A Crash Course in IPO Valuation
A Crash Course in IPO Valuation
9/15/24 Benchmarks for Operators
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A Crash Course in IPO Valuation
Klaviyo did a brave thing last year - they went public during an IPO drought. As I learned from speaking with their CFO Amanda Whalen on the RTN Pod, it was the right time for the company, and that took precedent over any temporary macro conditions. After all, an IPO is like high school graduation - a nice milestone, followed by a much longer stretch where you’re expected to grow and mature.
I asked about pricing an IPO, and the considerations that go into getting it right. It was way more dynamic than I thought - the management team is trying to optimize for a number of factors, some of which are directly in conflict with one another.
Here are the six factors:
You want to price at a strong valuation.
You also want to set expectations in a way that supports being successful, post-IPO.
You want to allocate to a strong core group of investors,
But you also want to avoid excess dilution and not take on more capital than you need.
And you want to have strong positive aftermarket trading once you launch,
But you don't want your pop to be too big.
The hardest one to nail is perhaps the size of your IPO pop, which I’ve already covered at length. Amanda elaborated:
“A part of the reason for not wanting too big a pop is one of the other ones that I pointed to, which is avoiding excess dilution. Because if you have a pop, then implicitly you've left some money on the table, which means that's capital the business could have raised.
On the other hand, you're bringing investors into your business and it's really important to share that upside with them. So you want to make sure that they are getting upside. These are some of the trade-offs.”
-Amanda Whalen, CFO of Klaviyo
It is a delicate balance. It's like you want it not too hot, not too cold.
You are trying to create positive buzz and drum up enterprise exposure, while also not over throwing your coverage and promoting a narrative that’s hard to live up to. You want your investors confident in your story, while also feeling like there’s meat left on the bone for future growth and expansion. And you want to protect your share price, while also leaving some space for a positive run up.
Talk about six dimensional chess…
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TL;DR: Multiples are UP week-over-week.
Top 10 Medians:
EV / NTM Revenue = 13.2x (+0.6x w/w)
CAC Payback = 16 months
Rule of 40 = 51%
Revenue per Employee = $542K
Figures for each index are measured at the Median
Median and Top 10 Median are measured across the entire data set, where n = 109
Population Sizes:
Security: 17
Database and Infra: 14
Backoffice: 15
Marcom: 16
Marketplace: 15
Fintech: 16
Vertical SaaS: 16
If you’d like the company level metrics used in these reports, upgrade to paid and you can download the excel sheet at the bottom of this post
Revenue Multiples
Revenue multiples are a shortcut to compare valuations across the technology landscape, where companies may not yet be profitable. The most standard timeframe for revenue multiple comparison is on a “Next Twelve Months” (NTM Revenue) basis.
NTM is a generous cut, as it gives a company “credit” for a full “rolling” future year. It also puts all companies on equal footing, regardless of their fiscal year end and quarterly seasonality.
However, not all technology sectors or monetization strategies receive the same “credit” on their forward revenue, which operators should be aware of when they create comp sets for their own companies. That is why I break them out as separate “indexes”.
Reasons may include:
Recurring mix of revenue
Stickiness of revenue
Average contract size
Cost of revenue delivery
Criticality of solution
Total Addressable Market potential
From a macro perspective, multiples trend higher in low interest environments, and vice versa.
Multiples shown are calculated by taking the Enterprise Value / NTM revenue.
Enterprise Value is calculated as: Market Capitalization + Total Debt - Cash
Market Cap fluctuates with share price day to day, while Total Debt and Cash are taken from the most recent quarterly financial statements available. That’s why we share this report each week - to keep up with changes in the stock market, and to update for quarterly earnings reports when they drop.
Historically, a 10x NTM Revenue multiple has been viewed as a “premium” valuation reserved for the best of the best companies.
Efficiency Benchmarks
Companies that can do more with less tend to earn higher valuations.
Three of the most common and consistently publicly available metrics to measure efficiency include:
CAC Payback Period: How many months does it take to recoup the cost of acquiring a customer?
CAC Payback Period is measured as Sales and Marketing costs divided by Revenue Additions, and adjusted by Gross Margin.
Here’s how I do it:
Sales and Marketing costs are measured on a TTM basis, but lagged by one quarter (so you skip a quarter, then sum the trailing four quarters of costs). This timeframe smooths for seasonality and recognizes the lead time required to generate pipeline.
Revenue is measured as the year-on-year change in the most recent quarter’s sales (so for Q2 of 2024 you’d subtract out Q2 of 2023’s revenue to get the increase), and then multiplied by four to arrive at an annualized revenue increase (e.g., ARR Additions).
Gross margin is taken as a % from the most recent quarter (e.g., 82%) to represent the current cost to serve a customer
Revenue per Employee: On a per head basis, how much in sales does the company generate each year? The rule of thumb is public companies should be doing north of $450k per employee at scale. This is simple division. And I believe it cuts through all the noise - there’s nowhere to hide.
Revenue per Employee is calculated as: (TTM Revenue / Total Current Employees)
Rule of 40: How does a company balance topline growth with bottom line efficiency? It’s the sum of the company’s revenue growth rate and EBITDA Margin. Netting the two should get you above 40 to pass the test.
Rule of 40 is calculated as: TTM Revenue Growth % + TTM Adjusted EBITDA Margin %
A few other notes on efficiency metrics:
Net Dollar Retention is another great measure of efficiency, but many companies have stopped quoting it as an exact number, choosing instead to disclose if it’s above or below a threshold once a year. It’s also uncommon for some types of companies, like marketplaces, to report it at all.
Most public companies don’t report net new ARR, and not all revenue is “recurring”, so I’m doing my best to approximate using changes in reported GAAP revenue. I admit this is a “stricter” view, as it is measuring change in net revenue.
Operating Expenditures
Decreasing your OPEX relative to revenue demonstrates Operating Leverage, and leaves more dollars to drop to the bottom line, as companies strive to achieve +25% profitability at scale.
The most common buckets companies put their operating costs into are:
Cost of Goods Sold: Customer Support employees, infrastructure to host your business online, API tolls, and banking fees if you are a FinTech.
Sales & Marketing: Sales and Marketing employees, advertising spend, demand gen spend, events, conferences, tools
Research & Development: Product and Engineering employees, development expenses, tools
General & Administrative: Finance, HR, and IT employees… and everything else. Or as I like to call myself “Strategic Backoffice Overhead”
All of these are taken on a Gaap basis and therefore INCLUDE stock based comp, a non cash expense.
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