What’s Changed and What’s the Same for 2018 SaaS IPOs

June 13, 2018

Over the past 12 months, a number of our benchmarking customers have either filed or completed SaaS IPOs. And Adaptive, a customer and partner, filed for an IPO in May and then announced in a surprise move on Monday its acquisition for $1.55B by enterprise SaaS company Workday for more than double (2.2X) the expected post IPO valuation.

We’ve had the privilege at OPEXEngine to work with many SaaS companies that passed through the IPO milestone, from Omniture, Ping Identity, SuccessFactors, Qualys and RightNow Technologies in the early SaaS days, to Zendesk, Sendgrid, RallyTechnologies, Hubspot, Demandware and Everbridge, among others, in the last couple of years.

From 2006, when Microsoft was the only tech company in the top 5 publicly traded companies zoom ahead to ten years later in 2016 when the top five were ALL tech companies (Apple, Amazon, Facebook, Google, and Microsoft), tech in general and SaaS specifically, has come of age.  In 2016, the average market cap of a Cloud company at IPO had doubled to about $1B from around $500M in 2006.

2018 for the SaaS sector is off to a very strong start in the public markets with SaaS IPOs by Cloud subscription management vendor Zuora, Dropbox and Pluralsight, among others.  

"Tech IPO performance during 2018 to-date has been robust.  We are seeing larger deal volume than in 2017, and SaaS IPOs have been a major component of the overall tech segment." Mark E. Young, Managing Director, Technology Investment Banking , Canaccord Genuity

After confidentially benchmarking the detailed operating numbers and financials for hundreds of SaaS companies annually over the past 11 years, we’ve seen company data from early stage companies when the operating plan is focused on product market fit through growth SaaS vendors establishing significant company valuations and returns for investors in the public markets and M&A.  We are bound by confidentiality about specific companies, but here’s a few aggregate observations of what’s changed over 10 years and what’s the same.

SaaS Companies filing for IPO in 2018 More Mature than 10 Years Ago

The 2018 SaaS IPO companies and companies rumored to be considering an IPO this year all have a few common characteristics:

  • Higher recognized revenues than 10 years ago, all above $100M and some above $200M - Dropbox even posted revenues of $1.1B in FY17 before its IPO in March
  • High customer retention rates above 95% and net dollar retention rates above 100% (some reaching 120%) with more attention to the accounting of retention rates
  • Revenue growth rates over 30%
  • Still okay to post operating income losses as long as they are trending down
  • Broad, horizontal markets (large TAM); not seeing some of the niche market profiles that successfully raised money in the public markets 10 years ago
  • More capital invested before reaching IPO with $150M - $200M more common.
  • Platform offering, or articulated potential for a product expansion, even when focused on SMB and mid-market size customers – customer upsell potential the name of the game  

High Performing Companies Consistently Have Collaborative Management Teams Supported by Strong Finance Teams

Finance is the hub for all business metrics for SaaS companies and responsible for reporting and analysis of business performance.  High functioning Finance teams have all the following characteristics:

  • SaaS Finance teams for companies between $100M-$200M are larger than they used to be with a median of almost 50 FTEs in Finance, more than double what it was 10 years ago. Even early stage companies can have up to 10 in the Finance team.
  • Executive collaboration has proven to be more productive and contribute to higher performance than “silo” management where each department operates independently and in the dark about the numbers of other departments. Finance teams enable Executive management to be more collaborative and solve problems as a team with consistent sharing of management reporting and comparisons to peers.
  • Finance helps the management team optimize resource allocations with accurate data analysis. This allows the company to move quickly and correct quickly when needed.
  • Finance also supports business owners (Sales, Marketing, Product, Customer Success) to improve process and performance.
  • Finance delivers clear performance, expense and metrics’ analysis and comparisons to peers for each department of the company as a business partner to the functional executives. This is a proactive role focused on projections and improvement as compared to backward looking traditional finance

Metrics-Driven Management Culture

Highly successful SaaS companies use benchmarking as a management process to drive process changes to scale the business.

  • By comparing individual departmental performance to peers, each department is motivated to higher performance.
  • Finance teams use 3rdparty verification of internal metrics as the devil is in the details for SaaS metrics. "We found inconsistencies between our financial system of records and other systems which OPEXEngine focused us to fix.  OPEXEngine helped us align our internal data to produce consistent metrics and benchmark comparisons," says Jeffrey Wilkins, CEO, Facilities Management eXpress.

We’ve seen companies without tight management of their internal metrics stalling in reaching their exit milestone.  If a management team doesn’t fully understand and manage the underlying operating metrics driving their KPIs, the risk is much higher that there’s some process or underperformance slowing the company down. Weak operational management problems are usually relatively easy to fix (as compared to establishing a new product or market) and make these firms targets for PE firms with established operating management processes.

Floating on a Cloud

Venture analysts say that only single digit percentages of venture-backed companies will ever reach the IPO milestone.   This year, though, a lot of investments are paying off.  Strong growth numbers combined with continuing significant worldwide growth predictions for SaaS – 22.2% according to Gartner 2018 - are driving the already high SaaS valuations in the 6-10X ARR range in the public markets and 15+X ARR in private acquisitions to new heights - some recent acquisitions like Microsoft's acquisition of Github hit 24.5X.  It will be interesting to see what the second half of the year brings.