The Rising Value Of ARR

Tech IPOs are having a strong year after a multi-year period of slack volume. It’s fair to say that 2017’s IPO market was an improvement over 2016’s own, but 2018 seems to be the year in which the current tech cycle finally sees healthy liquidity via the public markets.

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And there’s evidence that 2019 could be a year in which another set of giant private technology companies manage their own listing. Unicorns like Uber, Airbnb, and Pinterest are expected to pick 2019 as their IPO year.

What’s driving the recovery in technology offerings, many of which have been modern software companies that sell their wares on a recurring basis, is a good question. I doubt that there is a single reason, but we do have a good, partial answer to why tech IPOs are finally picking up.

ARR’s Rising Value

This morning Silicon Valley Bank published its State of the Markets report for the third quarter. The tome is nearly always worth reading, and this quarter’s iteration fit the pattern.

Tucked away on page nine was a fascinating graphic that caught our eye. (Note: this chart shows valuation multiples based on annual recurring revenue, or “ARR.” ARR is a standard revenue metric favored by modern software companies who sell their wares on a recurring, instead of one-time basis.) Take a peek:

The chart tracks the run rate multiple1 for public cloud companies.

You can quickly see two trends:

  1. The SaaS Crash, or the early-2016 period when the tech sector worried that the fun was over, was very real. The valuation compression of that interval was brutal.
  2. Since that crash, recurring revenue has been on a steady ramp north to new local maximums in terms of value. (Cloud software companies mostly charge for their products as a service, so we are using run rate as a cognate for ARR.)

Recall that the 2016 IPO market was bad, the 2017 IPO market was better, and that 2018 is a return to form. The chart makes it plain as to why. As public market investors re-valued ARR upwards, IPOs have followed.

Tech startups didn’t want to go public when doing so would force a debut with a valuation haircut stapled to it. But now that ARR has recovered its value, it’s a good time go out.

All of this is unsurprising but useful to know. What we can also imply from the chart is that sustained market chop could derail the current IPO pace. So if we have more days like yesterday, IPO debuts could slow once again.

  1. Last quarter’s revenue * 4 / enterprise value. The data comes from the Bessemer Cloud Index, which we here at Crunchbase News cite often. We have an email into the firm asking for the same data set so that we can chart it ourselves, hopefully with a longer preamble.

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