The Real Data on What it Takes to Go Big and Eventually IPO with Meritech Capital

To get public, you have to have it all. You need a great story, team growth and efficiency, end market predictability and a great business reason to do it. It's very hard work. It takes at least a year before you even say you want to go ipo, if you can, to do it. It's an inordinate amount of work and only 20 SaaS companies per year can actually make it public. We don't think this number is going to go higher than this anytime soon. And so you need to ask yourself, why do public market investors have to own my stock? There's a hundred plus other great SaaS companies that are already public. You need to have a compelling story as to why they're going to buy your stock over someone else's. Good to see everyone today. Thank you so much for being here. I'm Alex Clayton, this is my partner Kathy Choith and we're going to talk to you about the road to ipo. The Road to IPO by Maritech. We are a late stage venture and growth firm. We've been around for 25 years and have had about 60 IPOs in history. We also do a lot of content around the public markets and wanted to use this time to walk through that today. So to start the road to IPO, a lot of software SaaS companies are asking their board and themselves the question, when can I IPO and how big do I need to be? The following presentation puts the size, performance, qualitative factors and post IPO performance into context and what it means for the future. Today we're going to address a few questions. What matters both qualitatively and Quantitatively, how recent SaaS IPO metrics have trended over time? What does it take today? And how do you maintain success post ipo? Which is just as important as getting there. Here's again what we'll be walking you through today. We'll start with section two, which are the qualitative factors to go public. So what are those going IPO is a well trodden path. I'm sure many people here, many of the companies here that have been at Saster in the past have gone public. It's a very well trodden road. There's been over 200 of them since 2012. We put the logos on the screen. There are so many that you can't even see them all. This is a something that's happened before and again a very well trodden road and we're going to tell you more about that today. And apart from the ZIRP timeframe, zero interest rate policy. There's only been about 20 of them for a year. There aren't 100 SAS IPOs a year. And if you look at this, you can see that the number of them has actually while in 2021 it grew dramatically, it's only been about 20 per year. And the key considerations you need a clear story. Can you get your grandmother excited about your IPO? That is actually a serious question that CEOs and their boards need to ask. Are you a market leader? Can you become a multi product platform and are there proof points to support your vision? You also need to be growing quickly. You need to have some reasonable scale and strong efficiency. Is your growth rate durable? What's the path to profitability? Do you have favorable unit economics and can you sustain them as you get bigger? These are all very important questions. You also need operational excellence. You need to have excellent offense, which is things like product and engineering, sales, marketing, comm success and defense, strategic finance, FP and a compliance, legal, people, all of those things. You also need to be predictable. Can you consistently beat and raise every quarter you're going to be telling the street about your results. You've got to beat and raise on both the top and bottom lines. Roughly about 80% of public SaaS companies beat wall street guidance on a quarterly basis, not on an annual basis, but four times a year. That is not easy. You also need a valid business reason to go public. This can include things like capital to support growth M and a validation for your enterprise accounts. And IPO in many ways is a coming out party marketing for customers, hiring and also liquidity for shareholders, investors and employees. So those were some of the qualitative factors. Now we're going to walk you through the metrics that matter for an IPO over time. Thank you, Kathy.

Thanks, Alex. So at Maritech we track core metrics for most public SaaS companies. And so we'll take a look today at some of those historical metrics at IPO for companies that public between 2009 through today. First we see that on average it takes companies about 10 years from founding to IPO. Here we have the average years to IPO hovering around that 10 year mark over this 15 year period. Now the road to IPO may seem quite long, but it's a process that allows companies to mature and build scale so they're successful many years beyond the ipo. And one of the key changes that we've seen is the scale of the business at IPO in terms of top line. Here we have the average ARR scale of companies at IPO quarter, and you'll see the tremendous increase from 2009, 2010, where companies are going public between 50 to 100 million of ARR. And in today's markets more recently, companies are in well over 300, 400 and 500 million of arrival. And we expect this trend to continue slowly up and to the right. Next, we'll take a look at ARR growth year over year. And as ARR scale has risen, the ARR year over year growth has remained around this 40 to 60% year over year range over the same period of time, with the exception of 2024. But we expect that this trend will come back up to the median slash average line in the coming years as well. Next we have net retention, which is one of the key metrics that we tracked for reported net retention. And this is a critical metric for SaaS companies as it tells you how well they're able to retain and expand their customer base, their existing customer base over time. And here we'll see that the average net retention has gone up slightly, but has remained around this 110 to 120% range, which is quite an impressive number. So as companies scale, we also see that cash burn tends to increase. Larger companies tend to require a bit more capital to fuel their growth. And so it's not uncommon to see companies burning hundreds of millions of dollars before deciding to go public. And now maintaining this burn efficiently is critical, especially as companies begin to approach the IPO stage. Now, a little bit on profitability, we see that free cash flow is becoming more important in this postserv era. Here we have the average last 12 months Free cash flow margins for companies at IPO quarter. And you'll see that after this middle section where free cash flow margins are in the negatives, there's an inflection point in the last two years that went into the positives. Hence, we see that investors are increasingly looking for companies that can maintain both strong growth but also start generating cash flow or at least see a path to it. Next we have the average rule of 40, which is defined as the error growth year over year plus last 12 months free cash flow margin at IPO quarter. And this is also a pretty important metric for SaaS companies. Companies need to be able to balance that growth and also free cash flow margin or free cash flow generation. And here you'll see that this metric has not fallen below 30% on average over the past 15 years. Next, we'll spend a bit of time talking about valuations and multiples at IPO pricing. Here you see that the average market cap at IPO has also risen dramatically over the past 15 years. In 2009 and early 2010s, companies were going public at low hundreds of millions of market cap value. And in today's markets, companies are well over in the billions. And we expect this trend to continue. Now as we've seen er, scale increase and market caps increase at ipo, we see that the multiples are still in line with historical averages. And so here we have the average ARR multiple at IPO and you'll see that companies are trading between this 7 times to 1011 times range, with the exception of 2020 and 2021. And this is also important to note because irrespective of what private markets are valuing you at today, public markets are still likely to value in this 7 to 11 times range. Great. So we'll take a look at a handful of companies of software companies that IPO'd in this postd era last year and this year. And we won't go through every single number on the page, but we'll start with Palladio. Klaviyo is a leading market automation company and they went public in September of last year with a market cap of $7.6 billion. There are around 700 million of ARR and are trading today in a 10 times ARR multiple. And one thing that's unique about Klaviyo is that they actually only burned $16 million before going public. Let's compare that with Rubrik. This is a data management and security software platform, went public enabled with a market cap of $5.6 billion. There are around 800 million of ARR and are now trading at 7 times error multiple. And you'll notice that difference in cash burn where Rubrik earned well over $700 million before going public. Lastly, we have OneStream, a financial operations software platform that went public two months ago at a market cap of $4.6 billion. There are around 500 million of ARR and are now trading at 11 times. And so even across these three, we see quite a variety in financial profile in terms of error size, growth and profitability margins. But we see that they're all trading in the 7 to 11 times range that we just talked about.

Thank you, Kathy. We walked you through a bunch of metrics of where you need to be, where things have trended in the past. What does it take today? We used our best judgment to inform you on where we think companies will be in the future. We Took a look at all 2018/IPOs. There were many, dozens of them. Looked at the medians and the top quartile. There are a lot of numbers on this slide. We're not going to go through all of them. But a top four tile company since 2018 was over 400 million of ARR growing at almost 60% worth about 7 and a half billion and as you can see had very strong metrics and still took about 10 years for them to get there. So what do we think you need to be at today and beyond this is what we believe today. We think that you need to be at least 400 million of arrows. You have to be growing at least 30% a year. You're probably going to be worth 3 to 5 billion dollars and trade anywhere from that 8 to 12x range. You need to have strong SaaS gross margins. You don't need to be making money. Companies can be unprofitable and can be burning. You don't need to be free cash flow positive, but you need a path to get there. And the street has to believe you also need to have strong net dollar retention and of course burn as little money as possible. Even though as Kathy showed you, it's been, it's over the past few years it's been hundreds of millions of dollars to at the IPO for most of these companies. What really matters to get public ARR at IPO has increased while time from founding to IPO has remained steady at around 10 years. ARR growth has slowed recently as free cash flow has come into has come into view as interest rates have risen. You need some scale like we said. We think that's probably at least 400 million in ARR. Otherwise you need extraordinarily good unit economics or high revenue growth and you should not expect to be there. You do not need to be free cash flow positive at ipo, but you need a path for it. You've got to be a rule of 40 company though at least. And multiples are now at historical norms we're talking about ARR multiples. No matter how great you are, no matter how great your business is, it's hard to trade at more than 10 times ARR. There aren't many companies that do that in the public market. But that does mean you're worth billions of dollars. If you reach these ARR scales, you have to be great and stand above the crowd. The market can only absorb around 20 IPOs a year. And so your company has to be special enough to make it in those 20. What matters for success after an IPO. I will turn it back over to Kathy to walk you through a few things.

So now that you're public, what actually matters after the ipo? Interestingly, we found that the absolute revenue size is not as important as you might think. In fact, the key driver for lasting success is long term durable revenue growth. It's about sustaining that growth over the long period and not just about how fast you're growing. So let's explore what we mean by this. Here we have a regression that charts AR multiples today versus the implied ARR scale of the most recently reported quarter of 139 different software companies. And I want to draw your attention to the R squared value of this regression. And by the way, R squared is a measurement of how strongly these two variables on the two axes are correlated on a scale of 0 to 1. And so we see here that the R Squared value is 0.09, which is quite low. So there's essentially no correlation between valuation multiples in today's public markets and the size of the company. Next we'll look at two different regressions that also demonstrate how durable growth and not fast. Fast growth is a key ingredient to market appreciation. On the left here we see a regression that charts the share price appreciation from IPO to today versus how much revenue has increased in dollar amounts from IPO to today. And you'll see here that the RX word value is 0.74, which is quite high and implying a strong correlation between how much the share price increases to how much the revenue has increased. Now let's contrast this to the right side. Now this charts the same Y axis but but on the x axis you'll see revenue growth compounding annually. And so the R squared here you can see it's much more scattered is 0.03. And so from this we can take away that investors are rewarding companies that can maintain steady growth over a long period of time and not just companies that are growing really quickly year over year. How do you grow durably? HubSpot is one of the great examples of a company that utilizes multi product approach to enable creating significant market appreciation. Here we'll see a simple ARR Bridge for HubSpot today. On the left side we have in the green bars ARR from HubSpot's main product, the marketing hub, which was the only product to exist at IPO and was around 100 million of ARR in 2014. In the middle section you'll see red bars that show incremental ARR that HubSpot has added from launching new products over the past decade since IPO. Now today HubSpot is well over 2.5 billion in ARR company that IPO'd under $900 million of market cap value is now worth well over $26 billion today. So as you can see, HubSpot is a great case study for a company to utilize this multi product approach in order to increase their net retention over time. And they have added essentially $11 billion of additional market cap value that wouldn't exist if it weren't for these new products.

Awesome. Thank you Kathy. She talked a lot about how the actual growth rate in the public markets isn't related to your returns. It's about growing durably over time. HubSpot's a great example of the different ways in which you can grow durably, including adding more products to your suite, selling more. You also increase net dollar retention and their valuation multiple has also come up significantly over time. I'm going to walk you through a couple examples here of durable growth. We have CrowdStrike, which as many people know is one of the leading endpoint security companies. They've been in the news, but they've done exceptionally well as a public company. We went and plotted their ending ARR from 2019 to today. When they went public they were about 500 million of ARR growing at almost 100% year over year. Very impressive high growth business. They've continued on a very high growth rate through 2024 and have been growing at a 50%, almost a 50% ARR growth CAGR since going public in 2019 and they're approaching $4 billion now. We have an example on the other side of the spectrum, a company called SPS Commerce, which is in the supply chain space. This is also a very unique and impressive company. And we use this durable grower example because they've been doing it in a much slower way. And while CrowdStrike was growing at 100% multiple years in a row, up to 500 million of ARR. SPS Commerce went public in 2010 at around 50 million of ARR. And for 15 years they've grown their ARR at a 20% CAGR. This is the power of compounding. They never actually grew faster than 35% in a single year while CrowdStrike was growing at 100% multiple years in a row. So we wanted to show these examples because durable growth, and not just high growth is most important for long term returns in the public markets. So we put CrowdStrike and SPS Commerce next to each other and plotted and showed you a table with some of their metrics. CrowdStrike's been public for six years. SPS for 15 years. Implied error to IPO. CrowdStrike was much bigger. When they went public. SPS Commerce was only 50 million. Again as Kathy showed 15 years ago, companies were going public at smaller scale. CrowdStrike is much bigger than SPS today at almost 4 billion. SBS is about 600 million of ARR and you can see they've been growing in very different revenue CAGRs 50% to about 20%. And look at the bottom in red. This is the share price multiple of invested capital since IPO. CrowdStrike has obviously seen huge returns. They're up 8x since 2019. Look at SPS Commerce. They're up 17x from when they went public in 2010. This is a great example and the power of compounding and the power of durable growth. And that is the key ingredient to share price returns in the public markets. Here's another very important fact pattern that public companies SaaS companies need to implore predictability. The classic beat and raise SaaS. Public SaaS companies typically beat consensus estimates and raise guidance for the subsequent quarter which signals strong business momentum and predictability. We went back and looked at results versus consensus and irrespective of all market conditions, 80% of the time SaaS companies are beating current quarter guidance and raising the subsequent quarter guidance. So if you want to be a public company, you need a predictable business so that you can show the street that you can continually beat your numbers. So what are some key takeaways after you go public? You've probably grown to a business that's multi hundred millions of error. You're public now and what really matters your absolute scale at least today is irrelevant for valuation multiple. Cathie showed you there is no relationship between between actual size of revenue or ARR and your valuation multiple durable long term revenue growth matters. It's about time in market and not market timing. You also can't grow durably without strong unit economics. Successful multi product strategies as we showed you with HubSpot can grow your TAM and increase efficiency over time. And the absolute pace of revenue growth or revenue cagrade compound annual growth rate. Since IPO has little to no relationship to share price returns. It's all about growth durability and you have to beat raise your business must be predictable. You have to tell investors that you're not only going to say, you're not only going to do what you say you do. You have to do better than that consistently over time. We walked you through a lot of graphs, a lot of numbers today and want to leave you with some key takeaways. What really matters. Here's the final word from us here at Maritech. To get public, you have to have it all. You need a great story, team growth and efficiency, end market predictability and a great business reason to do it. It's very hard work. It takes at least a year before you even say you want to go IPO, if you can, to do it. It's an inordinate amount of work and only 20 SaaS companies per year can actually make it public. We don't think this number is going to go higher than this anytime soon. And so you need to ask yourself, why do public market investors have to own my stock? There's a hundred plus other great SaaS companies that are already public. You need to have a compelling story as to why they're going to buy your stock over someone else's. We also think you need to probably be at least 400 million of ARR. Otherwise you've got to be a super fast grower, probably at least 50 to 60% a year or highly profitable. And you have to be at least a rule of 40 company which is the sum of your revenue growth and free cash flow margin. And regardless of private market valuation, at least in today's interest rate environment, companies cannot expect to be worth more than 10 times arrangement. And the down round IPO is actually irrelevant over the long term. You've seen companies like SPS Commerce that are up almost 20x from when they went public because they grew durably over time. Back to my next point. Need to grow durably and predictably and beat your revenue guidance. And lastly, if you have it all, you can see massive returns in the public markets. We talked to you about CrowdStrike which is up over 8x since they went public. SPS Commerce is up almost 20x since they went public. Salesforce is up 100x since they went public in their IPO 20 years ago. So if you can do all these things and grow durably, you can see incredible returns as a public company. And lastly maritech, we are a late stage venture and growth firm. We've had over 60 IPOs. We spent a lot of time thinking about software metrics and here on our website we have the largest free repository of public software information if you're interested in checking it out. Thank you so much.