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Path to IPO

The Path to IPO: What does it take to go public in 2022?

Each year, the ICONIQ Growth Analytics team produces an in-depth analysis of historical SaaS IPO performance, with a focus on the most recent cohort of IPOs that went public in the previous year1. Below is a summary of some of our findings2. You can access the full study here.

The Path to IPO: What does it take to go public in 2022?

Each year, the ICONIQ Growth Analytics team produces an in-depth analysis of historical SaaS IPO performance, with a focus on the most recent cohort of IPOs that went public in the previous year1. Below is a summary of some of our findings2. You can access the full study here.

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https://www.iconiqcapital.com/growth/insights/the-path-to-ipo-what-does-it-take-to-go-public-in-2022

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For software companies, 2021 was a historic year in many ways. Pent-up demand from robust private markets and a frothy public market led to a record number of SaaS companies going public. At the same time, they were met with changing macroeconomic conditions that led to a dramatic contraction in the public tech equity markets.

Driven in part by faster-than-expected quantitative tightening by the Federal Reserve in response to heightened inflation risks along with the impending rise of interest rates, the BVP NASDAQ Emerging Cloud Index (which tracks the performance of emerging cloud public companies) is down 18% YoY as of 1/31/22, with some high growth software stocks trading ~40-50% off 52-week highs3.

Looking forward, we can reasonably expect continued market volatility as investors grapple with various economic indicators, inflationary concerns, a tight labor market, and shifting geopolitical dynamics.

However, as growth partners, we strongly believe in the fundamental value creation opportunity for “best in class” software companies to grow and generate exceptional returns over time, even through shifting and sometimes difficult market environments. Despite the recent pullback, some of the highest multiple software companies have continued to trade well above historical averages.

Defining IPO success

So what does a “best in class” software IPO look like? Our annual study dives into the detailed profile of both average and top performing software IPOs by analyzing the business performance of SaaS companies that went public between 2013 and year-end 2021 as reported in their 424B4s.

As outlined in our first post on IPO performance, we use three distinct metrics to measure an IPO’s “success”:

  1. Indication of success at IPO: A company’s forward revenue multiple (EV / NTM Revenue) at IPO.
  2. Indication of success post-IPO: The current forward revenue multiple (as of 1/31/22).
  3. Indication of value creation: The ratio of the change in stock price (from Day 1 close to 1/31/22) divided by the percent change in S&P over the same time period.

Methodologies for assessing IPO success have historically varied. However, we believe our approach is a somewhat holistic and objective way to assess a company’s performance beyond the traditional method of looking at a company’s first day “pop.”

Examining the top quartile companies across each of these metrics, a group of 21 companies rose to the top in this year’s analysis.

Driving Ongoing Performance

A variety of factors spanning scale, growth, retention, and profitability will drive initial IPO performance. (In this case, we looked at forward multiple at time of IPO.) However, revenue growth and net retention have historically been most closely correlated to IPO performance. When refreshing our analysis this year, one of the most interesting findings was that while revenue growth remained the leading indicator of IPO performance, profitability did become slightly more correlated to IPO performance. This was perhaps driven by volatile markets and the rising importance of business predictability to investors.

Looking at what differentiates top software performers from their peers, we find that they are not always larger than their peers at time of IPO, but they typically have stronger growth in the years leading up to IPO and are also able to maintain healthy growth trajectories post IPO. While software companies see a median growth rate of ~40% YoY prior to IPO, these top performers saw a median growth rate of ~73% with certain companies seeing as high as 138% YoY growth in the last twelve months prior to IPO.

Operational efficiency ranges widely across recent IPOs, but top performers typically also have a higher OpEx spend than peers, with total operating spend as a percentage of revenue ranging from 53% to 194%.

Lastly, at the time of IPO the majority of software companies are not profitable. In fact, only four top performers were profitable at time of IPO. However, within two fiscal years of IPO, half of the public software companies we analyzed expected to be free cash flow positive, indicating that a clear line of sight into profitability is still important.

Looking Ahead

So how is the most recent cohort of 2021 IPOs doing post public market debut? While valuations continued to increase and the growth and profitability of companies going public remained consistent with 2020, the average stock gains of 2021 IPOs were notably lower for both average and top performing companies. It is also important to note that there has been a degradation in the business performance of companies going public in recent years compared to historical SaaS IPOs, with median LTM revenue growth and Rule of 40 significantly lower than pre-2020 cohorts.

The most striking and heavily reported fact is that ~70% of companies that IPO’d in 2021 are now trading below their issue price (as of 1/31/22).

Given the current market conditions, it will be interesting to see where 2022 IPOs end up pricing.  As always and especially during these next few months where it will be hard to predict results based on past performance, we welcome any questions and discourse on these topics.

Notes and Sources:

  1. The universe of companies included in this study consists of certain major enterprise SaaS IPOs from ~2H2013-2021, including all software IPOs across all ICONIQ Growth portfolio including co-investments as of the time period indicated above. IPOs that have since been acquired are excluded from this report. For more information, please see full study.
  2. All statements included in this post and companion study contain opinions and/or estimates of ICONIQ and its personnel that constitute its and their best judgement as of the date of the materials.
  3. Data from Factset and NASDAQ as of 1/31/22.

Notes

Disclaimer:

Unless otherwise indicated, the views expressed in this presentation are those of ICONIQ Growth (“ICONIQ" or the “Firm"), are the result of proprietary research, may be subjective, and may not be relied upon in making an investment decision. Information used in this presentation was obtained from numerous sources. Certain of these companies are portfolio companies of ICONIQ Growth. ICONIQ Growth does not make any representations or warranties as to the accuracy of the information obtained from these sources. 

This presentation is for general information purposes only and does not constitute investment advice. This presentation must not be relied upon in connection with any investment decision. The information in this presentation is not intended to and does not constitute financial, accounting, tax, legal, investment, consulting or other professional advice or services.  Nothing in this presentation is or should be construed as an offer, invitation or solicitation to engage in any investment activity or transaction, including an offer to sell or a solicitation of an offer to buy any securities which should only be made pursuant to definitive offering documents and subscription agreements, including without limitation, any investment fund or investment product referenced herein. 

Any reproduction or distribution of this presentation in whole or in part, or the disclosure of any of its contents, without the prior consent of ICONIQ, is strictly unauthorized.

This presentation may contain forward-looking statements based on current plans, estimates and projections. The recipient of this presentation ("you") are cautioned that a number of important factors could cause actual results or outcomes to differ materially from those expressed in, or implied by, the forward-looking statements. The numbers, figures and case studies included in this presentation have been included for purposes of illustration only, and no assurance can be given that the actual results of ICONIQ or any of its partners and affiliates will correspond with the results contemplated in the presentation. No information is contained herein with respect to conflicts of interest, which may be significant. The portfolio companies and other parties mentioned herein may reflect a selective list of the prior investments made by ICONIQ.

Certain of the economic and market information contained herein may have been obtained from published sources and/or prepared by other parties. While such sources are believed to be reliable, none of ICONIQ or any of its affiliates and partners, employees and representatives assume any responsibility for the accuracy of such information.

All of the information in the presentation is presented as of the date made available to you (except as otherwise specified), and is subject to change without notice, and may not be current or may have changed (possibly materially) between the date made available to you and the date actually received or reviewed by you. ICONIQ assumes no obligation to update or otherwise revise any information, projections, forecasts or estimates contained in the presentation, including any revisions to reflect changes in economic or market conditions or other circumstances arising after the date the items were made available to you or to reflect the occurrence of unanticipated events. Numbers or amounts herein may increase or decrease as a result of currency fluctuations.

Disclaimer

The views expressed in this presentation are those of ICONIQ Growth ("ICONIQ" or the "firm"), are the result of proprietary research, may be subjective, and may not be relied upon in making an investment decision.  This presentation is for general information purposes only and does not constitute investment advice. This presentation must not be relied upon in connection with any investment decision. The information in this presentation is not intended to and does not constitute financial, accounting, tax, legal, investment, consulting or other professional advice or services. Nothing in this presentation is or should be construed as an offer, invitation or solicitation to engage in any investment activity or transaction, including an offer to sell or a solicitation of an offer to buy any securities which should only be made pursuant to definitive offering documents and subscription agreements, including without limitation, any investment fund or investment product referenced herein.  Any reproduction or distribution of this presentation in whole or in part, or the disclosure of any of its contents, without the prior consent of ICONIQ, is strictly unauthorized. This presentation may contain forward-looking statements based on current plans, estimates and projections. The recipient of this presentation ("you") are cautioned that a number of important factors could cause actual results or outcomes to differ materially from those expressed in, or implied by, the forward-looking statements. The numbers, figures and case studies included in this presentation have been included for purposes of illustration only, and no assurance can be given that the actual results of ICONIQ or any of its partners and affiliates will correspond with the results contemplated in the presentation. No information is contained herein with respect to conflicts of interest, which may be significant. The portfolio companies and other parties mentioned herein may reflect a selective list of the prior investments made by ICONIQ. Certain of the economic and market information contained herein may have been obtained from published sources and/or prepared by other parties. While such sources are believed to be reliable, none of ICONIQ or any of its affiliates and partners, employees and representatives assume any responsibility for the accuracy of such information. All of the information in the presentation is presented as of the date made available to you (except as otherwise specified), and is subject to change without notice, and may not be current or may have changed (possibly materially) between the date made available to you and the date actually received or reviewed by you. ICONIQ assumes no obligation to update or otherwise revise any information, projections, forecasts or estimates contained in the presentation, including any revisions to reflect changes in economic or market conditions or other circumstances arising after the date the items were made available to you or to reflect the occurrence of unanticipated events. For avoidance of doubt, ICONIQ is not acting as an adviser or fiduciary in any respect in connection with providing this presentation and no relationship shall arise between you and ICONIQ as a result of this presentation being made available to you. ICONIQ is a diversified financial services firm and has direct client relationships with persons that may become limited partners of ICONIQ funds. Notwithstanding that a person may be referred to herein as a "client" of the firm, no limited partner of any fund will, in its capacity as such, be a client of ICONIQ. There can be no assurance that the investments made by any ICONIQ fund will be profitable or will equal the performance of prior investments made by persons described in this presentation. Any information in this presentation is directed at, and intended for, only persons who are experienced institutional or professional investors (“professional investors”) as defined by applicable law and regulation. Any person that is not a professional investor is not an intended recipient of this presentation and the matters discussed herein.

For avoidance of doubt, ICONIQ is not acting as an adviser or fiduciary in any respect in connection with providing this presentation and no relationship shall arise between you and ICONIQ as a result of this presentation being made available to you.

ICONIQ is a diversified financial services firm and has direct client relationships with persons that may become limited partners of ICONIQ funds. Notwithstanding that a person may be referred to herein as a "client" of the firm, no limited partner of any fund will, in its capacity as such, be a client of ICONIQ. There can be no assurance that the investments made by any ICONIQ fund will be profitable or will equal the performance of prior investments made by persons described in this presentation.

Any information in this presentation is directed at, and intended for, only persons who are experienced institutional or professional investors (“professional investors”) as defined by applicable law and regulation. Any person that is not a professional investor is not an intended recipient of this presentation and the matters discussed herein.

Copyright © 2024 ICONIQ Capital, LLC. All rights reserved.

Disclaimer

The views expressed in this presentation are those of ICONIQ Growth ("ICONIQ" or the "firm"), are the result of proprietary research, may be subjective, and may not be relied upon in making an investment decision.  This presentation is for general information purposes only and does not constitute investment advice. This presentation must not be relied upon in connection with any investment decision. The information in this presentation is not intended to and does not constitute financial, accounting, tax, legal, investment, consulting or other professional advice or services. Nothing in this presentation is or should be construed as an offer, invitation or solicitation to engage in any investment activity or transaction, including an offer to sell or a solicitation of an offer to buy any securities which should only be made pursuant to definitive offering documents and subscription agreements, including without limitation, any investment fund or investment product referenced herein.  Any reproduction or distribution of this presentation in whole or in part, or the disclosure of any of its contents, without the prior consent of ICONIQ, is strictly unauthorized. This presentation may contain forward-looking statements based on current plans, estimates and projections. The recipient of this presentation ("you") are cautioned that a number of important factors could cause actual results or outcomes to differ materially from those expressed in, or implied by, the forward-looking statements. The numbers, figures and case studies included in this presentation have been included for purposes of illustration only, and no assurance can be given that the actual results of ICONIQ or any of its partners and affiliates will correspond with the results contemplated in the presentation. No information is contained herein with respect to conflicts of interest, which may be significant. The portfolio companies and other parties mentioned herein may reflect a selective list of the prior investments made by ICONIQ. Certain of the economic and market information contained herein may have been obtained from published sources and/or prepared by other parties. While such sources are believed to be reliable, none of ICONIQ or any of its affiliates and partners, employees and representatives assume any responsibility for the accuracy of such information. All of the information in the presentation is presented as of the date made available to you (except as otherwise specified), and is subject to change without notice, and may not be current or may have changed (possibly materially) between the date made available to you and the date actually received or reviewed by you. ICONIQ assumes no obligation to update or otherwise revise any information, projections, forecasts or estimates contained in the presentation, including any revisions to reflect changes in economic or market conditions or other circumstances arising after the date the items were made available to you or to reflect the occurrence of unanticipated events. For avoidance of doubt, ICONIQ is not acting as an adviser or fiduciary in any respect in connection with providing this presentation and no relationship shall arise between you and ICONIQ as a result of this presentation being made available to you. ICONIQ is a diversified financial services firm and has direct client relationships with persons that may become limited partners of ICONIQ funds. Notwithstanding that a person may be referred to herein as a "client" of the firm, no limited partner of any fund will, in its capacity as such, be a client of ICONIQ. There can be no assurance that the investments made by any ICONIQ fund will be profitable or will equal the performance of prior investments made by persons described in this presentation. Any information in this presentation is directed at, and intended for, only persons who are experienced institutional or professional investors (“professional investors”) as defined by applicable law and regulation. Any person that is not a professional investor is not an intended recipient of this presentation and the matters discussed herein.

For avoidance of doubt, ICONIQ is not acting as an adviser or fiduciary in any respect in connection with providing this presentation and no relationship shall arise between you and ICONIQ as a result of this presentation being made available to you.

ICONIQ is a diversified financial services firm and has direct client relationships with persons that may become limited partners of ICONIQ funds. Notwithstanding that a person may be referred to herein as a "client" of the firm, no limited partner of any fund will, in its capacity as such, be a client of ICONIQ. There can be no assurance that the investments made by any ICONIQ fund will be profitable or will equal the performance of prior investments made by persons described in this presentation.

Any information in this presentation is directed at, and intended for, only persons who are experienced institutional or professional investors (“professional investors”) as defined by applicable law and regulation. Any person that is not a professional investor is not an intended recipient of this presentation and the matters discussed herein.

Copyright © 2024 ICONIQ Capital, LLC. All rights reserved.

The ICONIQ Growth website does not present information relating to ICONIQ Capital, its investment funds, or its advisory business and should not be consulted for any advisory purposes. The ICONIQ Growth content is intended for the use of company founders and executives.