's unclear how much of that he will retain after the IPO, he almost certainly will retain majority control of the company.
Tech startups and their pre-IPO backers generally defend such arrangements as a way to insulate a visionary CEO from the often short-term concerns of public stockholders so they can build the company in the direction of their long-term vision.
But by giving CEOs that kind of power, such stock structures can make them less accountable to shareholders and allow them to use the company to serve their own personal interests or to enrich themselves and their cronies.
There are worrying signs that James may already be taking advantage of his control of Domo for his own personal gain and that of his family members. In the regulatory filing, the company disclosed that it had entered into an agreement with JJ Spud, another company controlled by James, to lease and use an airplane it owns. Domo paid JJ Spud some $700,000 last year to use the plane.
The company also disclosed that it had spent another $300,000 in each of its last two fiscal years on catering services provided by Cubby's Chicago Beef, a restaurant owned by James and one of his brothers. It also spent another $200,000 on furnishings provided by an interior design firm partially owned by James at which another one of his brothers serves as an executive officer.
While James' compensation last year was relatively modest - $537,659 in total - he got a stock option grant of some 9.3 million shares in 2014. That's more than double the number of options Domo has handed out to its other top two executives over the last five years - and comes on top of the 48 million shares he already owns that give him control of the company.
The quality of companies seeking IPOs is going down, down, down
Domo's filing comes as the tech IPO market is heating up - even as the quality of the companies going out is falling. Last year, the portion of tech companies seeking to IPO that were profitable was just 17%, matching the lowest level seen since the end of the dot-com boom.
Data collected by University of Florida finance professor Jay Ritter indicates that the quality of tech companies seeking to go public tends to go down the longer into a boom - and the closer to a bust.
By that measure, Domo is just one more indication that this present boom is getting really long in the tooth. But the fact that company stands out even amid the ever-lowering standards for prospective IPOs should really have investors worried that they may have another sock puppet on their hands.