BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

Sales Tax Software Maker Avalara Keeps Up Tech's Red-Hot IPO Streak As Shares Jump 57%

Following
This article is more than 5 years old.

Wall Street's lovefest with cloud computing companies continued on Friday as shares of sales tax software maker Avalara jumped as much as 57% in its first day of trading.

Avalara's initial public offering values the company at more than $2 billion less than two years after it reached a billion-dollar valuation in a private funding round. The high-demand IPO, which priced at $24 per share and opened at $35, is the latest in a streak of successful exits for enterprise tech companies in the first half of 2018, continuing a trend of raised price targets and first day stock pops.

Founded in 2004 by Scott McFarlane and Jared Vogt, Avalara is far from an overnight success. But given the relatively sleepy area of its business—sales tax—the company surprised investors during its road show, its CEO McFarlane says. "Sales tax is not a new concept. The Egyptians came up with it 5,000 years ago. Our country was founded over what might be considered a sales tax dispute," he says. "When you talk to investors and tell them it still hasn’t been solved and there’s a company that can do it, I think that’s what opened eyes."

Avalara is a classic cloud computing software company in that more than a decade into its existence, the company is growing steadily but is not profitable, the model perhaps perfected by Salesforce chief Marc Benioff (although at a much larger scale). Avalara sells primarily to medium-size businesses of between 20 and 500 employees, serving 7,760 businesses of that size as of the end of March, according to its S-1 filing. Those businesses accounted for 85% of its revenue, which came in at $213.2 million in 2017, up 27% from the year before. The company lost $64.1 million in 2017, compared to $57.9 million the year before, and was on pace to project roughly the same amount for this year after its first quarter.

McFarlane says Avalara's been getting ready for its public market debut for the past five years. "It's always longer and takes more money than you think it will," he says. But Avalara isn't philosophically averse to pursuing profitability in the future, according to its boss.

While the typical businessperson may not have heard of Avalara, chances are they've used a product paid for using Avalara in part. When companies send out an invoice, Avalara handles the sales tax; it also can recalculate what a company needs to include when it sells in new geographies, changes its pricing or what it's selling such as through an acquisition. The most important strategic decision Avalara made, according to its CEO, was to partner with the invoice providers themselves as a go-to market strategy. Today Avalara works with more than 600 such companies, providing a prebuilt integrations ready to go when the customer signs on. Those include Magento, just acquired by Adobe, as well as Oracle, SAP Hybris and Stripe.

Avalara was No. 21 on the Forbes Cloud 100 list of top private cloud companies in 2017, with more than 1,400 employees. In December, McFarlane wrote his employee base that the company needed to reset its culture around drinking and judgment at company events.

The company is at least the tenth software-as-a-service business to go public in 2018, as venture capitalist (and Forbes 30 Under 30 alum) Alex Clayton noted in a detailed breakdown of its S-1 financials. Some of the notable exits have included file collaboration business Dropbox in March; Pivotal Software in April as well as DocuSign; Utah ed tech company Pluralsight in May; and Carbon Black, SmartSheet and Zuora. Avalara joins the ranks of the largest pops in stock of the group, suggesting the IPO window remains hot among investors looking for predictable software companies.

As companies can file confidentially with the SEC before publicly registering their S-1 to go public, an unknown number of tech companies may have already registered to join the rush. What's not doubted among investors and Silicon Valley trackers is that many have done so or plan to do so this fall. One challenge to the narrative could be Domo. Another Utah unicorn, Domo's S-1 filing has caused concern that the company is short on cash and could struggle in a potential debut.

With Avalara joining a crowded field of companies successful on the public markets at least so far, it would seemingly take a lot more than one or two more troubled IPOs for the cloud exit window to shut.

Follow me on Twitter or LinkedInSend me a secure tip