Two More Enterprise SaaS Plays to go Public

Two more enterprise SaaS plays plan to go public:  Paylocity and The Rubicon Project.

Paylocity is not a network or Industry Cloud play, it is a SaaS payroll and Human Capital Management (HCM) application targeted squarely at the mid-market–companies with 20 to 1000 employees.  It’s a nice little SaaS story, whose financials demonstrate that small companies can now buy payroll and a little more for about $100 per employee per year from a SaaS vendor. Because Paylocity is not a network story, I have not spent much time on it.

The more interesting IPO candidate is The Rubicon Project, which is a true marketplace for matching buyers (brands) and sellers (web publishers) of online ad space.  The online advertising marketplace market is one that I have studiously avoided studying until now. There are a zillion players, even more acronyms, and the purpose of these marketplaces–more effective advertising for brands and optimized revenue for internet publishers–is of little interest to me.  I must say, however, that the Rubicon Project prospectus did open my eyes in a few ways:

1.  The sheer numbers involved.  Rubicon provides 100,000 advertisers with access to 96% of all US Internet users.  Rubicon has direct relationships with 40% of the top 100 Internet sites that sell ad space.  According to the prospectus:

We analyze billions of data points in real time to enable our solution to make approximately 300 data-driven decisions per transaction in milliseconds, and to execute up to 2.1 million peak queries per second, approximately 25 billion transactions per week and 3 trillion bid requests per month.

Deciding which ad to serve up on which property based on demographics, advertiser and publisher constraints, user history, etc. is a really interesting challenge for data geeks I’m sure. You don’t see “trillions per month” in many prospectuses.  (Think of all the sheer brain power being applied to the task of increasing the chance you will notice an ad on your favorite website.  That’s what makes America great.)

2.  The company describes its network effect in compelling terms (at least to a novice like me):

Dual Network Effects Drive an Efficient and Self-Optimizing Marketplace

We bring value to both buyers and sellers through the dual network effects created by our solution—large volumes of data lead to better matching, which attracts more buyers and sellers, leading to more data. We have one of the largest digital advertising data repositories in the world, which puts us in a unique position to develop differentiated insights to help both buyers and sellers. Our solution is constantly self-optimizing based on our ability to analyze and learn from vast volumes of data. As our Advertising Automation Cloud processes more volume on our automated platform in the form of bid requests, user visits, events and transactions, we accumulate more data. This additional data helps make our machine-learning algorithms more intelligent and this

leads to higher quality matching between buyers and sellers, leading to better return on investment for buyers and higher revenue for sellers. As a result of that high quality matching, we attract even more sellers which in turn attracts more buyers and vice versa. We believe this self-reinforcing dynamic creates a strong platform for growth.

3.  But the most interesting aspect of the prospectus was something I did not expect.

We believe, based on industry research, that due to the complex ecosystem of multiple players that has developed to accommodate both buyers and sellers, only approximately $0.40 of every dollar spent by an advertiser is ultimately realized by the seller.

According to NextMark, it can cost an advertiser up to $40,000 and 480 man-hours to plan and execute a $500,000 advertising campaign.

I’m not sure if this statistic is true, but it is amazing if it is.  Even in the old days, media buyers paid a 15% commission.   This statistic would suggest that online advertising has moved backwards so far!  Combine this waste with the obvious secular trend of more online advertising and Rubicon appears to have a tremendous opportunity before it.

Despite this new-found fascination, I’m not going to invest in this arena for a few reasons:

• the price of this stock will likely be insane
• I suspect Rubicon deals with only part of the online advertising world and probably does not relate to search ads, Facebook, Twitter and other ecosystems that provide their own platforms.  The prospectus sheds no light on that dynamic.  Reading one prospectus does not an expert make in online advertising.
• Rubicon’s gross yield appears to be about 17%.  (Their revenue divided by the gross amount of advertising they sold.)  This is inline with the old media world, but I have no idea how sustainable it is in the future.  It is an extremely high yield relative to most other matchmakers I follow (2-10%).

You will need to make your own call.  I hope alert readers will comment as well. Just remember that I also hesitated on Google when it went public at $85!