Next week on Spend Matters, I'll be covering some of the details of SciQuest's recent S-1 filing from late March (and perhaps even an updated S-1/A document, if it's available by then). For those who don't follow the capital markets, an S-1 is the registration document that a company files with the SEC when it intends to issue shares in an initial public offering (or a not-so-initial public offering in SciQuest's case, given that it was a public company before going private in the wake of the B2B bubble burst nearly a decade ago). Filing an S-1 by no means implies that a company will be able to successfully generate enough interest in its shares (or that the SEC will allow it to sell them, if it takes issue with any potential accounting, business or other topics of concern within the registration document itself). But it's the first step a company takes in the public offering process after securing underwriters (i.e., investment banks) to see them through the effort.
In today's environment, many institutional investors are still skeptical of IPO candidates unless they've hit a certain revenue threshold. A decade ago, it used to be possible to go public if you had $20 or $30 million in revenue -- and to have a very successful, oversubscribed IPO at that. But today, many investors are looking for revenue exceeding $75 million if not $100 million in IPO candidates, especially if they're to ascribe a premium multiple (on a revenue or earnings basis) to the share price. SciQuest, despite showing a CAGR exceeding 20% between 2007 and 2009, still falls materially below the range that many investors expect in today's climate.
SciQuest could be rushing the process for numerous reasons, including a balance sheet that largely precludes any material acquisitions in an environment where M&A appears to be heating up. Or, perhaps their investors are looking for liquidity sooner rather than later. Regardless of the reason, however, there are larger vendors in the sector that have opted to sit on the IPO sidelines, including Quadrem, Emptoris and ICG Commerce. If SciQuest is successful in its IPO efforts, you can be sure that these providers and other vendors may decide to quickly follow in their footsteps.
What is my quick analysis of SciQuest's filing, based on my somewhat limited knowledge of their traction in the market (I have followed other providers more closely in recent years)? For one, I'd argue that they represent a very strong vertical play in the higher education and life sciences market, where they've largely convinced companies that have not gone down the ERP procurement route that they are the best option (whether the nuances of these industries support a specialized P2P play is open for debate). Additionally, I think it's important to note that SciQuest is not as broad as Ariba and other source-to-pay vendors in the sector. Despite a diagram in the S-1 showing a broad Spend Management footprint, SciQuest's actual capabilities in the sourcing, contract management and analytics capabilities are much weaker than what they offer in core P2P. In other words, investors and those observing the market should look at SciQuest as more of a pure-play P2P company with strong vertical specialization than a broader or suite Spend Management provider with solid capabilities across the board.
Despite this somewhat narrow focus, I remain hopeful that SciQuest receives a warm reception. Basware, a European P2P provider with a particular strength in the area of invoice automation, has shown that you don't need to have broad strength in all key procurement technology areas to build a $100+ million, growing and healthy business.
Stay tuned for further analysis of SciQuest's S-1 filing next week on Spend Matters. And cross your fingers (for the sake of the market) that they're successful.