How do SaaS Companies Trade after their IPOs?

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SaaS companies can get overvalued in the private markets. Private market investors many times pay 2+ years forward on a revenue multiple-basis to win deals, but when companies go public they can expect to trade ~5–6x NTM (next-twelve-months) revenue. Faster-growing and profitable SaaS companies can trade closer to 10x NTM revenue. So if you’re a fast-growing SaaS company will you trade up in the public markets? We’ve seen examples in the past few years of high-growth SaaS companies pricing around, or in some cases below, their last private round valuation; Coupa (below), Twilio (roughly flat), AppDynamics (slightly below if not for acquisition), New Relic (below) and Apptio (below). Does it matter? The answer is not really if the company executes.

Since 2009, there have been almost 80 SaaS (or mostly software) IPOs, and 20 of those have since been acquired. There have been ~35 other B2B-focused IPOs in the networking and infrastructure spaces, and 7 of those have been acquired. So where are they trading at today (or acquired at) relative to their IPO price? Public SaaS companies are on average up 91% from their IPO price, and the ones that have been acquired were up at essentially the same average, 90%. On the other hand, networking and infrastructure vendors are up 63%, and the acquired ones were flattish at 2%. Take a look at the chart below (price as of 25-Jan-17):

Public market investors certainly have an appetite for fast-growing SaaS companies that execute (on average more so than infrastructure companies), and the returns above are impressive. But it doesn’t tell the whole story. Often times investment banks will price IPOs at lower multiples than where the company will likely trade, creating a large first-day pop (hence sometimes pricing at or below the last round’s price). Even so, companies have traded up on average almost 100% from initial pricing, negating some of the initial pop dynamics I mentioned. The top 10 companies from the list are on average up 4.3x since IPO— take a look below (price as of 25-Jan-17):

For later-stage SaaS companies that have fast-growth, revenue predictability and a story to profitability, going public typically has a very positive impact on valuation, even if the pricing is at or below the last round. There is a precedent for 5x+ returns after going public, and it usually yields a great outcome for founders/employees and their investors.

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