How This CEO Was Able To Take His Company Public When Everybody Else Was Panicking

Eugene KimDec 17, 2014, 01:24 IST

In early 2014, a few months before taking his company public, Zendesk CEO Mikkel Svane and his two cofounders, Morten Primdahl and Alexander Aghassipour, went for drinks in San Francisco. It was the first time in a while that the three cofounders had gotten together after work. They founded Zendesk in Svane's Copenhagen apartment seven years ago, and the three were close friends. They had a lot to catch up on that night. But a lot of their conversation seemed to circle back to the same question: should we really start the IPO process? That's because early this year was a terrible time for subscription-based software companies, or software-as-a-service (SaaS) companies, to go public. The market was heading into a huge correction period, and some public SaaS companies like Workday and Veeva lost as much as half of their value in a matter of weeks between February and April. Although no one directly told Svane to postpone, it was clear that everyone would question him if he pulled the trigger. But Svane wanted to get the IPO done and move on. He explained to Morten and Alex all the benefits of going public, like how it would give Zendesk more market visibility and allow employees to cash out some of their shares. After a while, however, Svane realized there was no right answer and it would all boil down to his own decision. "We should just do it because we can," Svane told the two cofounders, pounding his fist into his hand. "This is a big challenge, but we should take on the challenge because we can." Part of the reason was because the IPO was becoming too much of a distraction to many of his employees. He says some people were "shellshocked" by the market and there were even rumblings from people asking if going public was a "terrible idea." But Svane was also confident in Zendesk's numbers. Zendesk's revenue nearly doubled from $38.28 million in 2012 to $72.04 million in 2013, while its net loss dropped from $24.15 million to $21.83 million in the same period. Zendesk's sales and marketing cost, the largest cost item for most SaaS companies, was also decreasing relative to sales. Sales and marketing costs accounted for 59% of total sales in 2012, but Zendesk dropped it to 52% in 2013. It's instructive to compare these numbers with two other subscription-based software companies that filed to go public around the same time, Box and Good Technology. Box's revenue was on a similar trajectory as Zendesk's - its revenue also more than doubled from from $58.79 million in 2012 to $124.19 million in 2013 (through January 2014), but its losses jumped from $112.56 million to $168.55 million. Box's sales and marketing cost was also a lot higher as a percentage of sales, although it was slowing, from 168% of sales to 138%. Good Technology, while not strictly a SaaS company, does sell subscriptions to its software, which helps companies manage mobile devices. But it was on the same trajectory as Box, with revenue growing at the cost of a widening loss figures, and its sales and marketing costs were around 70% of sales in 2013. So despite all the noise coming from the shaky market, Zendesk went ahead with an IPO in May 2014. It ended up pricing its shares at $9, much less than the $12.50 per share it valued itself just a couple months before. Svane admits the price range might have been higher had he went public at a different time. But to him, that's not really what the IPO was all about. "Once you kick it (IPO) off, you want to get it done. It's something you just want to get it over with. That was more important than what exactly the IPO looked like for us," Svane told Business Insider. If early share price is any indication, Svane is turning out to have made the right decision. Zendesk shares popped 49% on the day it went public, and has jumped nearly 150% so far. Zendesk is now worth roughly $1.7 billion. Box and Good Technology, meanwhile, are still not public. Both have had to raise additional financing rounds. As Svane reflects on the whole IPO process, he says it's important to have a long term view. "It's not what happens at the IPO that matters. It's not about what happens two or three weeks after it," he says. "It's what happens years after the IPO. That's where you create real value for your shareholders and as a company."

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How This CEO Was Able To Take His Company Public When Everybody Else Was Panicking