The Service Titan S-1

Live from Schenectady, New York, it's SaaS Talk with the Metrics Brothers, Growth and CAC.

And I'm Growth, better known as Ray Reich, founder and CEO of Benchmarkit.

And I'm CAC, better known as Dave Kellogg, EIR at Balderton Capital, independent consultant, And the author of Kellogg.

And together, we are the Metrics Brothers.

And we go together like route optimization and field service.

Ooh, wait, are we going back to your Salesforce Service Cloud days there, CAC?

Well, not entirely, although those words are very familiar to those days. Um, we're going to be talking about managing customers, but not for the mid-market enterprise. We'll be talking about ServiceTitan, the operating system that powers the trades, quote unquote, a vertical SaaS company that provides sales, marketing, and service. for the trades and their recent S-1 filing in particular in support of an upcoming IPO.

The trades. This is a really bad day to talk about that to me, Dave, because that's things like HVAC, plumbing, and roofing and such, right?

Yeah. Well, all the things that just broke at your new house.

Yeah. I just found out that I'm going to have to spend a lot of money on tradesmen to have heat, and it's 28 degrees out here. But so I understand it. I need ServiceTitan.

Well, you have to ask them if they're using ServiceTitan when they come. But before you do that, let's get a word from our sponsor.

The Metrics Brothers is proudly sponsored by Benchmarkit, the B2B AI and software industry's largest, broadest, and most contextualized benchmarking index. Dave Kellogg and Ray Groth Wright have put the Metrics Brothers podcast on hiatus for the remainder of 2026. All episodes we have ever recorded are still available on your favorite podcasting app. You can reach Dave @kellogg and Ray on LinkedIn @rayreich. Thank you so much for listening to the Metrics Brothers podcast.

So before we jump in here, let's do our standard financial disclaimer because we're talking about a company that's about to go public. A quick reminder, we do not give investment advice. If we did, it'd probably be wrong, and all information is provided for information and entertainment purposes only. Only listen to our trailer for some bad humor and our full terms and conditions.

Hey, Dave, we want a little bad humor to start today's episode.

Please, Ray, that's your specialty.

So we're going to be talking about the trades, but not for you to make trades.

Oh, oh, there you go. A little double entendre to start the day.

I thought you'd like that. But tell us a little bit about ServiceTitan.

I will, I will.

So look, ServiceTitan is really an American dream story. These are 2 co-founders. They're both first-generation immigrants. If you look at the CBS One, I think it was, or on the roadshow presentation, they each have pictures with their dads, and, and both of their dads were residential contractors. Um, and they realized because of this that these fairly small family businesses were completely unserved by SaaS, that literally their parents would go out and do work all day, come home and try to run the business at night. These guys saw the opportunity to support small business tradespeople. They founded the company in 2007. They hit $100 million in 2011, 11 years later. Roughly in accordance with my rule of 5, 6, 7, 8, 9, which says it should be 9 years, but close enough. They hit $200 million in 2020, and they recently filed an S-1. They're the 3rd venture-backed company, I think, in software to go public this year. They have a whopping $772 million in implied ARR, and they've raised $1.4 billion to do it. If they spent all that, which they haven't, it would be a burn multiple— it would be a cash conversion score of around 2. It's a little less than 2, and I think they still have some money in the bank.

Wow, that's, that's a lot of numbers. There's just one thing when I read this, I, and I know we don't talk about stock advice here and we don't talk about politics on the show, but you know what's really interesting about this story to me, Dave, was, you know, almost 45% of our top 500 companies in the US are founded by either immigrants or children of immigrants. And this one just goes right along with that. It just shows you the power of the American, I would say, society and our embrace of immigrants.

We're gonna have to get you on the All In podcast, Ray. We're gonna get you to be a guest there. We can have you start blogging with Marc Andreessen. We can do public policy now.

Right. You know, I hear they need a, a subzar for AI and crypto.

Oh, that's right, Ray. That job is— they definitely need a subzar for SaaS. I know for SaaS metrics, I think the job's open as well.

Well, so what do you think we should— I guess that one was so big, what do you think we should be talking about on it today?

Yeah, there's been a lot of good breakdowns done on it. Of note, Meritech did a nice one, uh, our friend CJ Gustafson did a nice one, uh, Only CFO did a nice one that was a little bit more meta level. So there's some good written pieces here. I don't want to do a full IPO breakdown, we almost never do, but I think we should do 3 things, right? One, just hit the numbers quickly so people know kind of breadbox level what the size of this thing is. 2, talk about what it means to be a down-round IPO. This will almost certainly be one. And then 3, talk about this interesting piece of structure, quote unquote, the compounding IPO ratchet, which is something I've never seen before and that we certainly must discuss.

Those are all great ones. There's one thing maybe I'd like to throw in, Dave, that jumped out at me, and that was the construct of their revenue between subscription usage And PS, so I'd like to get— maybe touch base on that later in the episode.

Okay, hit on that in the next block if you will, because I didn't really catch that. But let me just jump in and do the overview. So I'm going to rely primarily here on Alex Clayton's breakdown for these numbers. You can also just go look yourself directly in the S-1, it's a public document. Implied ARR of $772 million, uh, implied ARR growth of 24%, and that's versus 17% at the median and 28% for the top Decile. So I'm going to give you those numbers each time I hit a number. NDR is 110% versus 110% median and 118% for the top decile. And that decile is of the Meritech benchmark set. If you go to Meritech public comps, you can see it. Implied CAC payback period of 21.4 months versus a median of 31.5 and a top decile of 20.5. Gross margin of 70% versus median 78%, top decile 81%. Uh, I'm telling you all this for a reason. We'll get to in a minute. Uh, sales and marketing percent of revenue, 27% versus 30% median and top decile of 23%. R&D as a percent of revenue, 27%. And somehow this is weird because they decide that lower is better versus 17% median and 14% top decile. Not sure we look at it quite that way. Um, free cash flow margin of -2%, um, versus 15% median, 26% top decile. Rule of 40 score 24% versus 34% median, 46% top decile. And ARR per FTE versus $269K versus a median of $356K. So quite a bit lower. And just one interesting stat that's really not a SaaS benchmark is GTV, gross transaction volume. $55.7 billion was transacted on this platform in 2024. It's a pretty amazing number and suggests that their ARR, that they capture around 1.25 percent of it as revenue for themselves. So if you view it as kind of a tax on the ecosystem, it's a pretty low tax, uh, for the services they provide. Um, Ray, before I let you do selected numbers, I'll just say from that list, here's what I conclude, and I think others conclude this too. This is a good solid company, but not an exceptional one. And I think Only CFO talks about that in his post where he's basically saying, I like this as a litmus test for SaaS IPOs because it's not top decile on everything. It's above median on everything, But it's generally not top decile in anything, right? So it's in that, you know, upper, let's say 40%. It's not profitable and it's not R40 compliant, right? So their free cash flow margin is -2%. Their R40 score is only 24%. So I would say this is an above average company, probably 70th or 80th percentile in general. It's kind of a blue collar IPO, which kind of matches what they do, right? This is not the fancy schmancy one. This is— they're getting there, but, but, but, but not with perfect metrics. So over to you, Ray. What's your take?

You know, well, the one that you talked about, that gross transaction volume of, you know, $55.7B, that jumped out at me because when I looked at their overall revenue, Dave, 71% came from subscriptions, which is well known to SaaS industry, but 25% came from that gross transaction value that they charge, that 1.25%. So it's not Shopify numbers, But as they grow and get more volume and value going across their platform, that's very high gross margin business. So I like that part of their revenue distribution, Dave. And the second thing that jumped out at me was their R&D percent. You mentioned it was at 27% versus the median of 17%. I'm like, what are they doing to have such a high spend on R&D? And I couldn't get that from the S-1. But it jumped out at me.

Got it, got it. Just one little clarification on that 1.25%. I was just taking the gross transaction volume and kind of dividing into that their ARR and saying, ah, overall their ARR is about 1.25% of their GTV. In terms of pricing structure where Ray went, I have a feeling whatever their charges would be a lot higher than 1.25% because the 1.25% averages in any basic subscription fees as well.

By the way, thank you for that clarification. And what I didn't pull out of the S-1 was what the payment volume that's going through their platform is. So, but they do have a payment module and it also didn't say what percentage of clients have actually adopted that.

Got it. Okay.

So, so fair enough. Personally on the R&D spend, I was happy it's high, frankly. I'm not, I think with most SaaS metrics, lower is better. I'm not convinced that's true with R&D, nor am I convinced that higher is always better, right? You can waste money in R&D. By the way, a friend of mine, Max Shearson, just did a great piece on Battery's Substack, uh, on measurement of R&D, and I think we should cover that in a future episode.

That'll be a good one. We've talked about it for a while.

Yeah, let's go do it. Max and another guy, Jason at Battery, wrote a very nice piece that I think we should, uh, dedicate an episode to. So let's talk about this, this notion of 2 different concepts here, right? Really, one, the, the down-round IPO concept, and also the, the concept Only CFO raises, which is kind of a test of the IPO market. And let's just remind ourselves about the IPO market and software before jumping in. One, it's been almost frozen, right? There have been maybe 3, I think it is, or a handful of IPOs in the last year. And if you look at kind of recent software IPOs, you'll see that Reddit is a huge winner. It's up 197% since March of this year. So it's not even a full year. The NASDAQ by comparison is up 31% on the year. So we need to be careful because there is a rising tide lifts all boats effects here, right?

Like the NASDAQ itself is up 31%.

31%. So, so, you know, you just need to benchmark these figures off what happened in the market in general. Uh, Klaviyo is ahead of the market. They're up 42%, and they have been out for the whole year because they went public last year in the fall, I believe. Uh, Rubrik is up 38%, but only since April, so it's beating the market and with only, you know, 9 of the 12 months roughly. Uh, OneStream has only been public since July. They're up, uh, 17%, which They've only had half a year. So, but I don't think any of these, with the exception of Reddit, has been an ultimate barn burner. I mean, they're good. Don't get me wrong. I'll take a 38% year-to-date return, but I could buy the NASDAQ 1000 or the NASDAQ index and get 31%, or there we go, the NASDAQ composite and get 31%. So any thoughts on just this, Ray, and software IPOs in general before we jump into ServiceTitan?

Yeah. The one thing I'm really intrigued by is this is a vertical SaaS player, right? The trades.

Yeah.

And there's a lot of buzz out there about vertical SaaS being the future of the SaaS industry. Better performance metrics, higher enterprise value to revenue multiples. In fact, Dave, what I just looked at was right now the enterprise value to revenue multiples for vertical SaaS is about 1.5 times higher than the SaaS public company bucket overall. So I want to see what this says about the public interest in vertical SaaS companies.

Yeah. Okay. Well, that's good. And by the way, Ray, by the time we get this episode out, I suspect they'll already be public. So we need to be careful not to eat any words. But we'll see how it goes. But look, I think the market likes vertical SaaS, and I think I understand why. You tend to get higher switching costs, lower churn, better ability to do expansion. I've always felt that the vertical companies are just stickier. I don't know how to say it. You build leadership position in a vertical, it's very hard to dislodge you. And I do think that shows up in valuation. By the way, speaking of valuation, maybe some of that hair on OneStream bothered people because in our OneStream episode, we talked about some of the unusual structures they had in their capital structure. And I kept saying, well, you think somebody would care about this? And maybe they did. I haven't done the NASDAQ from their IPO date, right? But I know in the year, NASDAQ's up 31%, they're up 17%, but they've only had half the year. So Anyway, uh, there's some hair on this deal as well. We'll talk about it and, uh, let's jump in. But first, let's talk about this down-round valuation issue. So a couple of— a little bit of valuation history here. They raised $200 million— sorry, they raised $200 million at a $9.5 billion valuation, so almost a private decacorn, in 2021. So at peak ZIRP, uh, this company raised money at $9.5 billion. Um, then in November of '22, They raised $365 million Series H at $7.6 billion. So that was a down round, and down rounds happen. As Jason Lemkin often points out, they're not the end of the world unless you have some terribly bad structure. Most VCs have some sort of anti-dilution structure that says, in effect, if I buy in at price Y and you later sell shares at price X, my shares get repriced to price X. And they do that by just giving you more shares until your average price comes down, right? That's what's known as a ratchet. Typically, most private financings have that kind of simple ratchet. Um, so I'm assuming that happened when they did this down round, that they had to go print some more shares. So, and the basic argument there is, well, gosh, you know, all I'm doing is pricing the kind of overpriced round back to the market price round. If you believe the last one was overpriced and the current one is market price, which is an assumption because they're They were both market prices on the day, but, but let's just say the market was hot, right? So the argument is, well, gosh, is it better to take dilution now or risk taking dilution later, right? Because they could have raised that prior round at $7.6 billion and then it would have been a flat round. But, but in my mind, as long as you think things are going well, it's not a lot of downside to, to that anti-dilution. And I think this is Jason Lemkin's point. Um, And look, if you go fritter away all the money you raise at a high valuation, that's a different problem. But say you actually make good use of it, then if you needed the capital and you made good use of it, it's, you know, the dilution later may or may not happen. So it's kind of a gamble, right? If you take a kind of above average valuation now, you know there's some risk that it may get reset down later. But why not? Because it might not get reset down later. And most entrepreneurs are optimists, and they'll kind of take that deal Anytime. The other thing they'll do, and they also like vanity valuations, so they might take the high valuation just to go tell their friends they're a decacorn or tell their friends they traded at $5 billion or whatever. And that's not necessarily a healthy reason to do it, but that's the other reason people tend to take these very high valuations. But on the one hand, it's like, hey, what's the downside? Because I might not get diluted later, but I will certainly get diluted now, and maybe I won't. So I don't know if you have thoughts on kind of ratchets, but I can go through the rest of their history. No.

Well, I do, but it's— I think maybe we should cover a little bit later because this one has a ratchet at a different point than I've ever seen. But that's because it's with the IPO. But that's later in the show.

Yeah, I've defined basically what I consider to be the standard anti-dilution or ratchet provision, which is— I'll say it one more time for the audience— if you raise money at price X today and then raise money at price Y later, and price Y is lower than price X, Often those shares raised at price X will be repriced down to price Y, basically as if I invested at the lower valuation. And that is accomplished by printing more shares and giving them to me. So they then did a $170 million tender offer combined H-1 at $6.7 billion. So they raised some money for the company and let basically employees and early investors essentially cash out. with, again, a $170 million round at $6.7. So now we've had 2 down rounds in a row, right? We raised at $9.5 in 2021. We raised at $7.6 in '11-'22. We raised at $6.7 in '23. And then they priced the IPO at $52 to $57 a share, which is a $5.2 billion valuation.

Right. Which are— and the way I count, that's a 3rd down round.

Yeah, correct. This will be a quote unquote down round IPO. Almost certainly. Whether it'll be a down round from the $6.7, unclear, right? It'll definitely be a down round from the $9.5, there's no question. And these guys are hoping to raise between $450 and $520 million, um, at that $5 billion valuation.

Hey Dave, I gotta ask you though, so a down round IPO, kind of what do you think of that? What does that mean? Because it's— I don't see it that often, but Maybe we'll see it more right now.

You know, they never used to happen back in the day. Companies were very careful to always manage their fundraising strategy to make sure the share price always went up towards the IPO. And there was a lot of energy and care put into that. Sometimes people would actually deliberately not take valuations they thought were too high because they were— because the philosophy at the time was raise enough money to go 18 to 24 months. And if I don't think I can use the money you gave me to make the company worth more than the valuation you're giving me today, Maybe I shouldn't do it because I'm gonna have to do a down round and I'm gonna have to take extra dilution, and, um, I want to avoid that. Down rounds were seen as kind of a scarlet letter. I think they're seen more rationally now. So there's nothing sinful about it. I mean, look, for public companies, the stock goes up and down. For publics, we're used to this. If the company raises money at a $10 billion valuation and the stock drops to $8 billion and they need to raise more money and do I don't think anyone talks about a down round. They're just like, oh, the company's choosing to raise money at different prices over time. Maybe it wished it raised more money at 10 when it could have, but if it needs the money now and there's demand for it, let's go sell some stock at 8. It's not a stigma of a down round, right? Because we're used to public companies fluctuating all over the place with the market. And for years, decades, private companies tried to damp that out with this very careful strategy where certainly when I ran private companies, everything had to be an up round. Like flat was the bare minimum you'd take. And otherwise you wouldn't raise, right? You would just hunker down and try and get through, but kind of God help you if you wanted to do a down round. I think given the volatility we've seen, that philosophy is out the window. These guys clearly don't believe in it because they've done several consecutive down rounds. And I just think, look, a down round, as a matter of fact, it just means the valuation is less than a prior valuation. Public companies go up and down all the time. Somehow we expect privates to only go up. With these 12-year, 15-year horizons to IPO, it's simply not going to happen. There's going to be too many boom and bust cycles. So my general advice is always, hey, make hay while the sun shines, raise money when the stock's expensive. And then the trick is not to go piss that money away because it was kind of free money. Yay.

Right.

The trick is raise money when the stock's expensive and spend it as if it's not.

So when I looked at their numbers, I'm like, okay, why are they really going public? And we're going to talk about, you know, that IPO ratchet and the hurdle rate they had, but there's some benefits to being public versus staying private, right?

Uh, there are. Um, I don't think— I mean, I don't think most people think that's why they're going public, to get the benefits. There's also a lot of drawbacks, right? There's a whole bunch of private companies that are staying private and huge, like Databricks or Stripe, um, because they don't want to go public. These guys want to go public. I think it's largely because— I mean, the consensus is because they have this ratchet, that they have a compounding ratchet, which is a thing I've never seen before. Generally speaking, this falls into a thing we would call structure. And let me just tell you about what it is. The Series H round is a compounding IPO ratchet. You can control F the S-1 for capital stock conversion or ratchet if you want to read about it. But it basically says if the IPO price is less than the Series H investor price, which was $84.57 a share, that they're going to print enough shares to readjust that price down to the IPO price, right? So to make it concrete, if I bought 100 shares at $84.57 and this thing goes public at $57 a share, they're going to give me an extra 48.4 shares, right? So an extra almost nearly 50%, again, more shares. That's what this ratchet is. It's extra dilution imposed on the company that would have been imposed before if they had raised that round, you know, not at $85 a share but at the eventual IPO price, which looks to be $57. Let's just say it's the top end of the range.

But Dave, there's more to this IPO ratchet.

Correct. This is a really unusual thing. Ratchets are nothing unusual. This ratchet had a clock on it that basically said the clock has gone off. The clock said that, you know, 18 months from now roughly, i.e., by May 2024, That conversion price will start increasing at 11%. So basically, if it's $57 a share in year 1, a year later it'll be, I'll just say 10%, $62 or $63, right? So it's annual. That price is going to go up. So to put this in simple math, if they came out at $57, I'd have to give them 48.4 extra shares. That's a guy who bought 100 shares. If you wait another year, I got to give them 69.7. If you wait 2 more years, I have to give them 82.8. So you have this timer going off that says, assuming the IPO valuation is constant, I need to give them more and more shares to make them whole. So I believe most people think that's why they're doing the IPO now, to get, get beyond this, because the clock's already been going off for 6 or 7 months. And I think that's what's going on there. Ray, what do you think?

I totally think, because when I look at their numbers, like you said, it's a good company. It's not a great company. They still have some challenges on negative free cash flow. So I would have probably waited 6 to 12 months unless there was something like this really motivating me to take it public.

Agree.

And these guys, look, I believe these guys are gamblers. I think they'll say, hey, why not raise money at the high valuation now? Worst case, we get dilution later and we would have had the dilution anyway. That's kind of the spirit I get when I read their financing history. And I don't think they're necessarily wrong. We talked about this earlier, but why do companies agree to these quote unquote dirty term sheets? Well, you get a better valuation in the short run that can give a vanity effect if you want it. You basically take a chance at future dilution, but you reduce short-term dilution. By the way, this extra dilution coming from this ratchet, Meritech estimates it to be around 4%. So it's not massive. If you look at the total shareholder base, it's around an extra 4% of shares get printed. To wrap this up, Ray, I know we're definitely at time. Things got a little bit weirder still. Because the company says it wants to use $300 million of the proceeds of roughly $500 million, so 60% of the proceeds, to go buy back their non-convertible preferred stock. So it's clear to me that they want to kind of scrape the hair off the company, right? Go public, we get rid of the ratchet, go buy back this non-convertible preferred stock which had dividends on it, right? So they're basically— the quote from somebody, I think it was TechCrunch, that unwinding expensive private capital investments is not what most companies say they will do with their IPO funds, but it is what these guys are choosing to do.

Yeah, well, that's interesting because it'd be nice if they could invest that into business to grow faster, expand their target addressable market, etc. But they are going to get rid of those evil term sheets of the past, which I think is actually good in my opinion.

Yeah, it's always better to put money in the balance sheet so they can invest, but, but I think it's also good to shave the hair off the cap table. And I think they're doing that, um, because if you want to be public, you don't want that hair on the company. So look, in the end, you can argue these guys, oh, they got pushed around by VCs with these dirty term sheets. But remember, they chose to take them. I'm positive they could have gone back to those VCs and said, if you gave us clean terms, what would the valuation be? And the VCs would have said a lot lower, and that would have locked in dilution now. So they didn't get pushed around. They entered into these transactions knowingly. Maybe they like vanity valuations, maybe they don't. I'd never heard much about the company before, so I don't know. If they liked vanity valuations, it's hard to believe you'd raise at $9.5 billion, right? You wouldn't go through to $10 billion, right? Odd place to stop. So I think they're basically gamblers who made side bets and they didn't pay off, and it's going to cost them an extra 4% dilution. But like I said, they would have had some of that dilution, maybe all of it anyway. So, and in the end, Ray, look, these, these guys are doing just fine. They each own about 7.5 million shares, so that's $400 million each. So, so, you know, if they got pushed around, you can go push me around later, right? And they each personally individually control about 34% of the stock because they have the I don't know what series they call it, but they have the super voting shares that founders sometimes have.

Yeah, it's— they call it Series B and it's 6x. So they wanted to make sure they could do some pushing around because they do have control of the voting shares.

They do indeed. Any other thoughts on this one, Ray?

No, other than I just am very excited to watch it because I'm so interested in how vertical SaaS performs, and I want to see how, how this 3rd IPO of the year performs.

Yeah, and I love this whole story around being a, you know, the thing I like about it most is a one-stop platform for a business type. Because software grew up as stovepipes, right? We grew up in, you know, sales systems, marketing systems, finance systems, planning systems, reconciliation systems, and all these stovepipes. And increasingly, especially for small businesses, people are just saying, here's everything you need to run a professional services business, or this is everything you need to run a trades business. And I think it's a much better value prop for the buyer.

Yeah, and I'll end it on 95% gross revenue retention says that that keeps their customers better than horizontal apps sometimes.

Oh yeah, I hadn't seen that. Wow, fantastic. Okay, well, thanks a lot, Ray.

Okay, bye-bye now. Thank you, everyone.

The Metrics Brothers AI, SaaS, and More is a production of The Metrics Brothers Growth and CAC and a member of the Benchmarkit Podcast Network. By accessing this podcast, you acknowledge that The Metrics Brothers make no warranty, guarantee, or representation as to the accuracy or sufficiency of the information provided or the humor content of the jokes told. Ray, information, opinions, and recommendations presented are, according to our spouses, probably wrong and provided for information purposes only. This podcast should not be considered professional, or for that matter, unprofessional advice. We disclaim any and all liability for any direct, indirect, indirect, misdirect, incidental, special, ordinary, consequential, inconsequential, or other damages arising out of any use of, or God help you, relies upon the information presented here. Ray Grothreich is based in New York City and available on X @rayreich. Dave Kellogg is based in Silicon Valley and available on X @kelblog. Schedectady, which is French for unspellable, is not our actual production location. Thanks for listening.