The IPO has all but disappeared.
In 2012, the SEC’s Advisory Committee on Small and Emerging Companies published a report titled “Where Have All the IPOs Gone”. The report sought to explain the recent decline in IPOs and the steady stream of companies leaving public markets, opting to go private instead through M&A.
Across all industries, an average of 311 firms went public every year from 1980-2000, but between 2001-2011 an average of just 99 firms did so.
For the software industry, the availability of private capital at all stages has accelerated the decline in new pricing activity. Private equity firms are increasingly comfortable with software assets – more PE firms have raised dedicated “pre-IPO funds” or mega-funds, and Softbank’s Vision Fund has put more money to work in the last year than was added to the NYSE in the first half of 2018.
Strategic M&A is also reducing the number of public companies, in effect relegating the IPO to a minor role serving as a stepping stone towards a larger liquidity event. For instance, Mulesoft was still in its infancy (having just turned a “public year old”) when Salesforce took the company private at a 36% premium. Similarly, Adaptive Insights was acquired by Workday on the eve of its IPO for double the valuation it would have received had it listed. Six of the most active strategic acquirers currently have enough cash to purchase nearly 20% of the aggregate enterprise value of the entire public SaaS index1.
A significant, albeit unintended, consequence of the thinning of the public markets is a lack of data. Operators and investors have far less visibility into financial profiles and operating characteristics of comparable businesses for benchmarking purposes.
At a time when fundraising is at a record high and it’s easier than ever to start a SaaS business, these data help owners properly position themselves to investors and informs strategic decision making. On the rare occasion companies do go public, it’s crucial we spend time evaluating where they’ve been and where they’re going.
With that in mind, let’s look back on activity in the public software markets in the first half of 2018.
2018: The Return of Software IPOs
Despite an overall downturn in recent IPOs, software pricing activity during the first half of 2018 represented a significant step up in momentum from the previous two years where just twelve software companies held initial public offerings (four in 2016 and eight in 2017).
In the first half of this year, ten SaaS businesses priced offerings representing $38B2 of aggregate enterprise value. It isn’t quite a reawakening, but early signals promise the second half of the year will only build upon the first’s momentum. For instance, Tenable priced it’s offering in late July and it’s rumored that SurveyMonkey has confidentially filed to go public later in the year.
All the businesses in the “1H 2018 IPO Cohort”3 sell horizontal applications and have raised a combined $4.7B of funding over a median of 14 years. This Cohort includes standout companies from across the U.S. including Dropbox, Zuora, Docusign, Smartsheet, among others.
At a glance, data suggests that the public markets have treated new entrants well. As of June 30, the total enterprise value for 1H 2018 IPO Cohort expanded 15% from IPO to $44B and the Cohort traded at a median 2018E EV / revenue multiple of 11.0x. The IPO could very well again be a viable strategy for long-term value creation.
So how do the financial and valuation data available for these businesses compare to the broader public SaaS index, and what can we learn from this Cohort to inform software businesses at all stages?
We’ll talk about what we can learn from the 1H 2018 IPO Cohort on Labs next week.
- OpenView’s public SaaS index includes ALRM, APPF, APPN, APTI, ATHN, AVLR, AYX, BAND, BCOV, BL, BNFT, BOX, CARB, CBLK, CBLK, CDAY, CISN, CLDR, COUP, CRM, CSLT, CSOD, DBX, DOCU, DOMO, ECOM, ELLI, EVBG, FIVN, HUBS, INST, KXS, LOGM, MB, MDB, MIME, NEWR, NOW, TWLO, OKTA, PAYC, PCTY, PFPT, PS, PVTL, QLYS, QTWO, RNG, RP, SEND, SHOP, SMAR, SPSC, TEAM, TWOU, ULTI, VEEV, WDAY, WIX, WK, WTC, YEXT, ZEN, ZUO.
- Data sourced from Pitchbook on 8/2/2018. Market data as of 6/30/2018.
- 1H 2018 IPO Cohort includes Avalara, Carbon Black, Ceridian HCM, DocuSign, Domo, Dropbox, Pivotal Software, Pluralsight, Smartsheet, and Zuora.