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Splunk shows spunk in market debut

by Olaf de Senerpont Domis | Published April 20, 2012 at 2:52 PM

Shares of software developer Splunk Inc. soared out of the gate Thursday, nearly doubling in their first minutes of trading after pricing well above their predicted range Wednesday evening.

The San Francisco-based company, whose technology helps enterprises search and analyze so-called machine data, debuted at $17 per share, significantly higher than the already-increased range of $11 to $13 per share. Splunk shares traded at $32.44, a 91% increase, in the early afternoon Thursday. Splunk shares closed at $35.48, a 109% increase on the day. The company raised $229.5 million and garnered a market capitalization of around $3 billion.

Splunk is one of the first "big data" software startups to go public. Big data broadly describes the countless bits of digital information generated by business applications, content created by people, and so-called machine data.

Splunk's software helps company's plumb the latter -- the piles of data produced by software applications and electronic devices, including call detail records, application log files and "clickstream" data from web user interactions with sites. The data is created by everything from smart grids to RFID tags to networked medical devices.

While Splunk isn't profitable -- it posted net losses its past three fiscal years of $7.5 million, $3.8 million and $11 million, respectively -- its growth has been impressive.

It posted revenue of $35 million, $66.2 million and $121 million in fiscal 2010, 2011, and 2012, respectively. It also claims to serve more than 3,700 customers, the largest of which include Bank of America, Comcast Corp. and Zynga Inc.

Thursday's impressive first-day performance is putting smiles on the faces of the folks at the venture firms that backed Splunk, which was founded in 2003.

The largest shareholders in the company are Sevin Rosen Funds and August Capital, which each will own 17.7% of the company post-offering. At $17 a share, their stakes are worth roughly $279 million each.

JK&B Capital will own 15.2% of Splunk post-offering, while Ignition Partners will own 10.5%. CEO Godfrey Sullivan, the former chief executive of Hyperion Solutions Corp., will own 7.1% of the company.

The three co-founders are happy guys too. One of them, Michael Baum, agreed to talk after he landed in New York to help ring the opening bell Friday morning at Nasdaq. Baum was Splunk's CEO until 2009, when he was replaced by Sullivan. The other two founders are Erik Swan, Splunk's chief technology officer, and Rob Das, the company's chief architect.

Baum, who is now with Rembrandt Venture Partners, owns roughly 6% of Splunk via a variety of trusts.

The Deal: In what capacity are you still involved with Splunk?

Michael Baum: I'm a large shareholder. It's a great place to be right now.

So how did the name "Splunk" come about?

We had an early version of software we gave to customers in Silicon Valley, and asked them, "What do you think we should call it?" Several said that our technology was helping them find their way through the bowels of the data center, kind of like the light on top of their helmets. We had a hard time spelling "spelunk" so we dropped the "e" and went with "Splunk."

Believe it or not we had to pay some guy in Washington $5,000 for the Splunk.com domain name.

We got a lot of flak from our VCs early on and early customers about the name. Our very first meeting in London was with a guy from [Royal Bank of Scotland plc], and the first thing he says is, "When are you going to change your name?"

The name seems unusual for a company that operates in the usually very serious enterprise software space. "Splunk" has a more consumer-oriented flavor to it. Is that intentional?

In a sense we are really marketing to consumers. New companies that are marketing and selling into the enterprise go right after the practitioner or the end user and you need to have the DNA as founders to create a product and a brand that is more consumer and mass adoption-oriented than top-down and complex. The best sales situations are when you walk in the room and five to 10 people are already using the product. It is no longer a confrontational sell but is now a truly consultative situation.

How did you first meet Eric?

We were at Yahoo! together, but before that we were at Disney, as we had started a company that Infoseek had bought [Disney acquired web portal Infoseek in 1999].

I had started a company, a PayPal competitor called dotBank that was acquired by Yahoo!

After 12 years of experience with large-scale, web-based consumer sites, Eric and I realized that there are lots of tools available, but what companies really faced was a data problem. Our big a-ha moment was when we really saw how people deal with data today. We spent the first year at Splunk just doing market research, and talked to 65 different data center managers. They dealt with data the same way we did while at Yahoo!, which was completely dysfunctional.

Did Splunk draw any acquisition interest after it filed to go public? Some have mentioned Oracle or IBM as potential Splunk buyers.

I can't really speak to that, but we did draw some takeover interest earlier on.

There are some challenges with someone taking us over. The company is still growing very quickly, so as a shareholder, you have to ask, "Why wouldn't I want to be a standalone, long-term company, as part of the big data market, which is growing fast? Why wouldn't I want to just capture that value versus being part of something else?"

Looking at how we go to market, with a direct-to-practitioner model, other established companies wouldn't really understand how to integrate us into their business.

How has the experience of watching Splunk move toward an IPO been?

I have an 11-year-old who asked me how many people have started a company that now trades on the public stock market. He did the math and came up with .004%. It's been nine years since we founded the company, and its been a truly amazing thing to be part of.

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Olaf de Senerpont Domis

Bureau chief, West Coast; Editor, venture capital

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