SaaStr - The Real Data on What it Takes to Go Big and Eventually IPO with Meritech Capital
The presentation outlines the rigorous process SaaS companies must undergo to go public, highlighting that only about 20 companies achieve this annually. Key factors include having a compelling story, strong team, growth, efficiency, and market predictability. Companies need to demonstrate why public market investors should choose their stock over others, with a focus on durable growth and operational excellence. The discussion also covers the importance of maintaining success post-IPO, emphasizing that long-term revenue growth is more crucial than rapid growth. Examples like HubSpot and CrowdStrike illustrate how durable growth and multi-product strategies can lead to significant market appreciation. The presentation stresses the need for predictability in financial performance, with most public SaaS companies beating and raising guidance consistently. The final takeaway is that companies must have a strong value proposition and growth strategy to achieve substantial returns in the public markets.
Key Points:
- Only about 20 SaaS companies go public annually, requiring a compelling story and strong growth metrics.
- Companies need to demonstrate durable growth and operational excellence to attract public market investors.
- Post-IPO success depends on long-term revenue growth rather than rapid growth, with examples like HubSpot illustrating this.
- Predictability in financial performance is crucial, with most public SaaS companies consistently beating guidance.
- A strong value proposition and growth strategy are essential for achieving substantial returns in public markets.
Details:
1. 🔍 The Road to IPO: Key Considerations
- To successfully go public, companies must present a compelling narrative, have a strong executive team, and demonstrate consistent growth and operational efficiency.
- A clear understanding of end-market predictability and a solid business rationale are critical for achieving IPO success.
- The IPO preparation process is intensive and typically requires at least one year of planning and execution before publicly announcing intentions.
- Only 20 SaaS companies manage to achieve IPO status annually, underscoring the competitive and challenging nature of this process.
2. 📈 Challenges & Strategies in the IPO Journey
- With over 100 public SaaS companies, a compelling investment narrative is essential to stand out.
- Meritech has facilitated approximately 60 IPOs over 25 years, highlighting their expertise in the process.
- Successful IPOs require understanding of size, performance metrics, qualitative factors, and post-IPO strategies.
- Despite over 200 SaaS IPOs since 2012, annual IPO numbers usually remain below 20, except for 2021's spike.
- A strong market leadership narrative and growth potential are crucial for drawing investor interest.
- IPO readiness demands sustained growth rates, a clear profitability path, and strong unit economics.
- Operational excellence across product, engineering, sales, marketing, finance, compliance, and legal is vital.
- Post-IPO success hinges on predictable performance to retain investor confidence and support.
3. 🚀 Qualitative and Quantitative IPO Factors
3.1. Quantitative IPO Factors
3.2. Qualitative IPO Factors
4. 📊 Key Metrics, Trends, and Case Studies
4.1. IPO Market Trends and Multiples
4.2. Case Studies: Market Automation and Data Management Companies
4.3. Key Insights for Future IPOs and Metrics
5. 📈 Durable Growth: A Strategic Advantage
- To be successful at IPO, companies need to be part of the 'Rule of 40', indicating a balance of growth and profitability, but they do not need to be free cash flow positive at the outset.
- Market can absorb around 20 IPOs a year, so companies need to be exceptional to be among them.
- Absolute revenue size at IPO is not as important as long-term, durable revenue growth for lasting success.
- There is a weak correlation (R-squared = 0.09) between company size and valuation multiples in public markets.
- Strong correlation (R-squared = 0.74) between share price appreciation and revenue growth in dollars, not just growth speed.
- HubSpot's multi-product strategy increased ARR from $100 million at IPO to over $2.5 billion, growing market cap from under $900 million to over $26 billion.
- CrowdStrike's ARR grew from $500 million in 2019 to nearly $4 billion, maintaining a growth CAGR of nearly 50% since going public.
- SPS Commerce grew ARR from $50 million in 2010 to $600 million, with a steady 20% CAGR, showing the power of compounding over rapid growth.
- SPS Commerce's share price has increased 17x since IPO, compared to CrowdStrike's 8x, demonstrating the long-term value of durable growth.
- 80% of SaaS companies beat quarterly guidance and raise future guidance, showcasing the importance of predictability for public companies.
6. 🔑 Final Insights and Strategic Takeaways
- Durable growth is prioritized over rapid revenue growth; growth durability significantly impacts share price returns.
- Effective multi-product strategies, like those of HubSpot, expand Total Addressable Market (TAM) and enhance efficiency over time.
- Predictability in business performance and exceeding expectations consistently are crucial for gaining investor trust.
- Achieving an IPO requires a compelling business case, significant growth, and market predictability, with only about 20 SaaS companies going public annually.
- To attract public market investment, a company should have a compelling narrative and at least $400 million in Annual Recurring Revenue (ARR) or be growing at 50-60% annually.
- Companies should aim to be a 'Rule of 40' company, where the sum of revenue growth and free cash flow margin is at least 40%.
- In the current interest rate environment, companies aren't expected to be valued over 10 times their ARR.
- Long-term success in public markets is shown by companies like SPS Commerce, which grew 20x post-IPO due to durable growth.
- Massive returns in public markets are possible; examples include CrowdStrike up over 8x, SPS Commerce up almost 20x, and Salesforce up 100x since their IPOs.
- Maritech, with over 60 IPOs, offers extensive software metrics and a large repository of public software information.