Morning Markets: As WeWork pushes towards an IPO and Cloudflare also preps a listing, an explanation concerning why so many tech companies want to get public in 2019.
It has been a good year for tech and venture-backed IPOs. Several private companies worth tens of billions of dollars have broken into the public domain in 2019 as Uber, Lyft, Pinterest, and Slack made large debuts. Even more, some 2019 venture-backed IPOs have managed to start with a value of just a few billion, winding up worth more than ten billion dollars after the market repriced them higher. Zoom and Beyond Meat fit that mold.
The diversity of offerings that we’ve kept tabs on is something worth remembering. We’ve seen esports offerings from China, heatlhtech IPOs, SaaS flotations, cybersecurity debuts, and more. You could call it a unicorn cattle call. And from what we hear from IPO-minded folks, there are more offerings coming.
A good question is why we’re seeing so much unicorn liquidity (the number of richly-valued, private, venture-backed public offerings) this year. There’s a partial explanation to that question that I ran across this morning that will prove useful.
In short, public-market valuations for tech and venture-backed IPOs have gotten so strong that the conversion of private valuations to their public-market counterparts has become far easier. Build a bridge across the chasm from A to B, and more people will make it across.
Let’s peek at a chart.
Historical Venture-Backed IPO Revenue Multiples
We’re going to track the amount of money that public market investors were willing to pay per dollar of revenue from venture-backed companies going public. More simply, we’re going to examine median revenue multiples from VC-backed companies over time.
Here’s a chart from Silicon Valley Bank’s Q3 State of the Markets report on the point:
What we can see here is an astounding increase in the value of revenue that VC-backed companies generate, at least in the eyes of the public markets. Since 2010, the revenue from this cohort of private companies going public has risen in value from $3 to $5 per dollar of revenue to more than $10.
I don’t think that it is a coincidence that some of the most valuable technology and venture-backed private companies are going public this year given our chart; if you don’t get out when public-market valuations are at historic highs you might wind up going public when those same valuations are heading down, a nasty picture that could compress an IPO’s market cap and therefore its capital raise, not to mention investor and founder returns.
Regular Crunchbase News readers will see the 11x multiple in the chart and recall that we’ve spoken about the number. Indeed, 11x is roughly the current revenue multiple that SaaS and cloud companies have on the public market. By seeing the median 2019 H1 venture-backed tech IPO revenue multiple reach around the same level as the average SaaS company means that recent IPOs are viewed very positively.
Why does the quasi-parity matter? SaaS companies feature recurring, high-margin revenue, giving them historically-strong revenue multiples. To see those multiples find more general application, as our chart shows, implies that tech and venture-backed shops with lower revenue quality are also being valued quite highly; that’s a mix of bubbly and bullish.
And that’s why we’re seeing lots of firms go public or work towards it. It probably doesn’t get much better than this. Why not go public now?
Illustration: Dom Guzman
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