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EquityZen's 2018 IPO Outlook — Q2 Update

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Catherine Klinchuch   May 10, 2018

At the beginning of this year, 2018, our Research team put together a 2018 IPO Outlook report that outlined the private companies most likely to go public throughout the course of the year. With a third of the year in the books, 2018 has already been crowned the champion of the IPO, singlehandedly bringing the IPO market "back." Here, our Research team provides an update.

Our Q2 2018 IPO Update includes fresh observations and predictions to supplement our previously-published 2018 IPO Outlook. Here, we take a look at the IPO environment YTD as well as which of our prior predictions worked and which did not. We also highlight some changes to our outlook for the balance of the year.



2018 — Off to a Good Start

1Q18 saw a solid uptick in VC-backed IPO activity. Year-to-date, 10 VC-backed companies have filed, up from seven last year. Volume has been lighter in 2018 ($3.0B 2018 YTD vs. $4.5B in the same period 2017); however, the drop is due entirely to SNAP, which alone accounted for $3.4B of last year’s volume. Excluding SNAP, the average IPO has actually been over 85% larger in 2018 vs. the same period last year. If the current pace of activity holds, we could see nearly 30 IPOs in 2018 (shown in shaded green bar at right), which would match the robust levels of 2013/2014.

Source: NASDAQ and EquityZen

What did we get right so far? 

Three companies from our original IPO Outlook went public in Q1, including DocuSign, Dropbox and Zscaler. Additionally, Pluralsight, which was included in our original outlook, has filed for an IPO with an expected pricing date of 5/17/18.


Source: NASDAQ

What did we get wrong? 

Primarily, we were too conservative on our assessment of the overall IPO environment. Stronger SaaS multiples are likely a key factor in the wider-than-expected IPO window YTD, as many VC-backed companies are SaaS providers. Five SaaS companies filed that were not in our original outlook: Zuora, Ceridian, Pivotal, Smartsheet and Carbon Black. Note that our outlook includes only domestic companies; thus, Spotify was not in our prediction list.


Source: Ycharts and EquityZen

What are we changing in this version of the outlook? 

Given the stronger SaaS environment, we are adding three SaaS companies to our prediction list: Domo, Rubrik and CrowdStrike. We are also adding Bloom Energy, GreenSky, Kabbage and Peloton. We are removing Airbnb, AppNexus, Credit Karma and Vice. Airbnb recently parted ways with their Wall Street-savvy CFO and media reports suggest that the company has put its IPO on the backburner for now. Vice and AppNexus will likely wait for smoother industry conditions, in our view. Meanwhile, we believe PE-firm Silver Lake’s recent $500M investment in Credit Karma may suggest an IPO is on hold for now. As a reminder, our IPO predictions are created from a bottom-up analysis. The primary factors that determine inclusion are a sizeable revenue base (generally at least $100M), public company experience in C-suite and past guidance from the company on IPO plans.

Read our comprehensive 2018 IPO Outlook that looks at a wide variety of private companies. Here are a couple of the companies from that report that we're particularly looking at:

Lyft


Year Founded: 2012
Industry / Description: Logistics / Ride-hailing service
Most Recent Equity Funding: $1.7B (2017)
Total Implied Valuation: $12.15B
Revenue Estimate: >$1B in 2017
Other Notes:  The company reportedly engaged underwriters in October for a potential offering.




Greensky


Year Founded: 2006
Industry / Description: FinTech / Consumer Lending
Most Recent Equity Funding: $200M (2018)
Total Implied Valuation: $4.5B
Total Revenue: ~$400M annually
Other Notes: The company has reportedly filed confidentially





Cloudflare


Year Founded: 2009
Industry / Description: Enterprise software / Website security and performance optimization solutions
Most Recent Equity Funding: $110M Series D (2015)
Total Implied Valuation: $3.1B
Revenue Estimate: $100M+
Other Notes:  The company hired former Symantec (SYMC) CFO Thomas Seifert in June 2017. Bloomberg reports suggest that CEO Matthew Prince is aiming for a public offering by mid-2018.

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Spotify: Blurring the Private and Public Market Lines

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Nat Disston   March 22, 2018

With 160 IPOs in 2017, it is rare for a company's initial public offering to get as much coverage as Spotify's already has this past year. In many ways, however, Spotify deserves the attention. For starters, Spotify is a widely used consumer product that continues to exhibit impressive growth against deep-pocketed and experienced competitors (*cough* Apple *cough*). Many Spotify fans and cynics alike will be eyeing their listing and continued results as a public company. Secondly, Spotify's decision not to raise any capital and forgo a traditional Initial Public Offering in lieu of an Initial Public Listing has already made them stand out in the tech world. While Spotify's trailblazing attitude allows them to eschew Wall Street banks and save unnecessary dilution from a traditional IPO, it comes with its own bevy of risks, such as price discovery and liquidity once the shares are publicly traded.

That brings us to the third reason we're looking forward to this listing (one that has not been discussed much on the interwebs): Spotify, once again the black sheep of the tech world, appears to be welcoming trades of their private shares with open arms. EquityZen's mission is to bring private markets to the public, and Spotify's recent maneuvers—although intended to help them with public market price discovery—are further evidence of the blurring of the lines between the private and public markets.

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Some Thoughts Regarding ForeScout's S-1

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Catherine Klinchuch   October 05, 2017

This analysis was conducted by EquityZen Securities LLC.

ForeScout filed an S-1 earlier this week, marking its first step towards completing an IPO. ForeScout expects to list on the NASDAQ under the ticker “FSCT”. The S-1 was (long) expected as the company had reportedly filed confidentially early this year.

We believe comps point to a $1.1-1.7B valuation for ForeScout

ForeScout’s expected pricing range is still TBA. Comparable public companies trade at a mid-to-high single digit multiple on sales, as shown in the table below. Note that ForeScout generates revenue from hardware & software sold on a perpetual license (vs subscription); as such, we would expect its relative valuation to fall below companies with SaaS models. Our valuation estimate uses a P/S range of 5.0x-8.0x and assumes 2017 revenue growth continues at its YTD pace of 30%. Note that ForeScout’s last funding round implied a $1.1B valuation.


Source: Google Finance, Company Filings, EquityZen estimates


Some of our key takeaways from the filing:

(+) Revenue growth is robust.  Revenue growth is a key component of valuation, particularly for software companies. ForeScout has posted strong revenue growth numbers over the past several quarters. Note that while 4Q16 growth doesn’t look great, the number reflects a difficult comp in 4Q15, when multiple years of revenue were recognized on a non-standard contract [relevant excerpt from S-1 below]. Coincidentally (?), the revenue boost from this non-standard contract occurred immediately prior to ForeScout’s Series G funding round in January 2016. Nevertheless, 30%+ growth so far in 2017 suggests the business continues to see strong demand growth.

Excerpt from Forescout S-1 (with non-standard contract wording highlighted):


Source: Company Filings, EquityZen estimates


(+) Customer service retention rates remain solid.  ForeScout has maintained retention rates on its support and maintenance contracts of well over 100% since 2014. The strength of these numbers suggest the company may be well positioned to drive top-line growth by capturing additional revenue from its existing customer base (e.g. upgrades, other services). Existing customers typically carry lower acquisition costs versus new customers.

Source: Company Filings, EquityZen estimates


(+) Sales productivity stacks up favorably.  Sales productivity here is estimated as incremental revenue less costs to generate that revenue over prior period sales & marketing spend (ForeScout notes its sales cycle is typically 6-12 months). The company stacks up relatively well to higher-growth peers that also sell software on a perpetual model. Note in chart below that 2015’s outsized ratio probably “borrowed” from 2016 (and perhaps even 2017) given revenue recognition item mentioned above.


Source: Company Filings, EquityZen estimates


(-) Net margin still stubbornly negative, though may be some nascent signs of improvement.  Net margins are still very negative. Gross margin compression partially to blame (see below), while R&D expenses also seem to be creeping higher as a % of revenue. Note that there appears to be a seasonal pattern to margins (with the exception of 4Q15...again remember the item above). Looking at Y/Y trends, margins do seem to be showing some small improvement...emphasis on small for the moment.

Source: Company Filings, EquityZen estimates


(-) Gross margin has slipped.  ForeScout has seen a little over 400bps of margin contraction since 3Q15. Definitely a trend to keep an eye on. An unfavorable mix-shift is partly to blame. Chart 7 shows that the percentage of revenue that ForeScout earns from product sales (vs maintenance & other services) has declined. The drop may be attributable to seasonal/cyclical factors. Product sales typically carry higher gross margins compared to services.


Source: Company Filings, EquityZen estimates

What else caught our eye?

ForeScout sells its products under a perpetual license versus the subscription model employed by most next gen software companies. While there are many valid reasons for perpetual license models, subscription has gained popularity among software companies and investors alike as they typically afford greater cash flow stability and visibility. Perpetual licenses could also impact ForeScout’s ability to expand with smaller and medium-sized companies, which tend to prefer the flexibility of subscriptions. Additionally, S-1 notes that ForeScout underperformed bookings targets in 2H16. No update provided on bookings trends in 2017.

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