Looking beyond the glitz of Snap to the sanity of MuleSoft

The unicorns are leaving their pen.

These private companies worth more than $1 billion have been caught between eager venture capitalists who have pumped up their privatemarket valuation and skeptical public-market investors. But now that Snap has leaped through the gate with its Thursday initial public offering, MuleSoft could be the next to make it out.

Both companies make software and both have seen rapidly growing sales.

But MuleSoft is far closer to making money, with a sustainable business model in which other businesses pay it regular, recurring fees. So naturally, the San Francisco company has been nearly invisible to the broader public.

Silicon Valley and Wall Street have long loved sexy new consumer technology, particularly when it comes to persuading rooms full of investors in Midwestern cities that they’re buying into the next big thing.

Snap, a Los Angeles company, makes the popular photo messaging app Snapchat, an easy sell because it’s used by most prospective sharehold-

ers’ kids. The company raised $3.4 billion on Thursday; its shares closed the week above $27, giving it a valuation of $31 billion.

MuleSoft has yet to price its offering, but something tells me the company will come nowhere near Snap in valuation or buzz. Yes, MuleSoft makes boring cloud software for businesses, and your kid will never talk to you about it. But if you were to judge a company exclusively by its fundamentals, MuleSoft clearly is the sounder long-term investment.

Let’s start with the financials. In 2016, MuleSoft lost a modest $49.6 million on sales of $187.7 million, according to documents filed with the Securities and Exchange Commission. The loss was due chiefly to marketing expenses, which can be high for cloud businesses.

Snap, which allows mobile users to send photos that automatically disappear after a brief period, also has a way of making money disappear. The company lost $514.6 million on sales of $404.5 million last year, which means it spends more than $2 for every $1 it takes in. And it expects operating expenses to grow.

But Snap presents the bigger growth opportunity, no? Snap’s revenue grew sevenfold last year. The company makes money from selling advertising, a global market it says will expand to $767 billion in 2020 from last year’s $652 billion. Even if it takes a small slice of that away from the likes of Google and Facebook, there’s a lot of room to grow.

Snap has benefited from “a dearth of growth tech IPOs in recent years,” said Matthew Kennedy, an analyst with Renaissance Capital in Greenwich, Conn., which tracks stock offerings.

Advertising spending, however, is highly fickle, and Snap faces big competition from Google, Twitter and Facebook.

Snapchat is a “disaster for advertisers,” Mike Wade, a professor of innovation and strategy at the IMD business school in Switzerland, wrote in an email. “People don’t go to Snapchat to search for information (like Google) to find a job (like LinkedIn), to deeply engage with friends (like Facebook) or to buy stuff (like Amazon and Alibaba). Its medium, much like Twitter, is inherently poorly designed to support advertising, and beyond this, there are no obvious sources of revenue or profit.” (Snap has also started selling camera-equipped sunglasses called Spectacles, but it’s too early to tell how its hardware sales are going.) By comparison, MuleSoft sells software subscriptions to businesses, which means the company enjoys a stable source of recurring revenue. And MuleSoft hardly lacks for growth: From 2014 to 2016, revenue more than tripled. Research firm Gartner estimates that the market for global cloud services will hit $383.4 billion in 2020, compared with $209.2 billion last year. It may not be as big as the advertising business, but it’s not a bad place to be.

Despite the lack of chatter surrounding MuleSoft, Kennedy predicts that more sophisticated investors like mutual funds and pension funds will gravitate toward the company.

He noted the successful stock debut last year of Nutanix, a San Jose firm that also makes cloud software. On its first day of trading, Nutanix more than doubled, from $16 to $37 per share. The company has

since cooled off, but Friday’s closing price of $23 represents a nearly 44 percent gain from its offering price.

MuleSoft also enjoys an edge over Snap for another, less obvious reason. The company offers shareholders the right to vote on matters like board elections, and mergers and acquisitions. Snap does not. Other than voting with their portfolios by selling their shares, investors have no way to influence the way CEO Evan Spiegel runs the company.

Spiegel is treating investors as a nuisance, not an asset. Shareholder engagement is an important check on executives, especially inexperienced ones like Spiegel, who went straight from Stanford to startup. He may fashion himself as the next Mark Zuckerberg, who exercises near total control over Facebook through its share structure, but at least Facebook is minting money.

In fact, Snap’s stock structure invites instability. Should Snap fail and run out of cash, Spiegel will find it hard to raise additional capital from Wall Street when investors lack voting rights.

“The world has a way of extracting retribution” for acts of hubris, said Adam Epstein, founder of Third Creek Advisors, a Bay Area corporate governance advisory firm.

Epstein predicts that institutional investors will buy smaller amounts of Snap shares and hold them for shorter periods.

Those Snap shares might be the Wall Street equivalent of a Snapchat photo: enjoyed for a fleeting moment before disappearing from memory.

MuleSoft, though? You can frame that picture.