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Investors backing IPOs of Mass. tech firms

Demandware chief Tom Ebling says the firm proved its model is “inherently profitable.’

Suzanne Kreiter/Globe staff

Demandware chief Tom Ebling says the firm proved its model is “inherently profitable.’

Facebook Inc. did not win many friends on Wall Street after its initial public offering in May, but the kind of technology companies Massachusetts is known for have earned lots of “likes” from investors.

After the Burlington e-commerce software company Demandware Inc. made its public debut in March, the initial $16 share price quickly shot up by 63 percent.

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Brightcove Inc. had similar success. When shares of the Boston firm, which creates online video tools, began trading in February, the stock price jumped 30 percent on the first day.

The two companies are among a crop of newly public software operations that deliver services via the Internet and have become darlings of technology investors. While Wall Street may be wary about social media, it has shown an affinity for smaller enterprise software companies this year, said Stephanie Chang, a research analyst at Renaissance Capital, a Greenwich, Conn., investment advisory firm. Such companies are fast-growing and have easily measured revenue streams because their businesses are built on selling subscriptions for their services, she said.

“That is especially appealing in a shaky market environment such as the one we are currently experiencing,” Chang said.

At the head of the pack of public tech darlings is Guidewire Software Inc., a San Mateo, Calif., company that serves the insurance industry. Guidewire’s $13 initial price rose to $28.12 on Friday, and the stock has been one of the best-performing ones this year. The company went public in January.

The most recent tech company to go public is ServiceNow, a San Diego firm that provides data analysis services via the Web. The company priced its IPO Thursday and raised $210 million in the first debut of a major tech company on Wall Street since Facebook’s arrival. When ServiceNow began trading on Friday, its initial price of $18 climbed to $24.60 in the first day, a surge of more than 36 percent.

Investor interest in enterprise tech companies shows the the market has not completely soured on technology, said Mike Tuchen, chief executive of Rapid7 Inc., a network security company in Boston. “Investors are extremely accepting of disruptive companies that are targeting big opportunities.”

Tuchen said 12-year-old Rapid7 could go public within the next two years.

Both Demandware and Brightcove have faced market volatility, but nothing like what hit Facebook and its social media brethren after they went public. It has been a rocky nine months for Zynga Inc., a San Francisco social-gaming company, and Groupon Inc., the daily deal site based in Chicago. All three social media companies have been trading well below their initial offering prices, and many financial analysts blame Facebook’s flop for putting a freeze on the IPO market. Its May 18 debut raised $16 billion, but its initial share price of $38 quickly sank to a low of $25.52 in early June.

The number of companies going public dropped from 44 in the first quarter of 2012 to 28 in the second quarter, according to analysis from PricewaterhouseCoopers. But financial analysts say that a growing number of companies are in the pipeline to go public, and overall IPO stocks have outperformed the broader market.

Demandware chief executive Tom Ebling said he avoids looking at the company’s daily performance on the market. “It’s just unhealthy, and for one thing, we don’t want a lot of people here paying attention,” said Ebling. “[Employees] own stock, and, hopefully, it will do really well, but the truth is with a small-cap company, it could be  good one day, and bad the next day.”

Demandware raised $88 million in a public offering that came eight years after it was founded to provide back-end e-commerce services that online retailers use to conduct transactions on their websites. Customers include the high-end clothing chain Barneys New York and casual footwear maker Crocs Retail Inc.

The company did not turn a profit until 2010 and lost $1.4 million the next year, but it has reported strong revenue growth, according to documents it filed with the Securities and Exchange Commission — $56.5 million for 2011, a 50 percent increase over the previous year.

Executives at Brightcove, which raised $55 million in its IPO, declined to be interviewed for this article.

Demandware earns a percentage of sales processed through its e-commerce platform. “We proved to the investment community that the model is inherently  profitable,” Ebling said.

Their IPO success has been a validation for the company and many of its venture capital investors, as well as for the firm’s earliest employees, he said.

“When we first invested in Demandware, the thought of an e-commerce company working in a [software as a service] model was a bit heretical,” said Larry Bohn, a managing director at General Catalyst Partners, a Cambridge venture capital firm that was an early investor and still holds about a quarter of its stock. Bohn sits on the company’s board.

When the company started, he said, retailers were skeptical that a “mission critical” service like e-commerce could be securely delivered via the Web. Since then, Bohn said, businesses have come around.

“People in Massachusetts don’t mind tackling the harder mission-critical things that enable the next generation of companies,” said Michael Skok, a partner at North Bridge Venture Partners, a Waltham firm that was another early Demandware investor. It also holds about a quarter of the company’s stock and Skok sits on its board, too.

But it is still uncertain whether Wall Street will embrace the latest innovative technology company from Massachusetts to go public. Exa Corp., a Burlington maker of software for vehicle makers to improve aerodynamics, debuted on the Nasdaq Thursday and raised $6.25 million. Its stock closed at $10.61 on Friday, up 8.27 percent.

Michael B. Farrell can be reached at michael.farrell@globe.com.
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