Past, Present and Future of Enterprise IPOs

Since 2009, there have been dozens of enterprise software and infrastructure companies reaching $1B or more in valuation in the private markets. Many companies are choosing to stay private longer, raise more investor dollars, and are pushing off potential IPOs. What has that meant for the enterprise IPO market?

Over the past 8 years there has been 115 enterprise software and infrastructure IPOs, representing almost $107B in market cap at IPO price. Those same companies have sold over $18B of stock to public market investors during the same time. While the years 2009–2011 were relatively tepid times to IPO, 2012–2014 were quite active. What has happened in the past couple of years? As you can see in the chart below, there were 14 IPOs in 2015 and only 10 in 2016 YTD.

Commensurate with the drop in the volume of IPOs, the total market cap per year offered by these same companies has also declined.

The relative market cap at IPO (on average) of these companies is also not as high as one would expect with such lofty private market valuations. In 2016 YTD, the average market cap of the 10 IPOs at pricing was ~$890M. The highest year during the time period, 2015, represented ~$1.5B. See the chart below:

While the offering sizes have not changed drastically over the past 8 years, one thing to note is that the average float has declined considerably. What does this mean? Float in this scenario is the percentage of the company being sold at the IPO price. A couple factors are at play — companies are taking a conservative approach to pricing, hence selling less stock at IPO. Management and Boards also want less dilution to protect their ownership stakes. As you can imagine, less float means taking less cash to the balance sheet. I’m curious to see if this trend continues or normalizes to above 20%. See below:

Now let’s take a look at my first chart, which has the number of IPOs per year, with an added bar that shows the total number of enterprise software and infrastructure companies valued over $1B in the private markets, as reported by TechCrunch. As I stated earlier, there has been almost $107B of market cap created at IPO by 115 companies since 2009.

Today, the 51 private companies represent $109B in market cap according to their last valuations. This doesn’t include companies that are near $1B in valuation, or haven’t announced publicly. I would have to guess the $109B is actually much higher. Right now we have more private market cap in unicorns than the last 8 years of IPOs combined.

There has been a decrease in enterprise IPOs, more private market unicorns, and a continued need for liquidity for both employees and investors. So what next? I think a few things could happen:

1) M&A from strategics: Some unicorns will realize the IPO market may be too crowded or not want to be public, and sell. As evidenced by deals such as Demandware, NetSuite, LinkedIn, and Fleetmatics, public companies are willing to pay premium multiples on an NTM (next-twelve months) revenue-basis for companies that are important strategically. Those deals were 9.1x, 8.4x, 6.7x, and 5.8x, respectively. For reference, high-growth SaaS companies trade ~6x NTM revenue today. Strategics may want to wait until companies go public and see how the public market values them, but I have a sense there will be considerable private to public transactions.

2) Private equity M&A: Software private equity firms will continue to be aggressive. For example, SilverLake ($10.3B fund), Vista Equity ($10B fund) and Thoma Bravo ($7.6B fund) to name a few, have raised ten’s of billions of dollars to buy software companies. They also don’t seem to always be concerned with paying high multiples or buying companies that have negative EBITDA margins i.e Marketo acquired by Vista for 5.9x NTM revenue and negative EBITDA margins and Cvent, another Vista acquisition, for 6.1x NTM revenue and break-even EBITDA margins. Negative EBITDA margins have historically precluded companies from selling to private equity firms who have generally needed significant cash flow to support the debt used to fund leveraged buyouts. Thus, Marketo, Cvent and other recent transactions are examples of a paradigm shift in sponsor-backed software M&A where private equity firms will trade the benefits of utilizing leverage for the promise of future growth to generate returns.

3) Companies will just have to go public: Some of these unicorns may or may not catch up multiple-wise with their private market valuations, and will just have to go public. Even if it could mean a flat or discount to their private market valuation at IPO i.e. Hortonworks and New Relic. New Relic for example, went public at $23/share and is now ~$34. Public market investors have appetite for fast-growing B2B businesses and those companies can see upside in the public markets; Twilio, Nutanix and Coupa are up ~150%, 110% and ~75% from their offering prices this fall, respectively.

I’m excited to see the outcomes for many of these businesses. While the IPO market appears crowded, the opportunity for software companies to create value has never been greater — we’re still in the very early innings of the cloud transition.

If you have any questions or would like to chat about any of this, drop me an email at aclayton@sparkcapital.com