Public Markets Continue to Reward Growth, Above All
Christine Edmonds | November 21, 2019
Results of an in-depth study of all software IPOs since July 2013
Select insights from our recent comprehensive study of enterprise software IPOs between July 2013 and Oct 2019.
ICONIQ Capital recently performed an in-depth study of all software IPOs since July 2013 in an attempt to take a comprehensive — and more importantly — objective look at both historical and current performance of publicly-traded software companies.
This analysis was based on publicly available data that we independently collected and aggregated from 56 S-1s and 424B4 filings¹. The aim of this study was to answer key questions related to drivers of performance, valuation & trading multiples, IPO structure & banker selection and disclosure. We are excited to share select insights below.
Post-IPO performance has been exceptionally strong for many software companies over the past ~6 years². While a variety of factors, including industry sentiment and overall equity market performance dictate the success of an IPO, the market has historically rewarded companies with strong growth and healthy margins⁴ .
Multiples for software companies are the highest they have been in nearly 20 years⁵ (with an average EV/FY+1 revenue multiple of 12.7x in 2019 to date), while, on average, the overall market has been relatively stable from a valuation standpoint over the past ~3 years⁶ (with an average market multiple for S&P by year consistently falling between 2.3x and 2.4x FY+1 revenue).
Despite this, we are also continuing to see these same companies further increasing their value, with a handful experiencing multiple expansion in public markets — suggesting that the potential for sustained growth and scale in technology at both company and market levels may have exceeded previous expectations⁷. Not surprisingly, investors have taken notice.
In order to distill drivers of IPO performance, the first question we had to tackle was how exactly to assess the ‘success’ of an IPO — by nature a subjective, and somewhat convoluted measure.
Prior studies have often pegged success to post-pricing “pop” — whether day 1 close or 30-day post-offering. But assuming that a price increase within a somewhat arbitrary “just right” range is an absolute sign of success would be a mistake — and perhaps, a misunderstanding of both the process and incentives at play during pricing, all further muddied by broader market performance, liquidity, sentiment and timing. In fact, the noise inherent in this is significant enough to be prompting some to think about direct listings.
Given this, we felt that a potentially more objective way of measuring success is to consider a company’s value, as determined by the market.
In the private markets, this value generally reflects investors’ views of its fundamentals and growth prospects. Recent IPO challenges underscore the importance of business model sustainability, and more specifically, strong unit economics — growth and capital needs aside.
For these reasons, we chose to look at valuation through three distinct but related metrics:
But, given almost all decisions in this environment are oriented to some degree around forward looking multiples — it is a helpful lens through which we can begin to sift through the last ~6 years of software IPOs in order to better understand how IPO performance correlates to business performance.
Through this framework, we isolated 13 ‘high performing’⁸ IPOs on which we were able to build our driver analysis…
…in alphabetical order:
So, what differentiates these thirteen companies from the others and what really drives valuation at and post-IPO?
The answer is perhaps more validating than surprising to both investors (and the companies we invest in) operating in today’s capital-rich environment, but important nonetheless:
Broadly speaking, the market has historically rewarded companies with strong growth and healthy margins.
ithin the set of metrics that are disclosed across all companies, top correlated factors can broadly be bucketed into three dimensions of performance: growth, efficiency and scale.
While the identification of these three dimensions may be yawningly obvious, the range of ‘best in class’ performance measured within each is perhaps more enlightening:
Median LTM revenue growth for ‘high performers’ has historically hovered around 80%, but examples exist of growth as high as 120%, even for these companies of scale⁹
Very few software companies are free cash flow positive at time of IPO with a median FCF margin of -10% across ‘high performers.’¹⁰ In fact, even three years post IPO, we found that approximately a third of ‘high performing’ companies were still free cash flow negative¹¹
Despite this, all ‘high performing’ companies met or exceeded Rule of 40 at time of IPO — bolstered by strong growth¹²
The above is a mere subset of the insights from our in-depth IPO study that we shared with our portfolio companies earlier this year. We also provided actionable findings related to underwriter economics and banker selection, metric-specific analyses of performance leading up to IPO, guidelines related to IPO process and preparation, and several detailed case studies. Please contact us for more information.
Notes & Sources
[1–4, 6–7, 9–12] Source: Based on ICONIQ Analysis of data from FactSet, Public Filings for Software IPO June 2013 to Oct 2019 — Does not include companies that have been acquired since IPO
 According to CNBC, “Goldman Sachs is sounding the alarm”, software stock valuations stand near the highest levels since 2000
 “High performing” is simply a conceptual label we have designated to this group of companies, which have been subjectively selected generally because they are either top quartile multiples at IPO and increase in multiple to today, or multiple >5x at IPO and has more than doubled to today. The selected companies may not be exhaustive of all companies that meet such criteria.