Original URL: https://www.theregister.com/2013/10/07/alfresco_ipo_analysis/
Alfresco's IPO is bad news for tech stock junkies
GroupOn, Zynga and 3Com: How not to go public
Posted in On-Prem, 7th October 2013 09:03 GMT
Analysis UK open-source software biz Alfresco took a big decision in January when it named its first new chief executive in eight years, replacing the British John Powell with the American Doug Dennerline.
Powell, who had been CEO since the founding of Alfresco, captained the British company from small fish to 1,300-customer whale, scoring notable big-hitters KLM and the NHS while taking business from the computing old guard of IBM, Microsoft and EMC’s Documentum.
Alfresco bosses claimed they became the most successful open source company by revenue after Red Hat, and – while they don’t release numbers – Alfresco is understood to be making just over $50m a year, with $100m revenue easily achievable within the next few years.
But times change, and an American exec was a calculated strategic necessity from a management team who decided more growth and even more capital were the future.
The route to those riches is making an IPO. However, fans of tech companies floating on the stock markets, beware – the run to going public won’t turn into a sprint just because there's a new CEO.
With summer gone and the media in a lather about social networks' IPOs, surely now is the time to begin preparing for a 2013 or 2014 Alfresco float?
Granted, Alfresco is no social network looking for an implausibly high valuation – it's an open-source enterprise content management player. And the company aspires to be the next Workday, Cornerstone or ServiceNow (all of whom successfully went public and increased their valuations) rather than IPO flameouts GroupOn or Zynga.
But Dennerline told The Reg he won’t take Alfresco public for at least another three years. Instead, his first goal is tapping up the VCs for further funding.
Dennerline: fund raising before IPO
That money will be spent getting Alfresco ship shape for going public – eventually. It’s crucial to building out a next-generation of cloud-based products and building the kind of sales and customer operations he feels is currently lacking and will turn Wall Street off Alfresco.
Dennerline has hired 25 people in the last three months, predominantly in sales – among them a head of world wide sales and of services – bringing total head count to 300.
Sale are being added to achieve “consistency” and, predictably, with future money coming from a new, per-user pricing model that will soon start to roll out. Alfresco currently charges a per-user metric on just one product (WebU) and CPU on everything else.
New cloud offerings will target new groups of users outside the usual diehards, with newbies charged on a recognisably software-as-a-service style per-user metric.
“It’s people who use our [existing] community app in the past that has been driving the sales channel. We can’t sustain the growth we want just through people downloading the community edition and calling us and saying, ‘We want an enterprise contract’,” Dennerline told The Reg.
Open-source nous
Alfresco is known for its open-source engineering brains but Dennerline reckons he’s learned from history, having worked at 3Com. 3Com was founded by Ethernet daddy Bob Metcalfe and was also rich in engineering heritage, but it was short on sales nous – and got steamrollered into history.
Dennerline was 3Com employee number 300 – he was the company’s first sales rep in California who joined three weeks after it IPO'd. He left 11 years later and ended up working at Cisco. In Alfresco he was up against Microsoft, IBM and Documentum whose giant sales operations operate like well-oiled machines and on the other cloud providers such as Dropbox riding the consumerisation-of-IT wave. If Alfresco falters or fails to install a sustainable sales engine, it faces the fate of 3Com.
“Alfresco felt more like a tech driven company than a sales and go-to-market company,” Dennerline told The Reg. “I worked for 3Com – that was a technology driven organization and the sales force was second to the technology. Cisco was the opposite – the leadership of John Chambers is all about the customer and what the customer wants. That’s what I’m definitely bringing to Alfresco.”
Dennerline insisted he’s not hesitating on an Alfresco IPO and the ultimate goal remains going public. It’s just that, “when you're public, [Wall] Street wants to see continuous growth.”
As proof of commitment: he points to having hired a new CFO and a new general counsel, the latter a veteran of taking other tech companies public.
“I worked for 3Com – that was a technology driven organization and the sales force was second to the technology. Cisco was the opposite – the leadership of John Chambers is all about the customer and what the customer wants. That’s what I’m definitely bringing to Alfresco”
Doug Dennerline
“I spent five months not talking to anybody in banking or financial services who want to invest in us,” Dennerline adds, “but I have spent the last few months talking to many venture capital firms, and what I’d like to do is raise a round of financing in the next nine months to a year.”
“Take that into consideration to invest and then once that’s been put to good use, make the decision whether two to three years from today whether to go public,” he said.
Dennerline is a big-company operator, and looking at his CV it’s easy to see why the Alfresco board picked him to lead a move into the US and scale up the company’s operations.
He was at Cisco between 1998 - 2009, as part of Cisco’s era of stratospheric expansion (and subsequent halting retraction) that saw 113 acquisitions, including WebEx and Scientific Atlanta, which added 40,000 staff to the company's books before it was forced to cut thousands as the internet economy bubble burst. As head of collaboration software and then leading US field sales at Cisco, Dennerline reckoned his team mushrooms from 400 to 6,000.
“I learned a lot from that. I learned about layoffs too. I’ve accumulated a large amount of experience,” he said. Dennerline spent a year at Salesforce, too, as executive vice president of enterprise sales.
He’s scaled and sold companies, too – as president of online HCM specialist SuccessFactors, selling the business to enterprise giant SAP in 2011. Founded in 2001, SuccessFactors grew from 300,000 users at 100 companies in 2003 to eight million users across 3,000 companies.
He claims to have doubled the company’s sales force, reorganised the professional services organisation and hired leaders in sales, professional services, and marketing.
On check out, SuccessFactors had 2,000 employees and $330m revenue. In December SAP paid $3.4bn for the company – 52 per cent above its $40 per share price in 2011.
Big Company man running the open-source farm
As you can see, though, Dennerline is no open-source man and that’s where Alfresco’s made its name – and its reputation. It has an open-source content management system built in Java, JSP and JavaScript; a field largely populated by expensive and proprietary kit. There is a danger that the focus on predictable sales and Wall-St friendly profits could damage Alfresco’s relationship with the very community that’s helped make it successful.
Alfreso has successfully walked the fine line between free and charging – working with the community to develop and build code that’s absorbed into paid and unpaid (Alfresco Community Edition) products, under both commercial and LGPL free software licenses. It uses, among other bits, the Lucene web crawling and enterprise search engine devised by Doug Cutting before he went on to build Hadoop.
In years past, it was the fact that the Alfresco code is open source that let to the development of mobile features. These came from one Alfresco partner, not from Alfresco itself.
Company co-founder John Newton believes the openness of Alfresco’s code is important because it makes it possible to integrate Alfresco with other parties’ systems.
Newton told The Reg: “Look at Dropbox – I don’t have a clue how it runs. Huddle, we know they used [Microsoft's] .NET – you get these little insights once in a while by accident. We want to continue the transparency; we think that’s good for business and for the customer. Red Hat has maintained a good relationship and reputation – something that Oracle is really learning right now.”
The kinds of things Newton believes can and should be linked, but aren’t, are: SAP; email; Evernote; and Dropbox. “You have to build it, because this stuff doesn’t work together.”
The industry is littered with those in open source who’ve compromised for commercial reasons, i.e. to make money. Sun Microsystems blew its honeymoon with open-sourcers charging for extensions to MySQL. Oracle alienated open-sourcers in OpenOffice and MySQL. Novell, after signed patent indemnity agreements with Microsoft in the hope of igniting its businesses, was instead heaped with steaming piles of opprobrium by its user communities.
Newton: not tempted to stray from open-source code
Newton reckons Alfresco won’t follow this route: “Why we won’t be tempted is because that complex problem of linking inside and outside, linking the business together and making it simple enough for end users to understand, is a huge barrier to entry to anybody who’s going to just take the code and run away with it.”
Dennerline also insists that Alfresco is still developing software for the community. That said, he also told The Reg that a debate is currently underway inside the company about whether planned cloud service offerings should be open-source – like the on-site product. In that respect, Alfresco would be no different to Google or Salesforce.
OK, but what will the new Alfresco make and sell to keep growing at the rate Dennerline and the management wants – and, crucially, that will appeal to Wall Street?
Don’t forget, the IPO ideal is enterprise companies like Workday, ServiceNow and Cornerstone, not flops like GroupOn and Zynga. In November 2011 GroupOn opened at $20, rose to $26.11 and today trades at $10. Zynga opened at $10, hit $211.50, and today languishes at $3.
We want to continue the transparency; we think that’s good for business and for the customer. Red Hat has maintained a good relationship and reputation - something that Oracle is really learning right now”
John Newton
Workday, the on-demand “human capital management” (aka HR software) company, floated in October 2012, starting at $28 per share and rapidly doubling its valuation. Today Workday is priced at around $73.59. Enterprise IT services management specialist ServiceNow opened at $18 per share in July 2012 and hit $24.75 to trade at around $46 now. Online management trading provider Cornerstone listed in March 2011 at $9, went to $13 and is today trading at $52.81.
Also, there’s a risk that in three years from now the moneymen could lose interest in Alfresco. The rising tide is carrying the big data players with it.
Couchbase, the open source distributed NoSQL database upstart, landed $25m in funding in August this year. MongoDB devs 10Gen got $42m in May 2012, while Hadoop shop Cloudera scooped up $65m in December 2012. Valuations for all these firms are in the triple figure region and they all claim growing numbers of customers. Big data is big business.
Alfresco’s history has been on-premises enterprise content management (ECM), but the future – according to Dennerline – is those cloud services. Their target customer is users outside Alfresco’s software developer fan base. In other words, hosted ECM – which is potentially easier for suits to deploy and manage.
The plan is to put engineers and developers to work building those cloud apps - “a new suite of apps that we will bring to market over the next few years,” in Dennerline's words.
“I’m bringing in new talent taken from UX and UI specialists and pairing them with our experts in enterprise content management and marrying them together,” he added.
The existing on-premise platform will continue to be verticalised in areas where Alfresco is doing well – government, financial services and high tech environments. Six months from now, there will be “additional products” charged using the new model, Dennerline said. But he admitted revenue from cloud is a long way off.
“We have a viable, growing entity. The lion’s share for now, and the next year and a half will be on-premise software,” said Dennerline. He insists there’s no risk in waiting three years for that IPO. Rather, demand is pent up – and will remain so.
“A lot of people who followed Alfresco for a while, they like what they are seeing in the direction and leadership we are bringing in… and wondering why it’s taken this long to go faster. They want to be involved.” ®