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SimpliVity plans 2016 IPO amid cloud software streak

SimpliVity Corp., a six-year-old software startup that helps companies manage their hardware, plans to be ready to go public by the end of 2016, Chief Executive Officer Doron Kempel said.

The company, which has been selling its software for two years, has increased its customer base fivefold to about 550 in the year through June, Kempel said in an interview. Already valued at more than $1 billion in its latest funding round, the Westborough-based company is leaning toward Morgan Stanley as an underwriter, he said.

SimpliVity is part of a new wave of IPO plans stacking up by companies that make software for managing servers, storage and switches. All have shown brisk sales growth in recent years as more clients alter their infrastructure and move more operations to the cloud. Their growth has drawn more venture funding than companies typically attract before going public. SimpliVity has raised $276 million.

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“The companies are generally bigger, further along, they’ve got sales rather than just a business model,” said Jay Ritter, a professor of finance at the University of Florida. “It’s definitely a growth area.”

Ritter said the outlook is favorable when compared with the biotech industry, where he said some 150 companies went public in recent years, many with tiny workforces and zero sales.

Puppet Labs Inc. and AppDynamics Inc. are among a handful of other enterprise software companies seeking to go public by the first half of next year, according to people with knowledge of their strategies.

Puppet Labs is planning to raise $100 million to $150 million through an IPO, and is in the process of selecting bankers, according to two people familiar with the company’s intentions, who asked not to be identified because the plans aren’t public. No one from Puppet Labs, which helps businesses automate the configuration and management of machines and software, was available to comment, according to Justin Dorff, a spokesman for the Portland, Oregon-based company.

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Going public may prove to be an uphill battle.

“The returns on technology IPOs in general have been poor” this year, said Kathleen Smith, principal at Renaissance Capital, which manages IPO-focused exchange-traded funds. “There’s still interest in companies with a near-term path to profitability. Without earnings, any little challenge to expectations hurts the trading in the stock, so they are more volatile.”

Enterprise software startups will also face competition for investor interest with established giants like Oracle Corp., SAP SE and VMware Inc. While the bigger, public companies often buy smaller competitors to spur growth, they may hesitate to buy those with high valuations, she said.

“The M&A market has been slow, especially for highly valued companies,” Smith said. “Investors of public companies don’t want dilution.”

Still, the cloud software market is growing fast and should surpass $100 billion by 2018, up from $39.3 billion in 2013, researcher IDC said in a report last year. Venture capital firms including Accel Partners, Kleiner Perkins Caufield & Byers and Charles River Ventures, have been in pursuit for several years, along with some tech giants. Cisco Systems Inc. is an investor in Puppet and a partner of SimpliVity.

Even within the sluggish tech IPO climate, enterprise software companies have been a bright spot since last fall. HubSpot Inc., which makes cloud-based marketing and sales software; Hortonworks Inc., a maker of data-management software; and New Relic Inc., a cloud-based application performance- management provider, have all appreciated at least 50 percent to more than 100 percent.

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AppDynamics, based in San Francisco, is preparing to go public by mid-year 2016, a person familiar with those plans said, echoing a story by Dealreporter earlier this month. The company, which makes software that lets businesses track application performance and anticipate problems, had more than $150 million in bookings in the past fiscal year and has almost doubled the number of customers, Chief Executive Officer Jyoti Bansal said. He declined to confirm the timing of any IPO.

MuleSoft Inc. has raised $259 million, and was valued at more than $1.5 billion in its last funding round in May, CEO Greg Schott said. The San Francisco-based company’s software lets businesses create code for connecting diverse databases and devices.

“At some point, going public is probably going to be the right move,” Schott said in an interview, declining to be more specific. “We are certainly at scale to where the banks would feel comfortable doing something any time.”

The newest crop of IPO-seeking enterprise software companies stayed private longer, and that has led to pent-up demand from public markets, according to Derek Thomson, U.S. capital markets research leader at PricewaterhouseCoopers LLP’s Deals Practice.

“Investors are very keen to look at tech companies that have very strong cloud-based platforms,” Thomson said.