The Domo IPO: Nothing to celebrate here
Without a doubt, everyone is talking about Domo Technologies’ IPO, which happened on June 29. If you haven’t heard about Domo, it’s probably the most overhyped and marketed BI software vendor in the industry. They’ve raised almost $800 million (across equity and debt) to make just $100 million in recurring revenue. They’ve now essentially run out of cash and are desperate for money so they’re doing an IPO to survive another year.
There’s no excitement about this IPO – it feels rushed and as if it’s not been thought through. Many people are also looking at Domo’s business model and questioning it.
The emperor has no clothes
There’s been a lot of secrecy and misinformation about Domo because it’s a private company, which has made everyone intensely interested in their IPO. It has lifted the lid on the financial metrics of the organization. For example, Josh James has been saying they’ve been doing $100 million in revenue and growing at 50% for three years now, but we now find out that the company has just hit $100 million in revenue. With that level of transparency, you’ve got to ask what’s really going on in the organization.
Most people accept that you’ll spend a fraction more than you’re bringing in on your growth path. But in Domo’s case, their metrics look out of whack. Their sales and marketing budget is 1.5 times their total recurring sales, so they must be running at about 10 times net new business. This means they’re buying revenue which isn’t sustainable. I also suspect that Domo has five-year contracts with its customers so they’ve had very little churn – but once those five years are up they’re going to have phenomenal churn.
Typically, the combination of growth rate and profitability should equal 40% for a SaaS business – the golden 40% rule. You can have 0% profitability if you’re growing at 40%. In Domo’s case, it’s more like -150%. They will run out of money even after they IPO – they raised $193 million which is just one year’s burn.
The IPO documents have also brought to light a lot of related party transactions between Domo, its CEO Josh James and his brother. There is a case to be made that the CEO has been lining his own pockets rather than focusing on growing a sustainable business.
Laid out bare Domo is a complete train wreck. This isn’t a business built on sound principles – it’s been built on marketing hype and a lot of dollars. Last round Domo was valued at close to $2 billion and now they’ve brought their valuation down to just over $500 million. So if I was the last investor in Domo I’d be a pretty unhappy camper right now.
This will have a broader impact on the industry
Domo’s IPO is being held up by some as the tipping point in the tech bubble. While there’s a sense of schadenfreude in the industry – a lot of people are going to get hurt.
This may have a negative impact on the BI industry and taint people’s perceptions of software vendors more broadly. Outsiders may assume that everyone is like Domo – not delivering real value. It may also impact the funding mechanisms available to our industry and where we sit in terms of the general hype cycle of technology more broadly.
There are also a lot of investors who have put their money in at a $2 billion valuation which has now shrunk by 75%. Most importantly, Domo employs a lot of people who can now see their business transparently for the first time and are probably worried about their future and the security of their jobs. Ultimately, Domo is a tragic story.