Is Your Company Growing Fast Enough?

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In 2013, I co-published a TechCrunch post with Jules Maltz at IVP on growth rates. We pulled data on technology IPOs since 2010 and tracked the reported historical growth rates for the four years before each company went public and in the year of IPO. We wanted a numerical answer to the question we often get asked by entrepreneurs: “How fast should I be growing to be an attractive IPO candidate?” Since we published that original post, there have been close to 100 more technology IPOs and so it was time to rerun the data.

The data in this analysis is presented differently than in the original blog post in several ways:

  1. The data has been separated for consumer and enterprise tech IPOs.
  2. The growth rates resemble forward-year growth rates. By presenting the data this way, it can be a useful tool for budgeting and planning.
  3. The revenue ranges have been changed to provide more granular benchmarking.
“A startup is a company designed to grow fast… The only essential thing is growth. Everything else we associate with startups follows from growth.” — Paul Graham, Y Combinator

Revenue Growth Benchmarks for Consumer Tech Companies

The chart above shows the 25th, 50th, and 75th percentile forward growth rates for all consumer tech IPOs between 2010 and 2017. As an example of how to interpret the data, if your company generated $15 million in revenue last year ($10–20 million range) and you project 233% growth for this year, that would fall in the 75th percentile. The data-set included 46 IPOs.

$10-20 million revenue:

  • 75th percentile growth: 233%
  • 50th percentile growth: 107%

$20-40 million revenue:

  • 75th percentile growth: 130%
  • 50th percentile growth: 78%

$40-60 million revenue:

  • 75th percentile growth: 82%
  • 50th percentile growth: 56%

$60–100 million revenue:

  • 75th percentile growth: 75%
  • 50th percentile growth: 53%

$100–200 million revenue:

  • 75th percentile growth: 60%
  • 50th percentile growth: 40%

More granular percentile data can be found below. This data allows you to benchmark the growth of your company against all consumer tech companies that have gone public over the last eight years.

At IVP, we consider companies in the 90th percentile to exhibit “red hot growth”. These companies are rare and include King, Snap*, Stitch Fix, Twitter, and Zynga, among others. At IPO, these companies were valued at 6.8x forward revenue. If your company falls into this bucket, you are in good shape.

Now, let’s put this data in context and see if you can identify the companies highlighted below.

Can you guess the company?

  • 2008 to 2009: Revenue growth of $12.1 million to $25.8 million (113% annual growth, 55th percentile)
  • 2009 to 2010: Revenue growth of $25.8 million to $47.7 million (85% annual growth, 59th percentile)
  • 2010 to 2011: Revenue growth of $47.7 million to $83.3 million (75% annual growth, 70th percentile)
  • 2011 to 2012: Revenue growth of $83.3 million to $137.6 million (65% annual growth, 55th percentile)

The answer is

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Yelp! Yelp operates as a platform that connects people with local businesses. The company went public in 2012 at a $900 million valuation and today is worth close to $3.5 billion. Yelp’s growth consistently fell in the 50–70th percentile range, which is above average. Since founding, the company has grown to become a dominant brand in the online review space. The landscape is changing, however, and it remains to be seen how the company can continue to grow in the face of competition from both Google and Facebook.

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Can you guess the company?

  • 2008 to 2009: Revenue growth of $10.6 million to $17.5 million (65% annual growth, 10th percentile)
  • 2009 to 2010: Revenue growth of $17.5 million to $30.5 million (74% annual growth, 18th percentile)
  • 2010 to 2011: Revenue growth of $30.5 million to $66.1 million (117% annual growth, 72nd percentile)

The answer is

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Zillow! Zillow operates a leading real-estate marketplace and was one of the smallest companies in our data-set to go public, generating only $66 million of revenue in 2011, the year of its IPO. The company went public at a $541 million valuation and today is worth $6.9 billion, generating over $1 billion of revenue in 2017. Heading into its IPO, Zillow had below average growth, but re-accelerated and maintained strong growth as a public company. It is rare to see re-acceleration, but Zillow exhibits strong network effects: as more listings are provided to the site, more buyers visit, resulting in more agents joining the site, and paying for ads. In the three years following its IPO, Zillow grew 77%, 69%, and 65%, representing 80th percentile growth. This growth, along with strong leadership and an effective M&A strategy are several reasons why the company’s stock price has appreciated so much.

“It’s great when startups can figure out how to grow to be worth tens of millions and then generate hundreds of millions, but it is a Herculean effort to get it from hundreds of millions of revenue to billions.” — Bill Gurley

Revenue Growth Benchmarks for Enterprise Tech Companies

The chart above shows the 25th, 50th, and 75th percentile forward growth rates for enterprise tech IPOs between 2010 and 2017. As an example of how to interpret the data, if your company generated $15 million in revenue last year ($10–20 million range) and you project 188% growth for this year, that would fall in the 75th percentile. The data-set included 113 IPOs.

$10–20 million revenue:

  • 75th percentile growth: 188%
  • 50th percentile growth: 121%

$20–40 million revenue:

  • 75th percentile growth: 83%
  • 50th percentile growth: 61%

$40–60 million revenue:

  • 75th percentile growth: 62%
  • 50th percentile growth: 40%

$60–100 million revenue:

  • 75th percentile growth: 54%
  • 50th percentile growth: 40%

$100–200 million revenue:

  • 75th percentile growth: 62%
  • 50th percentile growth: 33%

More granular data for benchmarking can be found below.

If you are in the 90th percentile, you are in good company with Box, Okta, Pure Storage*, Twilio, and Workday, among others. At IPO, these companies were valued at 5.5x forward revenue.

Now, let’s put this data in context and see if you can identify the companies highlighted below.

Can you guess the company?

  • 2013 to 2014: Revenue growth of $49.9 million to $88.8 million (78% annual growth, 85th percentile)
  • 2014 to 2015: Revenue growth of $88.8 million to $166.9 million (88% annual growth, 91st percentile). This growth falls into IVP’s “red-hot growth” bucket.

This answer is

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Twilio! Twilio is a cloud communication Platform-as-a-Service company that allows software developers to programmatically send and receive phone calls and text messages via API. The company went public in mid 2016 at a $1.2 billion market capitalization and today is worth $3.9 billion. Twilio was able to scale up quickly because of its simplicity, scalability, and pricing model that grew with usage.

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Can you guess the company?

  • 2014 to 2015: Revenue growth of $42.8 million to $58.5 million (37% annual growth, 41st percentile)
  • 2015 to 2016: Revenue growth of $58.5 million to $79.9 million (37% annual growth, 41st percentile)
  • 2016 to 2017: Revenue growth of $79.9 million to $111.9 million (40% annual growth, 50th percentile)

The answer is

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SendGrid! SendGrid is a customer communications platform for transactional and marketing email. The company went public in November 2017 at a $650 million market cap and is now worth close to $1.2 billion. In this case, focusing just on revenue growth to evaluate the company’s value would have been misleading. SendGrid was an interesting IPO candidate because of the growth combined with the large size of the market and the capital-efficiency of its business. In the year of IPO, SendGrid was close to operating breakeven and had positive free cash flow margin of 3%. Additionally, the company used only $44 million in cash to get over $100 million of ARR.

Here are some key lessons I learned along the way:

  • Benchmarks differ by sector: Enterprise companies exhibited slower annual growth than their consumer counterparts. On average, median growth rates for enterprise companies were 15–20% lower on an absolute basis for the same revenue ranges (chart below). In addition, the median scale of an enterprise tech company in year of IPO was $134 million vs $317 million for that of a consumer tech company.
Consumer minus enterprise revenue
  • Growth correlates with valuation: Consumer and enterprise companies that exceeded the 75th percentile revenue growth in each of the years prior to IPO had forward revenue multiples at IPO of 5.7x and 5.8x, respectively. Companies that were below this threshold in each year had multiples of only 3.0x and 3.8x, respectively.
  • Stay above 20% growth: This was an observation from the original post and it still holds true. 90% of companies that went public in our data-set did so with 20% growth in the year of IPO. Over 72% of these companies had above 30% growth.
  • Key to growth lies in existing customers: Companies can grow in two ways: 1) by adding new customers or 2) by generating more business from existing customers. Most companies allocate a majority of resources to sales and new customer acquisition. New business is exciting! Of course, it is, and that’s why retention is often called the ‘silent’ killer because customer success isn’t always prioritized. It is critical to dedicate enough resources to maintaining and growing existing accounts and customers.
  • Unit economics matter: Having strong growth is critical, but it needs to be backed up with efficient economics, as evidenced by SendGrid. Retention is one important factor to consider. Companies must also have strong margins, high LTV / CAC, favorable cash dynamics, strong engagement, fast payback, and good sales and marketing efficiency. While Blue Apron had ‘red-hot growth’, after IPO, the company’s key unit metrics have started to deteriorate, and the stock has dropped 80%. Here is a good primer to help you better understand the profitability of your business.
  • Growth matters post IPO, too: These benchmarks hold true for public companies as well. We saw this example with Zillow above. Another example is with Zendesk*, which generated $127 million of revenue and then grew 64%, 49%, and 38% in the three years following its IPO. As a result, the company’s market cap has expanded to $5 billion. Two counter-examples, are Groupon and LendingClub which have faltered as public companies because of slowing growth. Usually, when growth slows that is indicative of other problems at the company.

For those interested, here is a link to the data used for the analysis. Special thanks to SunTrust for providing valuation data.

* IVP is an investor in Pure Storage, Snap, and Zendesk.

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