Category Archives: social networking

Thoughts on the Jive Registration Statement (S-1) and Initial Public Offering (IPO)

I finally found  some time to read over the approximately 175-page registration statement (S-1) that enterprise social networking software provider Jive Software filed on August 24, 2011 in support of a upcoming initial public offering (IPO) of its stock.

In this post, and subject to my usual disclaimers, I’ll share some of my thoughts on reading the document.

Before jumping into financials, let’s look at their marketing / positioning.

  • Jive positions as a “social business software” company.   Nice and clear.
  • Since everyone now needs a Google-esque (“organize the world’s information”) mission statement, Jive has one:  “to change the way work gets done.”  Good, but is change inherently a benefit?  Not in my book.
  • Jive’s tagline is “The New Way To Business.”  Vapid.
  • Since everyone seems to inexplicably love the the tiny-slice-of-huge-market argument in an IPO, Jive offers up $10.3B as the size of the collaborative applications market in 2013.  That this implies about 2% market share in 2013 at steady growth doesn’t seem to bother anyone.  Whither focus and market dominance?

Now, let’s move to financials.  Here’s an excerpt with the consolidated income statement:

The astute reader will notice a significant change in 2010 when Jive Founder Dave Hersh stepped down as CEO and was replaced with ex-Mercury CEO Tony Zingale.  Let’s make it easier to see what’s going by adding some ratios:

Translating some of the highlighted cells to English:

  • Jive does not make money on professional services:  they had a -17% gross margin 2010 and -13% gross margin in 1H11.
  • In 2009,  a very difficult year, Jive grew total revenue 77% and did so with a -15% return on sales.
  • In 2010, Jive grew revenue 54% with a -60% return on sales, while in 1H11, Jive grew revenue 76% with a -64% return on sales.
  • In 2010, Jive increased R&D, S&M, and G&A expense by 127%, 103%, and 132% respectively.
  • In 2010, Jive had a $27.6M operating loss, followed by a $30.6M operating loss 1H11

To say that Jive is not yet profitable is like saying the Tea Party is not yet pro-taxation.  For every $1.00 in revenue Jive earned in 1H11, they lost $0.90. People quipped that the Web 1.0 business model was “sell dollars for ninety cents.”  Jive seems to be selling them for about fifty-three.

But that analysis is unduly harsh if you buy into the bigger picture that:

  • This is the dawn of a large opportunity; a land-grab where someone is going to take the market.
  • You assume that once sold, there are reasonably high switching costs to prevent a customer from defecting to a competitive service.
  • These are subscription revenues.  Buying $1.00 of revenue for $1.90 is foolish on a one-shot deal, but in this case they’re buying a $1.00 annuity per year.  In fact, if you read about renewal rates later on in the prospectus, they’re actually paying $1.90 for a $1.00 annuity that grows at 25% per year.

I’d say this is a clear example of a go-big-or-go-home strategy.  You can see the strategic tack occurring in 2010, concurrent with the management change.  And, judging by the fact that they’re filing an S-1, it appears to be working.

Before moving on, let’s look at some ratios I calculated off the income statement:

You can see the strategy change in the highlighted cells.

  • Before the change, Jive spent $1.16 to get a dollar of revenue.  After, they spent $1.90.
  • Before, they got $2.91 of incremental revenue per incremental operating expense.  After, they got $0.90.  (It looks similar on a billings basis.)
  • Before, they got $6.76 of incremental product revenue per incremental S&M dollar.  After, they got $1.73.

Clearly, the change was not about efficiency.  You could argue that it was either about growth-at-all-costs or, more strategically, about growth as a landgrab.

But we’re only on page 6 of the prospectus, so we’re going to need to speed up.

Speaking of billings and revenues, let’s hear what Jive has to say:

We consider billings a significant leading indicator of future recognized revenue and cash inflows based on our business model of billing for subscription licenses annually and recognizing revenue ratably over the subscription term. The billings we record in any particular period reflect sales to new customers plus subscription renewals and upsell to existing customers, and represent amounts invoiced for product subscription license fees and professional services. We typically invoice the customer for subscription license fees in annual increments upon initiation of the initial contract or subsequent renewal. In addition, historically we have had some arrangements with customers to purchase subscription licenses for a term greater than 12 months, most typically 36 months, in which case the full amount of the agreement will be recognized as billings if the customer is invoiced for the entire term, rather than for an annual period.

The following table sets forth our reconciliation of total revenues to billings for the periods shown:

This says that billings is equal to revenue plus the change in deferred revenue.  Billings is a popular metric in SaaS companies, though often imputed by financial analysts, because revenue is both damped and seen as a dependent variable.  Billings is seen as the purer (and more volatile) metric and thus seen by many as a superior way to gauge the health of the business.

For Jive, from a growth perspective, this doesn’t strike me as particularly good news since billings, which were growing 99% in 2010, are growing at 59% in 1H11, compared to revenue which is growing at 76%.

Now we’re on page 8.  Happily the next 20 pages present a series of valid yet unsurprisingly risk factors that I won’t review here, though here are a few interesting extracted tidbits:

  • The company had 358 employees as of 6/30/11.
  • They plan to move from third-party hosted data centers to their own data centers.
  • Subscription agreements typically range from 12 to 36 months.
  • They do about 20% of sales internationally.
  • They recently completed three acquisitions (FiltrboxProximal,  OffiSync).
  • There is a 180 day lockup period following the offering.

Skipping out of page-by-page mode, let me pull some other highlights from the tome.

  • There were 44M shares outstanding on 6/30/11, excluding 15M options, 0.8M in the options pool, 0.9M shares subject to repurchase.  That, by my math, means ~59M fully-diluted shares outstanding after the offering.
  • Despite having $44.6M in cash on 6/30/11, they had a working capital deficit of $15.9M.
  • The Jive Engage Platform was launched in February 2007.  In August 2007, the company raised its first external capital.
  • The Jive Engage Platform had 590 customers as of 12/31/10, up from 468 at 12/31/09.  There were 635 as of 6/30/11.
  • The dollar-based renewal rate, excluding upsell, for 1H11 for transactions > $50K was over 90%.  Including upsell, the renewal rate was 125%.
  • Public cloud deployments represented 59% of product revenues in 1H11.
  • The way they recognize revenue probably hurts the professional services performance because they must ratably take the PSO revenue while taking the cost up-front.

One thing soon-to-be-public companies need to do is gradually align the common stock valuation with the expected IPO price to avoid a huge run-up in the weeks preceding the IPO.  Gone are the days where you can join a startup, get a rock-bottom strike price on your options, and then IPO at ten times that a few weeks later.  Companies now periodically do section 409a valuations in order to establish a third-party value for the common stock.  Here’s a chart of those valuations for Jive, smoothed to a line, over the 18 months prior to the filing.

This little nugget was interesting on two levels, bolded:

The core application of the Jive Engage Platform is written in Java and is optimized for usability, performance and overall user experience. It is designed to be deployed in the production environments of our customers, runs on top of the Linux operating system and supports multiple databases, including Microsoft SQL Server, MySQL, Oracle and PostgreSQL. The core application is augmented by externally hosted web-based services such as a recommendation service and an analytics service. We have made investments in consolidating these services on a Hadoop-based platform.

First, it seems to suggest that it’s not written for the cloud / multi-tenancy (which, if true, would be surprising) and second, it suggests that they are investigating Hadoop which is cool (and not surprising).

More tidbits:

  • 105 people in sales as of 6/30/11
  • 122 people in R&D as of 6/30/11
  • Executives Tony Zingale (CEO), Bryan LeBlanc (CFO), John McCracken (Sales), and Robert Brown (Client Services) all worked at Mercury Interactive.  The latter three were brought in after Zingale was made a director (10/07) but well before he was appointed CEO (2/10).
  • Zingale beneficially owns 7.5% of the company pre-offering.  This is high by Silicon Valley standards, but he’s a big-fish CEO in a small-pond company.
  • Sequoia Capital beneficially owns 36% of the company.  Kleiner Perkins owns 14%.
  • I think Sequoia contributed $37M of the $57M total VC raised (though I can only easily see $22M in the S-1).
  • If that’s right, and if Sequoia eventually exits Jive at a $1B market cap, that means they will, on average across funds, get a ~10x return on their investment.  $2B would give them 20x.

What’s left of my brain has officially melted at page F-11.  If I dig back in and find anything interesting, I’ll update the post.  Meantime, if you have questions or comments, please let me know.

As a final strategic comment, I’d say that investors should consider the possibility of an increased level of competition from Salesforce.com, given their massive push around “the social enterprise” at Dreamforce 11.

I Just Shut Down FriendFeed

I just deleted my FriendFeed account. Why?

  • I decided that my life-friends didn’t want my Facebook feed polluted with automatic status-ing of my 10 work-related tweets/day. And I was reasonably sure that my work friends didn’t want to see pictures of me in high school. (Or, better put, perhaps I didn’t want them seeing pictures of me in high school.)
  • So I used FriendFeed to link together LinkedIn, Blogger, Twitter, and SlideShare. And I de-serviced Facebook as a FriendFeed service, effectively cutting the cord between my business world and my personal one.

Then, today, in my Facebook profile, I noticed that somehow FriendFeed was automatically status-ing my blog posts. Oops. I trusted someone with my credentials and now they’re abusing that trust.

There’s only one solution for that. After spending 10 minutes on FriendFeed trying to figure out how to delete my account, I did. And the difficulty in finding out how to delete my account only increased my desire to.

Social networking is all about trust. Trust that the sites will work. Trust that they will maintain security. Trust that they use login credentials responsibly. Trust that the site will make it straightforward to update preferences and delete an account if the owner so chooses.

That trust was violated. Ergo, no more FriendFeed for me.

Holy Cow! I’m on the BusinessWeek Home Page

One of my key rules for keeping this blog credible is to avoid the tendency to re-post stories without reading them or to write about new services without trying them. That means I’ll output fewer stories per week, but hopefully you’ll find the content richer and more meaningful.

Thus, when McGraw-Hill launched BusinessExchange a while back I was eager to blog about it, but I needed to get some real hands-on time first.

Why was I eager? I’m interested in BusinessExchange several reasons:

  • I’ve always been a fan of BusinessWeek, which I started reading in business school and have read continuously since then. (Well over a decade for those who count such things.)
  • BusinessExchange represents a big step (in fact, about as big a step as I can think of) by a major, traditional media player to re-invent itself in an Internet / Web 2.0 world.
  • The site is MarkLogic-based, I know the head of the team who built it, and I know it was built using agile methodologies.

Here’s what the New York Times had to say about BusinessExchange when it launched:

With advertising revenue sliding, publications try a lot of things online to get noticed, like — pardon the jargon — verticals, aggregation, user-generated content, popularity rankings and even something resembling social networks.

BusinessWeek magazine is about to introduce a site that combines some elements of all of the above in ways intended to capture new readers and funnel them into niches that will attract advertisers.

The site, called Business Exchange, is one approach to the fast-evolving digital world, where some news sites that experiment have rapidly expanded their audiences while those that do little more than post articles online have been left in the dust. After two years of quiet development, it will go public in late September, accessible through BusinessWeek’s own Web site (www.businessweek.com).

The core of Business Exchange is hundreds of topic pages, on subjects as broad as the housing market and as narrow as the Boeing 787. Plans call for the number of topic pages to grow quickly into the thousands.

I’ve been using BusinessExchange for a while now and was happy to learn last week that, based on my activity, they planned to make the “featured user” next Tuesday. What I didn’t know was how prominently that would feature on the BusinessWeek homepage, and it hadn’t also dawned on me “what else” was happening on that day.

As you can see, I’m most active in the topic of “venture capital” though I’m also pretty active in “information technology,” “business blogging,” and “public relations.” Things I like about the site include:

  • The ability to share stories from any source, BusinessWeek or not
  • The automatic ability it has to parse some stories, with a title and summary
  • The ability to save stories I find of interest
  • The ability to connect with / network to some pretty influential people — not the least of which include many of BusinessWeek’s senior editors and correspondents, including Stephen Baker who I met a few times many years ago when I was at Business Objects in Paris
  • The ability to find and read stories that have effectively been pre-selected by those in my network, essentially a form of collaborative filtering around news
  • The business context

Aside: one of my theories is that social networks will fragment around interest areas and that people will seek to avoid “collisions” where (to use my favorite example) someone wants a 0% probability of their (LinkedIn, Spock, SlideShare) profiles intersecting with their (Facebook, MySpace, Classmates, Flickr) profiles interesecting with their (AdultFriendFinder, Match, Fling) profiles. Thus, collision avoidance will balance against the desire to minimize the number of social network profiles into some equilibrium where your number of active social networks = your number of deliberately unlinked social contexts.

So, if you’ve not tried BusinessExchange, I would give it try. My profile is here. The homepage is here. Come be an early user of in transition of mainstream business media.

Correlations between Grateful Dead Fan Concert and Online Behavior

First Monday, a peer-reviewed Internet journal run by the University of Illinois at Chicago recently published an article entitled A Grateful Dead Analysis: The Relationship Between Concert and Listening Behavior which I found interesting.

Frequent readers will know that I’ve always believed the Grateful Dead provided a roadmap — twenty years in advance — for how the music industry should respond to the digitization of media, by changing business model emphasis from album sales to road touring, community building, and branded concessions. In fact, you could easily argue that the roadmap goes beyond music into publishing and information industries in general.

You might remember this post (Krugman on the Grateful Dead as a Business Model) where I reported with delight that Princeton’s Paul Krugman thought the same thing.

The First Monday article, however, isn’t about business models. Instead, it’s more of a study in community, comparing live concert vs. online listening behavior. Specifically, they took data from 1,590 live set lets across as 23 year period and compared it to 2.6M listening events from 2005 to 2007 on last.fm.

Excerpt:

The extreme upper right of this plot is important as “Trucking” and “Sugar Magnolia” represent not only the most popular songs in terms of times played in concert, but in terms of times listened to on last.fm. “Trucking” is on 25 of the 90 released Grateful Dead albums and “Sugar Magnolia” is on 32 of those albums. Both “Trucking” and “Sugar Magnolia” were also well received publicly. “Trucking” reached position 64 in 1971 and “Sugar Magnolia” reached position 91 in 1973 on the Billboard pop singles charts. Also in this area is “Touch of Grey”. “Touch of Grey” was the only Grateful Dead song with an accompanying music video and in 1987, reached the top 10 Billboard single’s chart.

A fun excerpt from the middle:

It is interesting to note the songs “Saint of Circumstance”, “Victim or the Crime”, “Lost Sailor”, and “Greatest Story” in the bottom left of polygon B. All of these songs were created by the song writing duo of Barlow and Weir and sung in concert often by Bob Weir. While these songs were played extensively in concert, they received relatively little attention from last.fm users.

This is no surprise to Dead fans. I think many of Bobby’s songs — particularly the testosterone-filled ones — were viewed as a chance to give Jerry’s voice a break. I like when the data draws easily supported empirical conclusions.

Excerpt from the conclusion:

This article presented an analysis comparing the popularity of Grateful Dead songs as identified by both how many times they were played in concert and how many times they were listened to by members of the last.fm online music service. The results presented here indicate a strong, but not perfect, correlation between concert plays and fan listens. These results suggest that the music choices of its online community of listeners reflect very well the live concert tradition of the Grateful Dead phenomenon, even after their dissolution.

The complete article is here.

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LinkedIn Raises $53M and Posts Video on Valuation

Today, the business social-networking site LinkedIn announced that it raised $53M at just over a $1B valuation. In addition, they posted a YouTube video with Jeffrey Glass from Bain Capital, David Sze from Greylock, David Cowan from Bessemer, and (Mark Logic board member) Mark Kvamme from Sequoia. Per TechCrunch this round brings the total funding up to $80.5M.

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10 Things You Need to Know about Facebook

Check out this article in Information Today entitled Facebook 101: Ten Things You Need to Know about Facebook.

If you’re not in the primary Facebook demographic and you’re not spending time using it despite that, then you really need to read this article. You’ve got to understand Facebook, and more importantly the concept of the social graph, going forward.

The social graph will simply be another piece of context that applications will leverage to help people do things. And the question then becomes (1) how many times do you want to store your social graph and (2) how do you avoid social graph train wrecks. On (1), do you really want to tell Yelp, Flickr, Spock, LinkedIn, Facebook, Plaxo, YouTube, BlueCollarOrDie, Classmates, Match, SlideShare, Scribd, Twitter, and DocStoc that you’re friends with Sara Jones? Can’t you just do it once or twice? On (2), how do you prevent your LinkedIn associates from meeting your stays-in-Vegas friends from Fling? How can you prevent a Facebook app from asking you to compare a board member’s body with a customer’s?

I realized in chatting with a young Mark Logician that the day Facebook announced its application platform strategy there were two types of people:

  • Type 1: Those who immediately went wow, this is going to change the world
  • Type 2: Those who went, huh, what does that mean?

Sadly, I was type 2 but I was intrigued enough to try and figure out what it meant and am happy that I did. Here are the 10 things you should know:

1. Who is using Facebook?
2. What can you find on Facebook?
3. Why are people using Facebook?
4. What kinds of 3rd party apps can you add?
5. What are advertisers doing on Facebook?
6. Who else is joining?
7. What groups are now on Facebook?
8. Why is Facebook so popular for photo sharing?
9. How do you find old friends?
10. What about privacy?

I’d be remiss if I didn’t note that I get quoted at the end of the story talking about KickIt, our (rather experimental) Facebook app. Here’s the excerpt:

Mark Logic, Inc. recently joined Facebook with its Kick It application, according to Dave Kellogg, president and CEO. “We launched it because we saw an opportunity to build a nice, simple example of the power of XQuery and XML search,” he says. But the app was created quite by accident (who said “Necessity is the mother of invention”?) by David Amusin, a new staffer at Mark Logic and a recent engineering graduate from the University of California–Berkeley. Amusin had an extra ticket to see the Dave Matthews Band and wanted to find a friend to invite to the concert. Facebook’s existing search wasn’t very helpful in searching for friends by interest category, so Amusin built the Kick It (aka “hang out”) app with the Facebook API. The result was a new way to help find people to “kick it” with and learn more about their friends.

Kellogg reports that bloggers who have found the “neat little app” have responded quite positively to it. But the company isn’t making a big push to drive traffic and doesn’t plan on making money on it. “In the midterm, I think more and more publishers are going to want to link with the social graph and associated information in building their products,” says Kellogg. “They will want to use content platforms that show demonstrable Facebook integration and to work with suppliers who understand how to leverage the Facebook API.”

Facebook News Parody Video

Making the point that messages don’t always carry well across media, check out this video parody of Facebook, translating it from webpage to live TV news show. Enjoy.