Weekly Update #241: A Quick Look at Historical IPO Metrics

With Zscaler and Spotify set to lead the charge in tech IPOs this year, we take a look at some historical metrics that can help put S-1 numbers in context (S-1s, or F-1s for foreign issuers, are the documents that companies must file prior to public listings). To this end, we looked at historical metrics for past software IPOs immediately prior to and up through the IPO year. We limit our short analysis to software to minimize variances in the data due to industry mix in any particular IPO vintage (e.g. VC-backed retail companies and software companies can have wildly different margins). Note that software companies do generally form the bulk of VC-backed IPOs anyway.

Some quick observations from our data:

• IPO companies tend to be larger (as measured by revenue) and younger today than in prior years.
• Software companies are generally not profitable upon IPO.
• In the years since 2014, the median software IPO has featured weaker operating profitability metrics (operating margin, operating cash flow to revenue) immediately prior and through the IPO year. Gross margins, however, have been modestly stronger.
• The weaker profitability margins in recent years don’t appear to be driven by a sharper focus on revenue growth. Outside of a strong showing in 2015, median 3-year revenue growth numbers have trended modestly lower since 2014.

Source: Ycharts, EquityZen Securities

Please note several limitations in our data set currently. Notably, financial metrics were not readily available for some companies historically. Further, our historical measurements include IPO year results when many IPOs take place before these are available. This was the quickest - albeit far from perfect - way to attempt to capture the financial outlook for the company as they entered into IPO (which factors heavily into valuation and IPO-readiness).

Other items we are reading:

• Cost-conscious e-commerce market set to heat up with Ebay following Amazon’s lead in announcing plans to launch an “under $10” storefront. These moves put the e-commerce giants in more direct competition with Wish.
• Amazon looks to set become more pervasive in consumers’ homes, acquiring Ring for $1B.
• Lyft’s market share lift from Uber’s stumbles may be levelling off. On another ride-sharing note, a recent MIT study highlighted the challenges faced by drivers on both apps.
• Google rolled out its answer to Slack, Hangouts Chat.
• Doordash completed a $535M funding round. Impressively, the company now cites being profitable on a per-order basis in some cities.