Liquidity Public Startups

Sendgrid’s IPO Pops After Pricing Above Range

Morning Report: Sendgrid went public, and it went well.

Yesterday, Sendgrid priced its IPO, selling 8.2 million shares at $16 per share. As TechCrunch notes, the company priced above its expected $13.50 to $15.50 price range, selling an extra 500,000 shares in the process.

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That works out to a pre-fee and pre-greenshoe haul of $131.2 million. In early trading, Sendgrid is trading for $18.25, up 14 percent as of the time of writing.

Those gains are not a surprising result given the firm’s trailing financial performance. Sendgrid posted revenue growth of 41 percent in the first three quarters of 2017 compared to the same period in 2016, growing its top line from $56.9 million to $80.2 million. The firm’s losses expanded over the same time period, but from a small $3.5 million to a still-modest $4.7 million this year.

And, critically, Sendgrid slipped into free cash flow positivity in the first 9 months of 2017.

To sum: strong growth, cash generation, and a small loss-pace at scale? That, we learned today, is a winning combination.

What’s fun is that Sendgrid actually fails the Rule of 40 test. The Rule of 40 is a loose concept that contrasts a company’s growth rate with its unprofitability. Grow 50 percent compared to the year-ago period, but run a negative 10 percent margin at the same time? That’s 40, and you’re doing great. Grow 50 percent but lose 20 percent and you’re a 30. And so forth.

As you recall, Sendgrid grew at a roughly 40 percent pace in its last-reported periods, but its -5.9 percent net profit margin puts it under the Rule of 40 threshold.

Bad? Not really. As venture capitalist Brad Feld points out, the Rule of 40 is incredibly squishy when it comes to what counts as profit or loss. A quick quote:

Profit is harder to define. Are we talking about EBITDA, Operating Income, Net Income, Free Cash Flow, Cash Flow or something else. I prefer to use EBITDA here as the baseline and then back test with the other percentages.

Sendgrid doesn’t report EBITDA, as it is using Big Kid financial reporting metrics in its S-1 (GAAP). But the firm does reserve the right to start using EBITDA (page 127) at a later date, if it so chooses. If it did, its EBITDA would likely be flat or slightly up from zero, so the firm would pass the Rule of 40.

That’s a long way of saying that IPO-ready companies that can essentially pass the Rule of 40 just got a green flag from Sendgrid’s IPO.

And if your favorite unicorn can’t meet that threshold what the hell is it doing still claiming that valuation?

From the Crunchbase Daily:

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