Building Enduring Public Companies: An ICONIQ Ideas conversation with Mike Scarpelli

Vivian Guo | March 10, 2021

Last September, Snowflake became the biggest software IPO in history. That day was a highlight in a tumultuous year for the financial markets. Annually since the second half of 2013, the ICONIQ Growth team has run a comprehensive study across enterprise software IPOs to assess historical and current performance of publicly traded software companies. Never before have there been such nuanced questions around the performance of public companies than in 2020, when we saw the impact of COVID on private and public markets alike, as well as a meaningful increase in the number of SPACs and direct listings.

To gain insight on how to build enduring public companies in this environment, ICONIQ Growth hosted an ICONIQ Ideas conversation on February 25, 2021 with Snowflake’s CFO, Mike Scarpelli. While the company’s success is built upon an immensely powerful product, their path to the public markets was forged by a leadership team relentlessly dedicated to creating the Data Cloud. Mike was instrumental in creating and executing the vision and strategy that fueled the company’s rapid growth to a fully diluted market cap approaching $100 billion. This wasn’t Mike’s first IPO rodeo though. He is one of the most accomplished CFOs in history, previously taking ServiceNow through an IPO to become one of the largest software companies in the world and, before that, with Data Domain, another generational and defining company.

Below are some highlights from our conversation with Mike, coupled with several of the data-driven findings from our most recent IPO analysis:

1. Perhaps the most important factor for public readiness is having the ability to forecast your business.

While having a differentiated product with product-market fit, strong growth and customer retention are all critical to the durability of a business’s strength and performance, Mike believes the most important factor for public readiness is the ability to consistently and accurately forecast your business on a quarterly and annual basis. “The IPO is just a point in time and most growth will come post-IPO,” he says. “The street is not forgiving when you miss your numbers, so it’s important you have confidence in your [ability] to guide your business. In the case of Snowflake, before we went public we had to get comfortable with our ability to forecast our business on a quarterly and annual basis from a revenue standpoint.”

In our most recent study, ICONIQ Analytics also examined the importance of forecasting. A company’s ability to “beat and raise” revenue estimates each quarter post-IPO is strongly correlated to public market performance, signaling visibility into future performance, strong growth prospects, and an internal financial and operational rigor.

Based on our analysis, top performing public companies[1] have an average beat of 9.6% each quarter against top-line consensus and a 6.7% beat against management guidance in their first 4 years as a public company. From a process standpoint, we typically see companies start “dress rehearsing” these forecasting best practices about 1 to 2 years before IPO in order to develop the required reporting rigor and accountability required of public companies.

2. While growth has arguably carried more weight in the public markets than profitability in recent years, having a clear path to profitability remains paramount.

According to Mike, “Investors are focused on growth but they also want to know you have the ability to drop money to the bottom line. So the first thing we really focused on at Snowflake was top-line growth, but making sure it was efficient in terms of the contribution margin. We needed to show investors that we do have the ability to control our costs and increase our gross margins.”

This is a key point reflected in our analysis of historical SaaS IPOs. Recent SaaS IPOs do indicate a continued emphasis on growth over profitability, with IPO multiples correlating most highly with factors related to Rule of 40 (primarily driven by growth), revenue growth, and net retention.

However, while FCF margin is less critical leading up to an IPO, strong companies are generally able to communicate a clear path to profitability both qualitatively and via their metrics. In our analysis of the last 8 years of SaaS IPOs, 50% of top quartile companies broke even within 2 years post-IPO.

3. There has been a notable increase in alternative routes to the public market in recent years with the rise of direct listings and SPACs. However, the traditional IPO still has many benefits, including some that may be less externally evident.

In addition to a rise in SPACs (special purpose acquisition companies), 2020 also saw an increase in the number of direct listings, with Slack, Asana, and Palantir choosing to pursue direct listings. However, the number of enterprise companies choosing to go public via these routes remain very small.

For Mike, “the IPO was such a branding event for Snowflake that [he] would never replace that IPO with a direct listing or SPAC.” Even in a COVID-19 world, compared to direct listings and SPACs, Snowflake saw a significant elevation in brand recognition from its virtual IPO, allowing its salespeople to open doors with the largest names across the world and also facilitate stronger recruiting.

Rather than feeling like they left money on the table, Mike believes the 1st day “pops” we often see among highly anticipated IPOs can be an important way to boost employee morale. Through the traditional IPO process, Mike argues that Snowflake was also able to strategically pick investors who they knew “would also be aftermarket buyers in the stock and buyers when the various lock-ups were expiring.”

4. Regarding metrics, there is always a balance between sharing your strengths and setting a precedent you have to maintain down the road. However, strong companies generally err on the side of sharing more, especially around net revenue and customer metrics which help investors better understand business fundamentals.

Mike is a big believer in deep transparency with investors: “The metrics you disclose should be the same metrics you talk about internally,” he says. “Once a year, I think about the metrics I’m showing. If I remove a metric, I always replace it with something else. And I explain why we’re disclosing one and not disclosing another.” Customer metrics — such as number of customers, customer size, and cohort performance — remain important for disclosures, particularly given the insight they can provide into the predictability and strength of a company’s ongoing growth trajectory.

Based on our analysis of 76 software IPOs, 95% of companies disclosed their number of customers and 83% disclosed a dollar-based net retention figure at the time of IPO. The majority of these companies also continued ongoing disclosure of those metrics in 10-Ks and 10-Qs. In 2020, the number of companies disclosing net retention increased to 90% of 2020 enterprise SaaS IPOs.

Numbers included in this analysis are based on publicly available data that we independently collected and aggregated from 76 enterprise SaaS S-1s and 424B4 filings. The aim of this study was to answer key questions related to drivers of performance, valuation & trading multiples, IPO structure & banker selection and disclosure.

The full study is available here. Please reach out to a member of the ICONIQ team for a full, high-resolution version.

Notes:

[1] We have defined “Top Performers” as enterprise SaaS IPOs in the last 8 years with top quartile results across at least 2 of these 3 key dimensions:

  1. Forward Multiple at IPO (based on NTM revenue; IPO multiples reflect basic shared outstanding for market cap)

  2. Forward Multiple as of 12/30/20

  3. Value Creation for Shareholders (ratio of change in stock price since Day 1 close vs market)

[2] Trademarks are the property of their respective owners. None of the companies illustrated have endorsed or recommend the services of ICONIQ