Initial public offering

How to tell when a SaaS startup is ready for IPO

Image Credit: Vintage Tone/Shutterstock

If you’re a founder, early employee, or investor of a growing SaaS startup, chances are that the word “Exit” has crossed your mind. Generally, you have two options: get acquired or go public. While the former has long been a viable option, the public market for SaaS businesses is relatively new. Salesforce.com was the first of its ilk to go public (in June 2004); the stock priced 30 percent above the initial filing range and ended its first day of trading up 56 percent. That success demarcated the market’s receptivity to SaaS companies, and a precedent was formed. Blackbaud and RightNow followed in subsequent months, and so have 75+ other SaaS businesses since then.

To understand what it takes for these companies to exist in the public markets, I and James Shalhoub, an investment banking associate at Jefferies, reviewed each of their S-1s and compared their IPO profiles.

At a glance

Based on historical data, the “median SaaS company” at IPO is 10 years old with ~530 employees, generates nearly $100 million in run-rate revenue, grows at 48 percent, and still operates at a loss. Founders, early employees, and investors would likely see their SaaS companies price above the filing range to achieve a ~$600 million market cap and watch their shares pop 32 percent after their first day of trading. The table below shows a range of the general IPO data points for these businesses.

Interesting benchmarks, but it’s unfair to apply these metrics to the entire SaaS universe. We consolidated the SaaS IPOs into three groups based on equity value at IPO: market cap of $500 million or less, between $500 million and $1 billion, and greater than $1 billion. We then analyzed relevant SaaS benchmarks, related to growth, profitability, capital allocation, and efficiency, to uncover deeper trends.

High expectations for growth

While public investors demand higher revenue growth from technology companies over other industries, the benchmark is set even higher for SaaS companies. After all, one merit of these companies is the ease with which they can deploy their product. Management can, in turn, spend more resources on acquiring new customers and expanding sales within existing accounts. The stakes are high for larger SaaS companies, though, as demonstrated in the chart to below.

SaaS players that achieved a $1 billion+ market cap at IPO had a median trailing 12 month (LTM) growth rate of 85 percent, helping fuel their larger valuation. The achievement does not go unnoticed, however. Every single one of these companies priced above their filing range and had a median first day close of +64 percent –…

Snapchat Went Public, and This Silicon Valley School Made a Cool $24 Million

When I was in high school, we held bake sales, car washes, and carnivals to raise money for things like shiny new uniforms and ski trips. Now – at least if you go to school in Silicon Valley – investment opportunities have gotten quite a bit more sophisticated.

And, if I remember the $200 we made after an entire day washing cars in the heat correctly, quite a bit more successful, too.

It all started back in 2012, when venture capitalist Barry Eggers came home to find his children at the kitchen table playing with a new app – Snapchat. In a world bogged down with social media, Snapchat offered something new and just different enough, with its filters and the disappearing content element.

At least that’s what Eggers thought, and he subsequently negotiated a $500,000 investment in the company.

That’s where St. Francis High School (where Eggers’ children go to school) came into play. The school set up a fund in 1990 that aims to…