Decoding the SaaS IPO Landscape: The Metrics that Matter and the Market Realities of 2024 and Beyond
By Addison Anders, Vivian Guo | February 9, 2024
Following a year of essentially no software IPO activity, 2023 witnessed a welcome surge of optimism marked by the debut of industry leaders Klaviyo and Instacart. However, despite their premium financial profiles, both companies commanded forward revenue multiples below the 2021 average, prompting a closer examination into the evolving dynamics of the market.
Analyzing 115 software IPOs over the past decade, the latest study from ICONIQ Growth Analytics, Decoding the SaaS IPO Landscape: The Metrics that Matter and The Market Realities of 2024 and Beyond, identifies the impact of macroeconomic factors, changing investor preferences, and the evolving metrics shaping the success of companies seeking public offerings in the current environment.
As we transition into 2024, the SaaS landscape is experiencing a paradigm shift toward efficient growth, with profitability emerging as a crucial element for IPO success. This year’s study not only offers insights into the metrics steering public multiples but also provides strategic considerations for companies navigating the path to public offerings amid evolving market conditions.
Equity multiples are directly correlated with federal interest rates, and the public markets have seen a significant compression in values due to rising interest rates and macroeconomic volatility. With the tailwinds from COVID and the resulting zero interest rate policy and low cost of capital environment, we saw companies with relatively less efficient profiles go public from 2020-2021.
Since then, most companies that went public in 2021 have seen significant value deterioration, with almost 80% trading below their original issue price. To see sustained success in the public market, we believe companies looking to IPO in the coming years will require stronger financial and operating profiles than their COVID-era counterparts.
Optimism around the SaaS IPO market grew in 2023, with Klaviyo and Instacart completing public offerings. Scale, profitability, and YoY revenue growth positioned Klaviyo as a category leader prior to IPO. Robust disclosures highlighted a 14-month CAC payback period and a net retention rate of 119%, both contributing to investor excitement. Klaviyo sought limited dilutive impact in the IPO, with float representing ~7% of fully diluted market cap versus the usual 10-15%. However, despite its premium financial profile, ongoing stock performance has been muted since launch.
Instacart tells a similar story of a profitable company with strong bottom-line and efficiency metrics. Notably, Instacart drove demand with extensive investor education pre-launch, taking 70 meetings with investors prior to IPO, over double the ~30 meeting average in 2020/2021. However, despite a strong bottom-line profile and emphasis on investor education, CART is down ~15% since its IPO. Previously, it took longer to see deterioration in stock price versus offer, and 2023 is the only class of SaaS IPOs analyzed to see a negative 30-day return.
As companies scale and approach IPO, we believe it’s crucial to understand which factors are most correlated to valuation, what financial profile is required, and how these standards are changing. The metrics that the market values have shifted over time, from a growth-at-all-costs mindset in December 2020 to a shift toward profitable growth in December 2023.
Based on our analysis of 115 IPOs over the past 10 years, we found year-over-year growth, gross margin, FCF margin, Rule of 40, and NDR to be the five metrics most highly correlated with EV/NTM revenue (which can be a measure of IPO success) in the current environment. Rule of 40 is now the primary driver of valuation in the public markets today, with revenue growth and NDR tied for a close second, indicating sustainable and efficient growth is top of mind for investors. However, it’s also worth noting that from December 2020 to December 2023 the relative importance of profitability and gross margin increased significantly.
What does this mean for companies looking to go public in the current environment? To answer this question, we analyzed four archetypes of typical SaaS profiles: High Growth, High Efficiency, Vertical SaaS, and Lower Growth, based on the illustrative metrics below. We also included Klaviyo as a point of reference.
We looked at the correlation between EV/NTM revenue multiple and these five metrics in each year from 2018-2023 to determine what the IPO market valued most each year and how that has changed over time. Using a blended score weighted toward the metrics that are the most correlated to the current multiple in each year, we examined how each archetype’s illustrative forward multiple would change. Today, High Growth and High Efficiency companies are being valued most similarly to 2019, when YoY growth and Rule of 40 were the metrics most highly correlated to IPO success. However, Vertical SaaS companies are being valued most similarly to 2020, when the market valued growth over efficiency.
So what does this tell us? Rather than viewing 2023 as an anomalous year, we are perhaps seeing a return to historical norms with SaaS companies being valued most similarly to the 2019 class of IPOs. In fact, multiples today are right in line with the pre-2020 era.
That said, the metrics driving valuation are not the same as 2019. Since 2020, the market has increasingly valued efficiency, and placed less emphasis on YoY growth. Even so, it’s important to note that as of December 2023 revenue growth still had a larger impact on public multiples than efficiency metrics alone, implying that profitable growth is perhaps the new standard.
It is also important to consider IPO timing. This year, there is a limited window due to the market uncertainty that comes with the upcoming US presidential election. We expect IPO activity to start in the spring and wrap up by September, with the bulk of activity in the summer. However, while we believe activity will pick up relative to 2022-2023, there will be a slow return to pre-2020 pace and we expect only a small cohort of category leaders to go public this year.
The good news is, today’s market conditions may be the perfect time for late-stage companies to lay the groundwork for an IPO, so they are prepared when more favorable market conditions return. We believe it is crucial that companies take a step back and map out their objectives as they start to consider an initial public offering – are they seeking liquidity for employees? Sponsor monetization? Or would they like to be the first public company in their space? These considerations can help companies decide if they are ready to go public in today’s market and what method they should choose to do so. We also believe it is critical for companies to develop a rigorous beat-and-raise process one to two years before IPO, as any misses (across both top-line and bottom-line) post-IPO will not be taken lightly in the current environment. Klaviyo and Instacart are great examples of this in 2H2023.
The 2023 class of IPOs showed us that a premium financial and operating profile is required to go public in the coming years. Companies going public in 2023 were more profitable and larger scale than those that went public in 2021. The road to IPO has evolved as well, with anchor investors driving momentum in both 2023 offerings. Pre-roadshow investor education is becoming more important as the market gravitates toward alpha investing, and investors are seeking visibility into growth, profitability, and robust unit economics. We anticipate category leaders with differentiated tech and an efficient growth profile to be most attractive to investors in 2024. Most importantly, we believe that sustained and profitable growth is the key to IPO success in 2024 and beyond.
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