Uber’s Immature Public Offering

by Brenon Daly

Being mature has never been a requirement for a tech vendor to go public. But that doesn’t mean a company should be childish, either. And yet, as Uber’s trip to Wall Street shows, a consumer tech startup can still get away with treating professional investors a bit like spoiled kids treat their parents: they don’t want anyone telling them what to do, even if they haven’t quite figured out what they will be when they grow up.

Uber, of course, is the extreme example of an indulged startup. Throughout much of its 10-year history, the company basically did what it wanted, expanding its services in some cases without concern about existing rules or practices. (There’s tech disruption and then there’s legal disregard. Too often, Uber claimed the former while practicing the latter, a point the company itself made in the now-obligatory ‘Letter from our CEO’ portion of its prospectus.) It could get away with that because it had billions of dollars of outsiders’ money to fall back on.

Now, after having piled up almost $8bn in accumulated deficit, Uber needs more money. Guided and supported by no fewer than 29 underwriters, the vendor will undoubtedly find new investors when it offers up shares to the public on Friday morning. The prevailing pricing in the IPO will likely see Uber pull in about $9bn, while the overall business will collect a valuation in the neighborhood of $90bn. Very much in character, Uber is going public like it ran a good portion of its business: on its own terms.

The arrogance that characterized Uber’s early days has certainly diminished quite a bit, but there’s still an unmistakable sense of adolescent self-assuredness at the company. As part of its self-described ‘bold mission,’ Uber sizes the current markets it serves not in the billions of dollars, but in the trillions. It amplifies that alluring vision by pointing out that it is only just starting with those opportunities, holding less than 1% share of any market in which it operates.

Uber continues that language of promise throughout the prospectus. While that vision sold early on – allowing the vendor to raise more funding than any other privately held US tech startup – the valuation inflation hasn’t left a lot of upside for it on Wall Street. (Or any at all, if it follows in the tire tracks of rival Lyft.) Private-market investors may have coddled Uber financially, but its pending IPO could serve as a tough-but-needed lesson in the painful process of growing up.

Slack set to enter a loose market

by Scott Denne

Another enterprise startup plans to test Wall Street’s seemingly insatiable appetite for business technology vendors. Slack has unveiled its prospectus for a direct listing on the NYSE, forgoing an initial public offering. Like other recent enterprise tech companies to enter the public market, Slack, though heavily funded at premium valuations, still appears to have room to trade up in its debut.

The firm’s forthcoming listing follows closely on the IPO of fellow workplace communications software developer Zoom Video. The latter company fetched an astonishing 60x trailing revenue in its first day of trading – a level it retained in the week since. Slack would need only a fraction of that multiple to leap beyond the roughly $6bn valuation it boasted in its most recent fundraising. There’s every reason to think it could.

As we noted in our coverage of Zoom’s first day, enterprise companies (those selling technology to businesses) have gotten a bullish reception in the public markets, with many of the 2018 and 2019 crop of IPOs trading above 20x revenue. To match its private company valuation, Slack, which posted $401m in revenue in its recently closed fiscal year, would need to fetch a 15x multiple. Its shares have recently traded hands in private transactions at twice that level. And given the parallels between it and Zoom, investors could carry it even further.

Both vendors are roughly equal in size (Zoom generated $330m in trailing revenue), with a similar growth rate. Slack came up just a few percentage points shy of doubling its topline, while Zoom rose a bit above that. The two companies also play in separate corners of the workplace productivity market that are both expected to garner increasing enterprise investments in the coming year. According to 451 Research’s VoCUL: Corporate Mobility and Digital Transformation, 40% and 43% of respondents plan to invest in team collaboration (Slack’s purview) and online meetings (Zoom’s specialty), respectively, over the next 12 months.

A new player in a new game

by Brenon Daly

Twenty years after the IPO of CDN giant Akamai, rival startup Fastly has announced its own plan to go public. We mention that at the open because one of the main selling points of Fastly’s pitch to Wall Street is setting itself apart from the competition. In its just-filed prospectus, Fastly uses the term ‘legacy CDNs’ more than 20 times.

The repetition isn’t meant to flatter. Eight-year-old Fastly discusses Akamai – and, to a lesser extent, Limelight Networks – in connection with the limitations of their offerings, which are meant to speed up and secure internet traffic.

Already having collected a rich, double-digit valuation in the private market, Fastly is making the economically rational effort to put some distance between itself and its discounted public-market comps. (Even with its shares near their highest level since the dot-com collapse, Akamai garners just 4.5x trailing sales, while Limelight lags far behind at not even 2x trailing sales.)

Like most other ‘new generation’ IT providers, Fastly plays up its growth rate while playing down the cost of that growth. Sales at the company rose about 40%, year over year, in 2018 to $145m. In comparison, Akamai is a single-digit percentage grower, although it is roughly 10 times larger than Fastly. Fastly also runs in the red, largely because its gross margins are just 54%, 10 percentage points lower than those at Akamai.

For us, though, the biggest difference between the two companies isn’t their technology or their business models or their target customers. Instead, it’s the IPO itself. It’s hard to imagine, but Akamai went public in 1999 on just $4m in sales and a staggering $58m loss. (It was a time of ‘irrational exuberance’ after all.) In other words, at the time of Akamai’s IPO, its entire business was smaller than the revenue that’s probably generated by a single key customer at Fastly.

It’s all business on Wall Street

by Scott Denne

Amid a short burst of high-profile tech IPOs, enterprise offerings are soaring, while consumer-focused companies are getting a less-bullish reception. In their public debuts, both Zoom Video and Pinterest priced above their range and traded up from there. The former, a video-conferencing specialist, reaped a hefty valuation increase in its debut. The social networking vendor, however, stayed just above its last private funding.

To be sure, Pinterest hardly received a bearish reception. It began trading at about $24 per share, for a 25% bump, bringing it slightly up from the price of its series H round in 2017. Currently, Pinterest is valued at $13bn, or nearly 16x trailing sales. Zoom, by comparison, jumped 75% from its IPO price when it entered the Nasdaq, garnering a $16.2bn market cap, or 60x trailing sales.

The discrepancy between enterprise- and consumer-tech offerings isn’t limited to these two. Last month, Lyft made a lackluster debut – its shares now trade 20% below its initial price. A few days later, PagerDuty, an IT ops provider, jumped 60% when it hit the public markets. The comparative reliability of enterprise-tech stocks accounts for some of the discrepancy.

As we noted in our coverage of PagerDuty’s IPO, many of last year’s enterprise IPOs still trade at or near 20x revenue. And many of the past consumer unicorns have faltered – Snap’s shares have fallen more than half from its 2017 IPO and Blue Apron is practically a penny stock. Perhaps more importantly, the recent enterprise debutants left room in their cap table for a first-day bump, while consumer companies extracted all they could from private investors, at the highest price they could, before turning to the public markets. Zoom raised $160m on the way to its IPO, while Pinterest took in almost 10x that amount.


Big or small, Wall Street likes them all

by Brenon Daly

On the same day the NYSE gave a warm welcome to a pair of enterprise tech vendors that are both running right around a level that, historically, would be the absolute minimum for a company to go public, investors also got their first official glimpse at the financials of a consumer tech behemoth that’s 10 times the size of the debutants. When the tech IPO market can cover that broad a spread, it truly is open for business.

Start with those companies that have already seen through their offering. The relatively slight build of both PagerDuty and Tufin Software Technologies didn’t really hurt them as they stepped onto the NYSE on Thursday. That’s particularly true for PagerDuty, a subscription-based IT incident-response software provider that put up just $118m in sales last year. Tufin, which recorded just $85m in sales in 2018, is about a year behind PagerDuty, assuming it holds its roughly 30% growth rate.

Nonetheless, PagerDuty priced its offering above the expected range and soared more than 50% on its debut. As we noted in our report on the offering, investors are valuing the company at some $2.8bn, or more than 20 times last year’s sales. Having already secured its standing as a unicorn in the private market, PagerDuty is now approaching ‘tricorn’ status in the public market.

Tufin debuted at a far more muted valuation, but still created more than $600m of market value. With 34.2 million shares outstanding (on a non-diluted basis), Tufin is trading at more than 7x 2018 revenue. As we outlined in our preview of the offering, Tufin’s valuation probably has less to do with how much revenue it generates than how it generates that revenue: back-end-loaded sales in a license/maintenance model.

But both those realized offerings on Thursday were very quickly and unceremoniously overshadowed by the anticipated debut of Uber. The ride-hailing company’s planned IPO, which will be brought to market by a herd of 29 underwriters, makes the offerings of Tufin and PagerDuty seem like a series B funding. Across the board, Uber’s financials – funding, revenue, losses – are orders of magnitude larger than either of the enterprise-focused IPOs. And yet, for all the variety of the companies and their offerings, each of them can find investors ready to throw more capital their way. The bulls are running right now.

Figure 1

PagerDuty calls on an exuberant IPO market

by Scott Denne

Following a nearly six-month lull, the market for enterprise IPOs has picked up where it left off – handing out gushing valuations to high-growth SaaS companies. PagerDuty became the newest beneficiary, pricing above its range and moving well beyond that as the stock began trading. The multiple commanded by the IT operations software vendor sets the stage for another notable year for enterprise IPOs.

In its public debut today, PagerDuty’s share price jumped to $38, about 60% from where it priced its offering ($24). That surge leaves the company with a $2.8bn market cap, valuing it at 23.5x trailing revenue. It also gives PagerDuty a more favorable multiple than many of its peers. For example, the debutant trades within a turn of Elastic, a 2017 vintage IPO that’s double the size of PagerDuty – it posted $241m trailing revenue to PagerDuty’s $118m – and growing at a faster pace (70% vs. 50% year over year last quarter).

PagerDuty isn’t the only enterprise company feeling Wall Street’s good graces. Video-conferencing provider Zoom set a price range earlier this week implying a valuation of $7.7bn (about 28x revenue) on its forthcoming IPO. And infosec vendor Tufin saw a 30% bump in its debut today (we’ll cover that company in this space tomorrow). There’s little doubt that after a dip in equity prices last year Wall Street has, once again, become a welcoming place for enterprise startups – several of last year’s other IPOs trade at multiples in the 20x neighborhood.

The S&P 500 has risen 15% since the start of the year and the latest consumer confidence survey from 451 Research’s VoCUL shows faith in the US stock market coming back to the same levels as last autumn. Should new offerings continue to garner healthy valuations, this year’s IPO pipeline could fill up to compete with last year’s record of 15 enterprise technology debuts, despite the first quarter passing without one.

Figure 1

Unusual beasts from the land of unicorns

by Scott Denne

Typically, venture capitalists offer public investors fast-growing companies that remain far from profitability. Occasionally they come out with an IPO candidate with massive growth and a trail of red ink to match (see our report on Lyft’s upcoming offering). Rarely do they bring to market a startup with massive growth and actual profits (or even a compelling case that it could shortly become profitable). On Friday, they took the wraps off two such unusual startups – Zoom and Pinterest.

Of the two, Zoom finished its most recent fiscal year in the black. While the video communications vendor’s topline more than doubled to $330m, it generated an $8m profit. That wasn’t an anomaly, as the company, with a $4m loss, was nearly profitable a year earlier. Pinterest, while not yet profitable, cut its net loss in half to $63m last year while sales jumped 60% to $756m. Mind you, that’s a decline in net loss, not a decline relative to its sales growth, which is typically the most a venture-backed IPO candidate can boast.

Public offerings from a pair of companies with compelling financials could generate investor interest in tech IPOs more broadly. And a welcoming IPO market could provide relief to any VCs and entrepreneurs seeking large exits in the next few months, as 10-figure outcomes via M&A have dwindled in the first quarter. According to 451 Research’s M&A KnowledgeBase, 2019 has yet to see a $1bn-plus acquisition of a VC-backed portfolio company, following a record 13 of them last year.

Playing small ball in the big leagues

by Brenon Daly

Over the past two years, no single IT sector has put forward more highly valued IPOs than information security (infosec). Spurred by ever-increasing spending by CISOs, startups across the cybersecurity landscape are either big or getting big fast. As they graduate up to Wall Street, growth-hungry investors have lavished rich, double-digit valuations on infosec startups.

So what, then, to make of the recent IPO filing by Tufin Software Technologies? The security policy management vendor is heading to the NYSE on the back of a year where it did less than $100m in sales. And its growth rate, while a solid 30% in 2018, barely matches the pace of some of the recent infosec debutants, even as they put up more than three times more sales.

And then, there’s the crucial consideration of how – and when – Tufin generates those sales. In the current era of cloud-delivered software, Tufin sells its product in the conventional model of software licenses, plus maintenance and professional services. Further, those sales are heavily back-end-loaded, with a make-or-break Q4 providing about 34% of total revenue for the company.

It’s worth noting that all five of the other infosec providers to come public since the start of 2017 derive at least a portion of their sales from subscriptions, with the two richest valuations being given to the full cloud-based vendors. (Zscaler trades at an astronomical 34x trailing sales, while Okta garners 23x trailing sales.) Subscription revenue tends to be more predictable than lumpy sales of licenses, particularly when the average price tag of just the software – as it is in some cases at Tufin – climbs above $200,000.

That’s not to say that Tufin doesn’t have the opportunity for growth in front of it. In its prospectus, the company cites a 451 Research Voice of the Enterprise survey of 550 IT buyers and users in 2018 that shows that 83% of the respondents do not currently run any security automation and orchestration technologies at their company. Yet, encouragingly for Tufin and other vendors, more than half of the respondents (54%) plan to have it in place by 2020.

In addition to Tufin, we suspect that at least one other company will likely be paying very close attention to the upcoming IPO. Rival Skybox Security, which we understand is roughly the same size as Tufin, is thought to be tracking to an offering of its own. The difference being, as we heard it, that Skybox is targeting a debut in 2020, when it will be north of $100m in sales.

Dialing up the next round of IPOs

by Scott Denne

With its recent IPO filing, IT management software vendor PagerDuty lines up to become the first enterprise software company to come to the public markets after an extended drought. A hiccup in the equity markets last autumn followed by the government shutdown effectively closed the door for new tech offerings, but now the pipeline is beginning to fill up after a record 2018.

Last year witnessed 15 enterprise tech offerings (to be clear, the count includes only business technology offerings, not those from consumer tech startups), mostly in the front half of the year (three deals priced in the first quarter and seven in the second). And while this year’s first half isn’t likely to match that, the pace of filings is picking up. To be the first enterprise tech provider to go public this year, PagerDuty will race security vendor Tufin, which filed a week earlier, while Slack announced in early February that it had confidentially filed for a direct listing.

It’s fitting that PagerDuty could be the one to kick off a new round of enterprise IPOs because it’s almost the prototypical Silicon Valley IPO candidate. It’s growing fast and losing money, though not doing either at an unheard-of pace. In its most recently reported quarter, PagerDuty came up just shy of 50% year-over-year growth as it crossed the $100m TTM revenue mark. It posted a $43m loss, though that’s smaller as a share of its overall revenue than in earlier periods.

In the market for on-call management software for IT, PagerDuty is larger than its rivals VictorOps and OpsGenie, which were acquired by Splunk and Atlassian, respectively. (Subscribers to 451 Research’s M&A KnowledgeBase can view our revenue estimates for VictorOps and OpsGenie). But PagerDuty is banking on expanding into larger and more crowded markets, such as IT event intelligence and incident management, as we noted in a November report on the company. Almost all of its revenue today comes from on-call management.

Whether Wall Street ultimately decides to embrace PagerDuty for the potential of its new products or the financial results from its older offerings, the company should have little trouble pushing past the roughly $1.3bn valuation from its series D last summer. To get there, it will need to trade above 12x TTM revenue. That seems doable given Wall Street’s welcoming mood.

As we noted in our analysis of Lyft’s IPO filing , consumer confidence in the stock market sits at a 12-month high. And even though there hasn’t been an enterprise IPO to hit the public markets since SolarWinds issued shares in mid-October, those that went out last year are being generously priced. Smartsheet, for example, trades at nearly 30x revenue and sports a topline that’s about 50% larger than PagerDuty’s, with growth rates just a few percentage points higher.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Lyft gets IPO in gear

by Scott Denne

Heading toward an IPO, Lyft remains miles from profitability, and it may not be able to count on the burst of growth that drove its initial rise to get it there. In its first act, the ride-hailing service, along with its rival, Uber, disrupted an existing market (taxis). In its second act, it’s looking to build a new market by turning its network to bikes and scooters. Despite the long road to profitability, Lyft, which recently filed its S-1, could still see a warm welcome on the street.

The company finished 2018 with nearly $2.2bn in annual revenue, slightly more than double its year-earlier total and more than 5x 2016’s topline. Such growth, of course, came at a cost – it posted a $977m loss last year. Most of Lyft’s operational costs rose in tandem with revenue through 2018. While it became more disciplined with its sales and marketing spending – just a bit more than one-third of its revenue went toward sales and marketing expenses, down from more than half in 2017 – much of that goes toward incentives and refunds for drivers and riders. With Lyft still battling with Uber for both groups, it’s difficult to see that cost shrinking by much more.

Growth in its core business, while still immense, doesn’t appear to have the kind of momentum that could overcome its outstanding losses. Lyft’s expanding number of riders has decelerated. In the fourth quarter, the number of active riders using Lyft rose just 7% from the third quarter, marking the first time that sequential quarterly growth in riders dipped into the single digits. A portion of those riders (though likely a modest portion) rented bikes and scooters – a business that generated immaterial revenue for Lyft today but not immaterial costs, as the company owns those vehicles. It spent $68m on its burgeoning scooter fleet last year and another $251m to acquire bike-sharing vendor Motivate, according to 451 Research’s M&A KnowledgeBase.

Don’t expect those caution flags to keep Lyft from garnering a higher valuation in its IPO. The company last raised money over the summer with a $600m funding round that came with a $15.1bn post-money valuation. Just to match that would imply a valuation that’s 7.2x trailing revenue, a mark that should be easy to hit given Wall Street’s embrace of Silicon Valley’s most-lauded businesses. Snap, for example, still commands a 10x multiple even after losing two-thirds of its value since its debut.

Moreover, Lyft could be coming public in a welcoming environment. According to 451 Research’s VoCUL, 22% of survey respondents said they were more confident in the stock market in February than they were 90 days ago, marking the highest such reading in more than a year.