The Tortoise and the Hare: Profitable vs. Unprofitable Software IPOs

An initial public offering, or IPO, is when a company opts to trade its shares publicly on the stock market – a decision that can be a risky investment. At times, unprofitable startups go public in hopes of reversing their situation, but most of the time IPOs come from the profitable startups looking to expand their value. Based on some fascinating new data visualization tools released today from Tableau Software(see note below), an intriguing trend has emerged among profitable and unprofitable IPOs.

Editors Note: This is the first of a four-part content series ReadWriteWeb is producing in partnership with Tableau Software, where we examine interesting data sets relevant to technology trends today. You can use Tableau Public to create interactive visualizations like this and publish them to your own blog, web sites, or anywhere online. You also can embed this (or any other Tableau Public) visualization on your own site.

As Tableau has shown previously, software IPOs have been few and far between in last decade; only 77 companies went public between 2001 and 2009, while 174 software IPOs were seen between 1998 and 2000 alone. A new data visualization from Tableau embedded blow reveals that in the short term, unprofitable companies that go public tend to perform better than profitable IPOs.

Below is an interactive chart produced by Tableau; the orange and blue lines represent the average returns of unprofitable and profitable software IPOs over time since the beginning of their offering. The selection boxes near the upper-right corner allow you to narrow the chart to specific decades of data, and using the slider below that allows you to focus the range of days since IPO. If you adjust the slider to near day 600, you will see that at this point the companies which were profitable at the time of their IPO finally surpass the unprofitable ones.

It seems that unprofitable companies (roughly 37% of sampled companies) see an initial boost from returns after their IPO, reaching 86% returns in their first year. However, after about a year and a half, these companies run out of steam and linger around the 100% before plummeting around day 666 (an unfortunate coincidence, surely). Profitable companies, on the other hand, see slower but steadier return growth, taking two years to reach levels their unprofitable counterparts reached in just one.

Pulling the date range slider out further, we can see that profitable companies continue to prosper for several years after their IPO while unprofitable companies see much less and much slower growth compared to their first few years on the market. The lessons learned here is that while going public may be an attractive solution to an unprofitable startup company, its not a long term one. Much like the hare from the classic children’s fable The Tortoise and the Hare, unprofitable IPOs, on average, have a great start only to eventually be surpassed by the slow and steady tortoises that are profitable IPOs.

The data visualization embedded above is provided by Tableau Software, which today released its new free product, Tableau Public, allowing for the creation and sharing of unqiue, rich, interactive data applications.

“It’s a way a blogger or writer can give their readers exactly the content they want,” says Tableau. “No plug-ins or programming skills are required for either creating the viz or having it render in a browser. A free tool like this could bring badly needed intelligence, beauty and speed to structured data especially as it proliferates all over the web.”