Waving goodbye to Wall Street

by Brenon Daly

For software providers, Wall Street used to be a desirable location to set up shop. But now, an ever-increasing number of companies are waving goodbye to the neighborhood of public entities. Either the vendors bypass the fabled destination as they head to newer places with more privacy or, once public, they do a deal that’s the corporate equivalent of moving to the suburbs: consolidate with a larger software firm.

Already this year, the two major US stock exchanges have lost almost twice as many software companies as they have gained. According to 451 Research’s M&A KnowledgeBase, 15 publicly traded (or soon-to-be publicly traded) software providers have been acquired, compared with just eight new software listings.

Just today, the Nasdaq saw both medical software supplier athenahealth and cloud expense management specialist Apptio announce take-privates by buyout shops. And Qualtrics got picked off by SAP even before it had a chance to matriculate to the Nasdaq. (451 Research subscribers can look for our full report on SAP-Qualtrics on our site later today.)

The net reduction in publicly traded companies has erased tens of billions of dollars of market value from what had once been viewed as the place for software vendors to be, from both a marketing and financial point of view. For generations, software entrepreneurs founded and funded their businesses with a singular goal: IPO. Ringing the opening bell on the Nasdaq or NYSE was seen as a rite of passage for a company that aspired to grow out of its status as a ‘startup.’

Of course, tech vendors in general have been eschewing IPOs ever since the dot-com bust, in part due to regulatory changes on Wall Street. But the trend has accelerated in just the past half-decade as gigantic pools of private capital have, to some degree, replaced public market investors. For instance, Qualtrics managed to raise $400m from investors without an IPO. Domo raised almost twice that amount as a private company before its offering last spring.

All of that private-market capital has allowed software providers the luxury of operating behind closed doors for much longer, perhaps indefinitely. Institutional investors have accepted that new reality. Several deep-pocketed firms started putting money into the private market, which is a bit of a stretch for investors accustomed to the liquidity and transparency that comes with a public listing. But if software vendors won’t come to Wall Street, then Wall Street investors have to go to them.

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