Finding Patterns in the DATA (Tableau) IPO

As featured in TechCrunch.

Stanford-born and Seattle-based Tableau Software (ticker symbol: DATA) enjoyed a tremendous debut on the public markets on Friday, closing on its first day of trading at over $50/share, up over 60% from its $31/share IPO price. The company raised over $250M through the sale of approximately 14% of the company, and its enterprise value now sits at approximately $2.5 billion.

For the pundits who’ve been arguing that the tech IPO landscape is in crisis, deals like Tableau serve as a powerful reminder that the public market is eager for certain tech companies. In fact, over the past year or so, there have been several other high profile tech IPO winners such as Workday, Splunk, Palo Alto Networks and ServiceNow.

What lessons can aspiring tech entrepreneurs learn from Tableau and these other Wall Street success stories? Here are few.

Stand Out in the Crowd. Tableau has built a highly attractive business. Growth has been very strong – March quarter revenue growth was over 60%, to $40M. The company is operating in a huge and proven market – the data analytics and visualization space has produced big winners across several software generations and remains interesting as big data pushes the limits of existing solutions. Finally, Tableau has been able to show profits, albeit modest, as the company has grown rapidly. For all these reasons, public investors flocked to Tableau.

If you’re considering an IPO for your company in the future, recognize that public fund managers have MANY companies from which to choose. More specifically, small-cap growth managers have between 500-1,000 companies in their universe. Given the enormity of this number, a typical manager will only follow 50-100 companies closely and, depending on strategy, will likely only invest in 25-50 of these in any one year. Tableau stands out in this sea of stock tickers. Does your company stand out? If not, what investments do you need to make to help you rise above the noise?

Price Your Company Right. Cynics will suggest that Tableau left money on the table. Since the stock popped over 60% on the first day of trading, the company clearly could have set its IPO price higher and raised more money. This misses the point. Tableau smartly recognized its IPO is a chance to establish a new shareholder base. By pricing the IPO at $31, the company surely had its pick of new investors since most everyone, seeing the obvious good deal, wanted to get in. I’m sure Tableau’s management team spent time evaluating who was most likely to hold their IPO stock and add to their ownership over time. If the company has done its job well, Tableau has stacked its shareholder list with the best, long-term oriented fund managers. This will serve the company well for years to come.

Similarly, you should spend time getting to know potential VC investors before you take money into your company. Consider prioritizing things like alignment of outlook and ability to help add value ahead of price. Taking the highest price limits dilution in the short-term, but if you add a VC who either can’t help or has a different vision that you for your company, you’ll likely regret the decision down the road.

Patience is an IPO Virtue. Tableau deferred its IPO for several quarters. In fact, had Tableau used $100M in revenue run rate as a threshold for IPO timing, as many others do, the company would have now been public for over a year. Because Tableau waited longer, the company was able to continue to invest in its business. With more time and investment likely came increased visibility and predictability, which is critical to performing as a public company. Also, Tableau has become more valuable during the past year as it has grown and solidified its leadership position in the market. With a higher valuation, Tableau’s IPO brought in more money and established a larger public float than would have been possible a year ago. Public fund managers dislike small, or “thin,” float deals; such thin float IPOs often lead to more stock volatility, which is difficult to manage.

As you build your company for IPO readiness, consider waiting until you have predictability well under control and your valuation allows you to sell a larger amount of stock without taking more than 15-20% of dilution.

Clearly Tableau is a remarkable company. Emulating these three traits will help you succeed as well.

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