What stood out in 2021?
2021 saw the largest number of consumer companies go public to date as companies took advantage of pandemic-fueled tailwinds and historically high valuations. The total amount raised across the consumer landscape was $26B, 19% more than in 2020, another banner year for IPOs.
The technology market reached its highest level in early November 2021, but fell dramatically by the end of the year as many investors rotated away from growth on expectations of rising interest rates. By the end of February 2022, 88% of all 2021 public listings were trading below their issue price. While this price degradation is largely a reflection of the market dynamics, almost half of companies going public in 2021 revised opening prices higher than filing ranges. Even so, investors were responsible for a median 23% day-1 pop in stock price for these listings, leading to valuations almost 20% higher than the year before.
This report differs slightly from our SaaS report in that we have not included a ‘Top Performers’ analysis given that many recent IPOs have not been given enough time to stabilize in current market conditions, and this report is instead focused on performance and key metrics leading up to IPO.
What metrics are most correlated with gross profit multiples?
Using gross profit multiples as one way of benchmarking IPOs across business models, industries and year with widely different gross margins, the factors most correlated to this metric can be classified broadly as 1) user growth and product stickiness; 2) strong unit economics; and 3) a clear path to profitability.
A company’s free cash flow expectations are oftentimes more impactful than their actual bottom-line profitability at IPO; only 50% of companies are profitable at IPO, but 70% predict profitability within 2-years of entering the public market.
What do we expect to see moving forward?
Q1 of 2022 marks the slowest quarter for total IPO activity in 6 years, with only 5% of the funding we saw in Q1 of 2021. The uncertainty in the market, fueled by the reversal of the easy monetary policy we’ve seen throughout the last 2 years as well as macroeconomic conflicts abroad continues to weigh on public markets. This can be seen through the delay of highly anticipated IPOs like C2FO, Justworks, Chobani, and others.
While we expect this public listing activity to continue to slow compared to prior years, as growth investors, we strongly believe in the fundamental value creation opportunity for later-stage consumer facing companies with characteristics outlined above as they enter the public markets, even in current market dynamics.