The recent filing for an initial public offering by Utah-based software company Domo has been garnering a lot of attention lately, but not in a good way.
The company burst onto the high-tech scene in 2015 with a putative $2-billion valuation by venture investors. That placed Domo instantly in the community of “unicorns,” start-ups ostensibly worth $1 billion or more. It had been in stealth mode until then, its founder and chief executive, Josh James, explained, building up its customer base and refining its products in secret.
James said his company was so advanced that “we don't really have a competitor yet.”
With the IPO filing on June 1, however, the curtain has opened on Domo’s performance. And the picture confronting would-be buyers is not pretty. It shows a company that is deeply in the red and burning through cash so fast that if it can’t stage its IPO by August or borrow millions, it will have to shrink drastically — conceivably, reading between the lines, to nothing.
But that may not be the most disturbing aspect of the IPO filing. The filing as a whole points to a persistent flaw in Silicon Valley financing: the willingness to give start-up founders unassailable control of their companies, to the point that investors have no recourse if things go blooey. (Domo actually is part of the Salt Lake City region’s “Silicon Slope,” one of several regional offshoots of Silicon Valley.)
The registration statement reveals that Domo will have a two-class stock structure, with Class A, owned entirely by James, granted 40 votes per share; Class B, owned by everyone else, will be granted one vote per share. Pre-IPO, James has 91.7% of the votes. The IPO won’t change that materially.
This arrangement can work when control is placed in the hands of a genuinely visionary and effective founder. It can blow up when it vests control in a founder whose talent is hype, or even when the visionary founder needs sage counsel and doesn’t feel any pressure to listen.
Mark Zuckerberg has used his unassailable control over Facebook to turn it into a global social media company, but also to resist pressure to respond properly to the company’s proliferating public problems. Then there’s the 88% voting control vested in Snap co-founders Evan Spiegel and Bobby Murphy; here’s betting that many investors who bought into the story that they needed impregnable authority to build their company wish they’d thought twice, now that the stock is trading at less than half the $24.48 at which it closed on the day of its IPO, some 13 months ago.
Another aspect of James’ management that should unnerve investors is his apparent predilection for using Domo as his personal piggy bank, with family members given drawdown rights. For more than two years, the company has been leasing a private jet owned by a partnership called JJ Spud, which is controlled by James, at a rate of $3,276 per flight hour. From Feb. 1, 2016 through last April 3, the bill has come to $1.8 million.
Domo also has spent $600,000 for catering services from Cubby's Chicago Beef, which describes itself as “a cute little sandwich and salad restaurant.” It’s owned by Josh James and his brother Cubby. (“The menu does look delicious, but there must be caterers in American Fork, Utah, that aren’t owned by the boss,” remarked Shira Ovide of Bloomberg). Domo also has bought $200,000 in furnishings from Alice Lane Home Collection, an interior design company partially owned by James, at which Drew James, another brother, is an executive.
Josh James received $537,000 in salary, bonus and other compensation last year; but it looks like he may have pocketed more with these side deals. (The company declined to comment on the registration statement.)
This wouldn’t be acceptable even if Domo were going gangbusters. It isn’t.
To be fair, investors had reason to believe in James at the start. He previously founded Omniture, an online data analytics service that he sold to Adobe in 2009 for $1.8 billion. The pitch for Domo was that it would fill in some of the gaps in enterprise data analysis that Omniture had left open, providing access to real-time marketing information that would help CEOs run their companies more efficiently.
The company’s stock registration disclosure shows that it hasn’t been able to get ahead of its expenses. In its last fiscal year ended Jan. 31, Domo lost $176.6 million on revenue of $108.5 million. In the first quarter ended April 30, it lost another $45.5 million on revenue of $32 million. Its accumulated deficit as of April 30 is more than $803 million.
As for James’ crowing about the lack of competition, you can treat that statement as “inoperative.” Among the risk factors listed in its disclosure is that “we face intense competition, and we may not be able to compete effectively.”
Major stock exchanges are starting to look askance at dual-class stock structures that vest supermajority control in individuals or small groups. Domo acknowledges in its disclosure statement that Standard & Poor’s will be excluding companies with these structures from some of its indexes, and other index owners may follow suit. That’s a problem for Domo, because the rise of passive investments keyed to stock indexes means that many investors won’t be buying its stock.
That’s the downside of how James has structured his company. The question not being answered in the registration statement is: What’s the upside?