Marketo makes a mint in IPO: San Mateo company’s stock shoots up more than 50 percent higher in debut

SAN MATEO — Marketo’s journey from small startup to Silicon Valley software stalwart reached its crescendo Friday, as co-founder and CEO Phil Fernandez stepped to the Nasdaq platform to kick off the day’s trading session with $85 million invested through an initial public offering.

“I was tearing up a little bit” with his co-founders and first two employees surrounding him, Fernandez said. “You just work so hard day in and day out, it’s hard building a company from nothing.”

Fernandez’s labor built something special in investors’ eyes, as they pushed the company’s stock price up more than 75 percent in its first day of public trading. After pricing shares at $13 in the IPO, the stock closed Friday at $23.10, a 77.7 percent gain.

The San Mateo enterprise software company, which focuses on the marketing and sales sector, sold 5.75 million shares to the public, with early investors selling an additional 300,000 shares. In addition, one of those early investors, Battery Ventures, bought 500,000 additional shares at the IPO price in a private offering; Battery had the smallest stake of the five venture capital firms that have pumped nearly $100 million into Marketo.

Marketo, founded in 2007, offers software that helps marketers reach potential customers and gauge the effectiveness of their efforts, with its products offered through the cloud. Cloud software — also known as software as a service, or SaaS — is accessed over the Internet on servers maintained by the software company, keeping costs for hardware and maintenance down for the businesses that subscribe.

“We saw when we started the company that SaaS was going to change everything,” Fernandez said Friday, “because it was going to let us be a company that could think about ‘how could we get to 100,000 customers’ rather than ‘how do we get to 1,000 customers.’ “

Enterprise software companies that use the cloud model have been rewarded on Wall Street regularly in the past few years, with recent Silicon Valley examples including Pleasanton-based Workday and Santa Clara’s Palo Alto Networks. Workday, which sells human-resources software, went public in October 2012 at $28 a share and closed Friday at more than double that price, $67.98. Palo Alto Networks, which sells security software through the cloud, charged $42 a share in its July 2012 IPO and closed Friday at $56.43.

Marketo and another company debuting Friday, Seattle-based Tableau Software, “are riding the wave of enterprise cloud software companies that have gone public in the past year with strong receptions from IPO investors, followed by strong aftermarket performance as well,” PrivCo founder and CEO Sam Hamadeh said in an email.

Hamadeh, whose company analyzes financial data of private companies, noted that cloud companies are well-received by Wall Street because their earnings are more predictable — with customers paying monthly or annual subscription rates instead of buying boxed software on a whim.

Marketo’s revenues have been growing rapidly, but the San Mateo company has yet to realize profits. In the past three full years, Marketo has seen its revenue rise from $13.5 million to $29.8 million to $52.8 million, but the company’s net loss has also increased every year, growing from $11.8 million in 2010 to $34.4 million in 2012.

Fernandez agreed with Hamadeh’s take, however, and said profitability will arrive as the customer base continues to grow.

“As long as we keep adding customers and keep having them pay the bills, you can’t do any math that doesn’t ultimately get to profitability,” Fernandez said.

Marketo also faces strong competition, including from Silicon Valley software giant Oracle (ORCL). The Redwood City company spent more than $800 million at the end of 2012 to buy Eloqua, a Virginia company that offers software and services similar to Marketo’s. That deal happened six months after Salesforce — the San Francisco company that first loudly trumpeted the possibilities of cloud software — used its largest acquisition ever on social-media-focused marketing software company Buddy Media.

Fernandez — who was chief operating officer of two Silicon Valley firms that went public in the late ’90s — sees large companies choosing different companies’ software offerings for every department instead of selecting one firm for all of its different needs, however, and believes that Marketo will prove the famous Oracle CEO wrong.

“I think Larry Ellison is dead wrong when he says innovation is dead and people want to buy big (software) suites — that’s not what’s happening in the world. I love our competitive position,” he said.

Contact Jeremy C. Owens at 408-920-5876; follow him at Twitter.com/mercbizbreak.