SAN FRANCISCO — Zendesk brought peace to a roiled market for initial public offerings Thursday, as shares in the cloud-software company jumped in their debut despite a recent backlash against young Silicon Valley tech companies.
Zendesk priced its IPO shares at $9 Wednesday evening, the middle of its proposed range, for a total take of $100 million at an initial valuation of $631.7 million. When the stock reached the New York Stock Exchange floor Thursday under the ticker symbol ZEN, it immediately jumped to $11.89 and moved as high as $13.92 before closing at $13.43, a 49.2 percent gain.
“We, as a company, have been extremely determined about going public. We believe it’s in our DNA, it’s in our destiny,” CEO and cofounder Mikkel Svane said in an interview Thursday. “We believe that to go out and try and change the business software industry, it does require us to go public and be a public company.”
Zendesk’s performance should produce a sigh of relief in Silicon Valley, after an IPO drought for technology companies that many feel was caused by a drastic turn for tech stocks. The tech-heavy Nasdaq composite index suffered its biggest loss since 2011 in April, and the first two weeks of May saw only seven IPOs, according to data from William Blair — compare that to total IPO activity from January to mid-May, which had 93 IPOs.
The Wall Street downturn has been most dire for the youngest companies, spooking IPO investors even more: Large Silicon Valley tech companies that went public in the past two years have lost roughly 50 percent of their peak market value, a Mercury News analysis showed last week, a group that includes Twitter, Facebook, Workday and other prominent firms.
“Yes, there has been a chilling of the IPO (market),” said Josh Green, chairman of the National Venture Capital Association. “You look and go ‘Oh my goodness, they’re below their IPO prices.’ But this is a very healthy market, a very discerning market, and one that is not about to allow another bubble.”
Success on Zendesk’s first day of public trading may help settle the markets and renew investors’ confidence. It will also help dictate when companies such as Box and Alibaba, whose market entry is being carefully watched, will decide to price shares and make their Wall Street debut.
“The broader IPO window remains open, but the valuation cliff in the tech sector has constricted deal flow,” said Brent Gledhill, global head of investment banking for firm William Blair.
Founded in 2007 in Denmark before moving to San Francisco, Zendesk provides software-as-a-service, or SaaS, for companies to answer customers’ questions, and manage customer support, such as through email, chat, voice, social media and websites.
“I can’t say enough great things about building a company in San Francisco,” Svane said in a telephone interview from the NYSE after ringing the bell to kick off trading Thursday. “For me, as a technology entrepreneur, coming to San Francisco was really like coming home.”
Like most of the Silicon Valley IPO pipeline, the company has experienced strong revenue growth along with mounting losses: Its revenue for 2013 was $72 million, more than double the revenue for 2012 and a 362 percent increase from 2011, but Zendesk posted accumulated losses in the past three years of more than $54 million.
Still, some venture capitalists are confident that Zendesk is the right company to open the IPO floodgates.
“Zendesk is a fantastic company, and you need a fantastic company to reopen the market,” said Venky Ganesan, a managing director at venture firm Menlo Ventures. Ganesan is not a Zendesk investor. “The product is great and … they are trying to get a large number of small customers so they can grow those into medium size customers. It is a very good go-to-market model.”
There are many good companies getting ready to go public, NVCA’s Green said, but they may be riskier — slower revenue growth and less certain road to profitability — than the market can digest right now.
“A month ago it was growth at all costs, and now it’s growth with a path to profitability,” Ganesan said. But the chilly market won’t last long; most expect the fourth quarter will be red-hot with IPOs once again
Zendesk is selling all the shares in the offering and realizing all the returns, which it plans to use for general administrative purposes and other needs, including donating up to 1 percent of the proceeds, which could include the formation of a charitable foundation. The firm’s venture investors — Charles River Ventures, Benchmark Capital Partners and Matrix Partners own the largest percentages of Zendesk — will not sell any shares in the offering and have offered to purchase up to $25 million worth of shares at the IPO price, according to a financial filing with the U.S. Securities and Exchange Commission.
Zendesk’s underwriting banks, led by Goldman Sachs, Morgan Stanley, and Credit Suisse, have access to an additional 1.67 million shares if demand exists.
Contact Jeremy C. Owens at 408-920-5876; follow him at Twitter.com/jowens510. Contact Heather Somerville at 510-208-6413; follow her at Twitter.com/heathersomervil.
