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The Real Data on What it Takes to Go Big and Eventually IPO with Meritech Capital · The Official SaaStr Podcast: SaaS | Founders | Investors

• 0:00
  SPEAKER_01: Please welcome to the stage Alex Clayton,
• 0:02
  SPEAKER_01: General Partner at Meritech Capital,
• 0:04
  SPEAKER_01: and Kathy Choi,
• 0:05
  SPEAKER_01: Partner at Meritech Capital.
• 0:07
  SPEAKER_01: Good to see everyone today.
• 0:08
  SPEAKER_01: Thank you so much for being here.
• 0:09
  SPEAKER_01: I'm Alex Clayton.
• 0:11
  This is my partner,
• 0:12
  Kathy Choi,
• 0:13
  and we're going to talk to you about the road to IPO.
• 0:17
  SPEAKER_01: The road to IPO by Meritech.
• 0:19
  SPEAKER_01: We are a late stage venture and growth firm.
• 0:21
  SPEAKER_01: We've been around for 25 years and have had about 60 IPOs in our history.
• 0:25
  We also do a lot of content around the public markets and
• 0:28
  wanted to use this time
• 0:29
  SPEAKER_01: to walk through that today.
• 0:31
  SPEAKER_01: So to start, the road to IPO.
• 0:35
  A lot of software SaaS companies are asking their board and
• 0:38
  themselves the question,
• 0:39
  SPEAKER_01: when can I IPO and how big do I need to be?
• 0:42
  SPEAKER_01: The following presentation puts the size,
• 0:44
  SPEAKER_01: performance,
• 0:46
  SPEAKER_01: qualitative factors,
• 0:47
  SPEAKER_01: and post IPO performance into context and what it means for the future.
• 0:53
  SPEAKER_01: Today we're gonna address a few questions.
• 0:55
  SPEAKER_01: What matters both qualitatively and quantitatively?
• 0:59
  SPEAKER_01: How recent SaaS IPO metrics have trended over time?
• 1:03
  SPEAKER_01: What does it take today?
• 1:04
  SPEAKER_01: And how do you maintain success post IPO?
• 1:07
  SPEAKER_01: Which is just as important as getting there.
• 1:12
  SPEAKER_01: Here's again what we'll be walking you through today.
• 1:15
  We'll start with section two,
• 1:16
  which are the qualitative factors to go public.
• 1:20
  SPEAKER_01: So what are those?
• 1:22
  SPEAKER_01: Going IPO is a well-trodden path.
• 1:24
  SPEAKER_01: I'm sure many people here,
• 1:26
  many of the companies here that have been at Saster in the past
• 1:28
  have gone public.
• 1:29
  SPEAKER_01: It's a very well-trodden road.
• 1:31
  SPEAKER_01: There's been over 200 of them since 2012.
• 1:34
  SPEAKER_01: We put the logos on the screen.
• 1:36
  SPEAKER_01: There are so many that you can't even see them all.
• 1:39
  SPEAKER_01: So this is something that's happened before.
• 1:41
  SPEAKER_01: And again, a very well-trodden road.
• 1:43
  SPEAKER_01: And we're going to tell you more about that today.
• 1:46
  SPEAKER_01: And apart from the ZERP timeframe,
• 1:48
  SPEAKER_01: zero interest rate policy,
• 1:49
  SPEAKER_01: there's only been about 20 of them per year.
• 1:53
  SPEAKER_01: There aren't 100 SaaS IPOs a year.
• 1:55
  SPEAKER_01: And if you look at this,
• 1:57
  SPEAKER_01: you can see that the number of them has actually,
• 2:00
  SPEAKER_01: well,
• 2:00
  SPEAKER_01: in 2021,
• 2:01
  SPEAKER_01: it grew dramatically.
• 2:02
  SPEAKER_01: It's only been about 20 per year.
• 2:06
  SPEAKER_00: Yeah.
• 2:07
  SPEAKER_00: Great.
• 2:08
  SPEAKER_01: Oh, one more.
• 2:09
  SPEAKER_01: And the key considerations.
• 2:11
  SPEAKER_01: So you need a clear story.
• 2:14
  SPEAKER_01: Can you get your grandmother excited about your IPO?
• 2:18
  That is actually a serious question that CEOs and their boards
• 2:21
  need to ask.
• 2:22
  SPEAKER_01: Are you a market leader?
• 2:23
  SPEAKER_01: Can you become a multi-product platform?
• 2:26
  SPEAKER_01: And are there proof points to support your vision?
• 2:29
  SPEAKER_01: You also need to be growing quickly.
• 2:31
  SPEAKER_01: You need to have some reasonable scale and strong efficiency.
• 2:34
  SPEAKER_01: Is your growth rate durable?
• 2:36
  SPEAKER_01: What's the path to profitability?
• 2:37
  SPEAKER_01: Do you have favorable unit economics?
• 2:40
  SPEAKER_01: And can you sustain them as you get bigger?
• 2:42
  SPEAKER_01: These are all very important questions.
• 2:45
  SPEAKER_01: You also need operational excellence.
• 2:47
  SPEAKER_01: You need to have excellent offense,
• 2:49
  SPEAKER_01: which is things like product and engineering,
• 2:51
  SPEAKER_01: sales,
• 2:52
  SPEAKER_01: marketing,
• 2:52
  SPEAKER_01: comms,
• 2:53
  SPEAKER_01: success,
• 2:54
  SPEAKER_01: and defense,
• 2:55
  SPEAKER_01: strategic finance,
• 2:56
  SPEAKER_01: FP&A,
• 2:57
  SPEAKER_01: compliance,
• 2:58
  SPEAKER_01: legal,
• 2:59
  SPEAKER_01: people,
• 3:00
  SPEAKER_01: all of those things.
• 3:01
  SPEAKER_01: You also need to be predictable.
• 3:03
  SPEAKER_01: Can you consistently beat and raise?
• 3:07
  SPEAKER_01: Every quarter, you're going to be telling the street about your results.
• 3:10
  SPEAKER_01: You've got to beat and raise on both the top and bottom lines.
• 3:13
  Roughly about 80% of public SaaS companies beat Wall Street
• 3:17
  guidance on a quarterly basis.
• 3:19
  SPEAKER_01: Not on an annual basis, but four times a year.
• 3:22
  SPEAKER_01: That is not easy.
• 3:24
  SPEAKER_01: You also need a valid business reason to go public.
• 3:27
  SPEAKER_01: This can include things like capital to support growth,
• 3:31
  SPEAKER_01: M&A,
• 3:32
  SPEAKER_01: validation for your enterprise accounts,
• 3:33
  SPEAKER_01: and IPO in many ways is a coming out party,
• 3:36
  SPEAKER_01: marketing for customers,
• 3:37
  SPEAKER_01: hiring,
• 3:38
  SPEAKER_01: and also liquidity for shareholders,
• 3:40
  SPEAKER_01: investors,
• 3:41
  SPEAKER_01: and employees.
• 3:44
  SPEAKER_01: So those were some of the qualitative factors.
• 3:46
  Now we're going to walk you through the metrics that matter for
• 3:49
  an IPO over time.
• 3:50
  SPEAKER_01: Thank you, Kathy.
• 3:51
  SPEAKER_00: Thanks, Alex.
• 3:52
  SPEAKER_00: So at Meritech, we track core metrics for most public fast companies.
• 3:56
  And so we'll take a look today at some of those historical
• 3:58
  metrics at IPO for
• 4:00
  SPEAKER_00: companies that are public between 2009 through today.
• 4:05
  First,
• 4:06
  we see that on average,
• 4:07
  it takes companies about 10 years from founding to IPO.
• 4:13
  Here we have the average year's IPO hovering around that 10
• 4:17
  year mark over this 15 year period.
• 4:20
  SPEAKER_00: Now the road to IPO may seem quite long,
• 4:23
  SPEAKER_00: but it's a process that allows companies to mature and build scale.
• 4:28
  SPEAKER_00: So they're successful many, many years beyond the IPO.
• 4:33
  And one of the key changes that we've seen is the scale of the
• 4:37
  business at IPO in
• 4:38
  SPEAKER_00: terms of top line.
• 4:42
  SPEAKER_00: Here we have the average ARR scale of companies at IPO quarter.
• 4:47
  SPEAKER_00: And you'll see the tremendous increase from 2009,
• 4:51
  SPEAKER_00: 2010,
• 4:51
  SPEAKER_00: where companies were going public between 50 to 100 million of ARR.
• 4:55
  SPEAKER_00: And in today's markets,
• 4:56
  SPEAKER_00: more recently,
• 4:57
  SPEAKER_00: companies are in well over 300,
• 4:59
  SPEAKER_00: 400,
• 4:59
  SPEAKER_00: and 500 million of ARR.
• 5:01
  SPEAKER_00: And we expect this trend to continue slowly up and to the right.
• 5:08
  SPEAKER_00: Next, we'll take a look at ARR growth year over year.
• 5:12
  SPEAKER_00: And as AR scale has risen,
• 5:14
  the AR year-over-year growth has remained around this 40% to
• 5:17
  60% year-over-year
• 5:19
  SPEAKER_00: range over the same period of time,
• 5:21
  SPEAKER_00: with the exception of 2024.
• 5:23
  But we expect that this trend will come back up to the median
• 5:27
  slash average line in
• 5:28
  SPEAKER_00: the coming years as well.
• 5:34
  SPEAKER_00: Next we have net retention,
• 5:35
  SPEAKER_00: which is one of the key metrics that we track for reported net retention.
• 5:39
  SPEAKER_00: And this is a critical metric for SaaS companies,
• 5:43
  as it tells you how well they're able to retain and expand
• 5:46
  their customer base,
• 5:47
  SPEAKER_00: their resistant customer base over time.
• 5:50
  SPEAKER_00: And here we'll see that the average net retention has gone up slightly,
• 5:53
  SPEAKER_00: but has remained around this 110 to 120% range,
• 5:54
  SPEAKER_00: which is quite an impressive number.
• 6:02
  SPEAKER_00: So as companies scale, we also see that cash burn tends to increase.
• 6:07
  SPEAKER_00: Larger companies tend to require a bit more capital to fuel their growth,
• 6:11
  and so it's not uncommon to see companies burning hundreds of
• 6:14
  millions of dollars
• 6:15
  SPEAKER_00: before deciding to go public.
• 6:17
  SPEAKER_00: And now maintaining this burn efficiently is critical,
• 6:20
  SPEAKER_00: especially as companies begin to approach the IPO stage.
• 6:27
  SPEAKER_00: Now a little bit on profitability.
• 6:28
  We see that free cash flow is becoming more important in this
• 6:31
  post-deserved era.
• 6:34
  Here we have the average last 12 months free cash flow margins
• 6:37
  for companies at IPO quarter.
• 6:39
  And you'll see that after this middle section where free cash
• 6:44
  flow margins are in
• 6:44
  SPEAKER_00: the negatives,
• 6:45
  there's an infection point in the last two years that went into
• 6:48
  the positives.
• 6:50
  And so we see that investors are increasingly looking for
• 6:53
  companies that can
• 6:54
  SPEAKER_00: maintain both strong growth,
• 6:56
  SPEAKER_00: but also start generating cash flow or at least see a path to it.
• 7:04
  SPEAKER_00: Next,
• 7:05
  SPEAKER_00: we have the average rule of 40,
• 7:06
  which is defined as the error growth year over year plus last
• 7:10
  12 months free cash
• 7:10
  SPEAKER_00: flow margin at IPO quarter.
• 7:13
  SPEAKER_00: And this is also a pretty important metric for SaaS companies.
• 7:16
  Companies need to be able to balance that growth and also free
• 7:19
  cash flow margin or
• 7:20
  SPEAKER_00: free cash flow generation.
• 7:22
  And here you'll see that this metric has not fallen below 30%
• 7:25
  on average over the past 15 years.
• 7:32
  Next,
• 7:32
  we'll spend a bit of time talking about valuations and
• 7:35
  multiples at IPO pricing.
• 7:39
  Here you see that the average market cap at IPO has also risen
• 7:43
  dramatically over
• 7:44
  SPEAKER_00: the past 15 years.
• 7:46
  SPEAKER_00: In 2009 and early 2010s,
• 7:47
  companies were going public at low hundreds of millions of
• 7:51
  market cap value.
• 7:53
  SPEAKER_00: And in today's markets, companies are well over in the billions.
• 7:57
  SPEAKER_00: And we expect this trend to continue
• 8:03
  SPEAKER_00: Now,
• 8:03
  SPEAKER_00: as we've seen ARR scale increase and market caps increase at IPO,
• 8:08
  SPEAKER_00: we see that the multiples are still in line with historical averages.
• 8:13
  SPEAKER_00: And so here we have the average ARR multiple at IPO.
• 8:17
  SPEAKER_00: And you'll see that companies are trading between this seven times to 10,
• 8:21
  SPEAKER_00: 11 times range with the exception of 2020 and 2021.
• 8:26
  And this is also important to note because irrespective of what
• 8:29
  private markets are
• 8:30
  SPEAKER_00: valuing you at today,
• 8:31
  public markets are still likely to value you in the seven to 11
• 8:34
  times range.
• 8:39
  SPEAKER_00: Great.
• 8:39
  SPEAKER_00: So we'll take a look at a handful of companies,
• 8:42
  of software companies that IPO'd in this post-ZERP era last
• 8:46
  year and this year.
• 8:49
  And we won't go through every single number on the page,
• 8:51
  but we'll start with Playbio.
• 8:55
  Klaviyo is a leading market automation company and they went
• 8:58
  public in September of
• 8:59
  SPEAKER_00: last year with a market cap of $7.6 billion.
• 9:02
  They're around 700 million of ARR and are trading today at 10
• 9:06
  times ARR multiple.
• 9:09
  And one thing that's unique about Klaviyo is that they actually
• 9:11
  only burned $16
• 9:12
  SPEAKER_00: million before going public.
• 9:15
  SPEAKER_00: Let's compare that with Rubric.
• 9:17
  SPEAKER_00: This is a data management and security software platform,
• 9:21
  SPEAKER_00: went public in April of this year with a market cap of $5.6 billion.
• 9:25
  They were around 800 million of error and are now trading at
• 9:28
  seven times error multiple.
• 9:30
  And you'll notice that difference in cash burn where Rubric
• 9:33
  burned well over $700
• 9:34
  SPEAKER_00: million before going public.
• 9:40
  SPEAKER_00: Lastly,
• 9:40
  SPEAKER_00: we have OneStream,
• 9:41
  a financial operations software platform that went public two
• 9:46
  months ago at a
• 9:47
  SPEAKER_00: market cap of $4.6 billion.
• 9:49
  SPEAKER_00: They're around 500 million of ARR and are now trading at 11 times.
• 9:54
  SPEAKER_00: And so even across these three,
• 9:56
  SPEAKER_00: we see quite a variety in financial profile in terms of ARR size,
• 10:00
  SPEAKER_00: growth,
• 10:01
  SPEAKER_00: and profitability margins.
• 10:04
  But we see that they're all trading in the seven to 11 times
• 10:07
  range that we just
• 10:07
  SPEAKER_00: talked about in the prior slide.
• 10:11
  SPEAKER_00: Great.
• 10:14
  SPEAKER_01: Thank you, Kathy.
• 10:15
  SPEAKER_01: We walked you through a bunch of metrics of where you need to be,
• 10:19
  SPEAKER_01: where things have trended in the past.
• 10:20
  SPEAKER_01: So what does it take today?
• 10:22
  We used our best judgment to inform you on where we think
• 10:25
  companies will be in the future.
• 10:27
  SPEAKER_01: We took a look at all 2018-plus
• 10:29
  SPEAKER_01: IPOs.
• 10:30
  SPEAKER_01: There were many dozens of them.
• 10:32
  SPEAKER_01: We looked at the medians and the top quartile.
• 10:35
  SPEAKER_01: There are a lot of numbers on this slide.
• 10:36
  SPEAKER_01: We're not going to go through all of them.
• 10:38
  SPEAKER_01: But a top quartile company since 2018 was over 400 million of ARR,
• 10:43
  SPEAKER_01: growing at almost 60%,
• 10:45
  SPEAKER_01: worth about $7.5 billion.
• 10:46
  And as you can see,
• 10:48
  had very strong metrics and still took about 10 years for them
• 10:51
  to get there.
• 10:52
  SPEAKER_01: So what do we think you need to be at today and beyond?
• 10:57
  SPEAKER_01: This is what we believe today.
• 10:59
  SPEAKER_01: We think that you need to be at least 400 million of ARR.
• 11:03
  SPEAKER_01: You have to be growing at least 30% a year.
• 11:07
  you're probably going to be worth $3 to $5 billion and trade
• 11:10
  anywhere from that 8 to 12x range.
• 11:13
  SPEAKER_01: You need to have strong SaaS gross margins.
• 11:15
  SPEAKER_01: You don't need to be making money.
• 11:17
  SPEAKER_01: Companies can be unprofitable and can be burning.
• 11:20
  You don't need to be free cash flow positive,
• 11:22
  but you need a path to get there.
• 11:24
  SPEAKER_01: And the street has to believe you.
• 11:26
  SPEAKER_01: You also need to have strong net dollar retention and,
• 11:29
  SPEAKER_01: of course,
• 11:29
  SPEAKER_01: burn as little money as possible.
• 11:32
  SPEAKER_01: Even though,
• 11:32
  SPEAKER_01: as Kathy showed you,
• 11:34
  SPEAKER_01: over the past few years,
• 11:35
  it's been hundreds of millions of dollars to get the IPO for
• 11:38
  most of these companies.
• 11:41
  SPEAKER_01: So what really matters to get public in 2024 and beyond?
• 11:47
  SPEAKER_01: ARR at IPO has increased,
• 11:50
  SPEAKER_01: while time from founding to IPO has remained steady at around 10 years.
• 11:55
  ARR growth has slowed recently as free cash flow has come into
• 12:00
  view as interest
• 12:01
  SPEAKER_01: rates have risen.
• 12:03
  SPEAKER_01: You need some scale.
• 12:04
  SPEAKER_01: Like we said, we think that's probably at least $400 million in ARR.
• 12:08
  SPEAKER_01: Otherwise,
• 12:09
  SPEAKER_01: you need extraordinarily good unit economics or high revenue growth,
• 12:13
  SPEAKER_01: and you should not expect to be there.
• 12:16
  You do not need to be free cash flow positive at IPO,
• 12:19
  but you need a path for it.
• 12:21
  SPEAKER_01: You've got to be a Rule of 40 company, though, at least.
• 12:24
  SPEAKER_01: And multiples are now at historical norms.
• 12:26
  SPEAKER_01: We're talking about ARR multiples.
• 12:29
  SPEAKER_01: No matter how great you are,
• 12:30
  SPEAKER_01: no matter how great your business is,
• 12:32
  SPEAKER_01: it's hard to trade at more than 10 times ARR.
• 12:34
  SPEAKER_01: There aren't many companies that do that in the public market.
• 12:37
  But that does mean you're worth billions of dollars if you
• 12:40
  reach these ARR scales.
• 12:42
  SPEAKER_01: You have to be great and stand above the crowd.
• 12:46
  SPEAKER_01: The market can only absorb around 20 IPOs a year,
• 12:49
  SPEAKER_01: and so your company has to be special enough to make it in those 20.
• 12:55
  SPEAKER_01: So what matters for success after an IPO?
• 12:58
  SPEAKER_01: I will turn it back over to Cathy to walk you through a few things.
• 13:01
  SPEAKER_00: Thank you.
• 13:02
  SPEAKER_00: And so now that you're public, what actually matters after the IPO?
• 13:06
  Interestingly,
• 13:07
  we found that the absolute revenue size is not as important as
• 13:10
  you might think.
• 13:12
  In fact,
• 13:12
  the key driver for lasting success is long-term durable revenue growth.
• 13:17
  It's about sustaining that growth over the long period and not
• 13:20
  just about how fast
• 13:21
  SPEAKER_00: you're growing.
• 13:22
  SPEAKER_00: So let's explore what we mean by this.
• 13:29
  Here we have a regression that charts AR multiples today versus
• 13:33
  the implied AR
• 13:34
  scale of the most recently reported quarter of 139 different
• 13:38
  software companies.
• 13:40
  And I want to draw your attention to the R squared value of
• 13:43
  this regression.
• 13:44
  SPEAKER_00: And by the way,
• 13:45
  R squared is a measurement of how strongly these two variables
• 13:48
  on the two axes are
• 13:49
  SPEAKER_00: correlated on a scale of 0 to 1.
• 13:52
  SPEAKER_00: And so we see here that the R squared value is 0.09, which is quite low.
• 13:57
  So there is essentially no correlation between valuation
• 14:00
  multiples in today's
• 14:01
  SPEAKER_00: public markets and the size of the companies.
• 14:07
  SPEAKER_00: Next,
• 14:07
  we'll look at two different regressions that also demonstrate
• 14:10
  how durable growth
• 14:11
  SPEAKER_00: and not fast growth is a key ingredient to market appreciation.
• 14:17
  SPEAKER_00: On the left here,
• 14:18
  we see a regression that charts the share price depreciation
• 14:21
  from IPO to today
• 14:22
  versus how much revenue has increased in dollar amounts from
• 14:26
  IPO to today.
• 14:26
  SPEAKER_00: And you'll see here that the R squared value is 0.74,
• 14:32
  which is quite high and applying a strong correlation between
• 14:35
  how much the share
• 14:35
  SPEAKER_00: price increases to how much the revenue has increased.
• 14:40
  SPEAKER_00: Now let's contrast this to the right side.
• 14:44
  SPEAKER_00: Now this charts the same y-axis,
• 14:46
  SPEAKER_00: but on the x-axis,
• 14:47
  SPEAKER_00: you'll see revenue growth compounded annually.
• 14:51
  SPEAKER_00: And so the R squared here, you can see it's much more scattered, is 0.03.
• 14:58
  SPEAKER_00: And so from this,
• 14:59
  we can take away that investors are rewarding companies that
• 15:02
  can maintain steady
• 15:03
  growth over a long period of time and not just companies that
• 15:07
  are growing really
• 15:08
  SPEAKER_00: quickly year over year.
• 15:13
  SPEAKER_00: So how do you grow durably?
• 15:16
  HubSpot is one of the great examples of a company that utilizes
• 15:19
  multi-product
• 15:19
  SPEAKER_00: approach to enable pretty significant market appreciation.
• 15:24
  SPEAKER_00: Here we'll see a simple ARR bridge for HubSpot today.
• 15:28
  SPEAKER_00: On the left side,
• 15:29
  SPEAKER_00: we have,
• 15:30
  SPEAKER_00: in the green bars,
• 15:31
  SPEAKER_00: ARR from HubSpot's main product,
• 15:33
  SPEAKER_00: the marketing hub,
• 15:34
  which was the only product to exist at IPO and was around 100
• 15:38
  million of ARR in 2014.
• 15:40
  SPEAKER_00: In the middle section,
• 15:41
  you'll see red bars that show incremental ARR that HubSpot has
• 15:45
  added from launching
• 15:46
  SPEAKER_00: new products over the past decade since IPO.
• 15:49
  SPEAKER_00: Now today, HubSpot is well over 2.5 billion in ARR.
• 15:55
  A company that IPO'd under $900 million of market cap value is
• 16:00
  now worth well over
• 16:01
  SPEAKER_00: $26 billion today.
• 16:04
  SPEAKER_00: So as you can see,
• 16:05
  HubSpot is a great case study for a company that utilizes
• 16:08
  multi-product approach in
• 16:09
  SPEAKER_00: order to increase their net retention over time.
• 16:14
  And they have added essentially $11 billion of additional
• 16:17
  market cap value that
• 16:19
  SPEAKER_00: wouldn't exist if it weren't for these new products.
• 16:24
  SPEAKER_01: Awesome.
• 16:26
  SPEAKER_01: Thank you, Cathy.
• 16:28
  She talked a lot about how the actual growth rate in the public
• 16:32
  markets isn't
• 16:33
  SPEAKER_01: related to your returns.
• 16:34
  SPEAKER_01: It's about growing durably over time.
• 16:37
  HubSpot's a great example of the different ways in which you
• 16:40
  can grow durably,
• 16:41
  SPEAKER_01: including adding more products to your suite,
• 16:43
  SPEAKER_01: selling more.
• 16:44
  SPEAKER_01: You also increase net dollar retention,
• 16:46
  SPEAKER_01: and their valuation multiple has also come up significantly over time.
• 16:51
  I'm going to walk you through a couple of examples here of
• 16:53
  durable growth.
• 16:55
  SPEAKER_01: We have CrowdStrike,
• 16:56
  SPEAKER_01: which,
• 16:56
  SPEAKER_01: as many people know,
• 16:57
  SPEAKER_01: is one of the leading endpoint security companies.
• 16:59
  They've been in the news recently,
• 17:01
  but they've done exceptionally well as a public company.
• 17:05
  SPEAKER_01: We went and plotted their ending ARR from 2019 to today.
• 17:09
  SPEAKER_01: When they went public,
• 17:10
  SPEAKER_01: they were about 500 million of ARR,
• 17:13
  SPEAKER_01: growing at almost 100% year over year.
• 17:16
  SPEAKER_01: Very impressive high growth business.
• 17:18
  They've continued on a very high growth rate through 2024 and
• 17:22
  have been growing at
• 17:23
  SPEAKER_01: a 50%,
• 17:24
  SPEAKER_01: almost a 50% ARR growth CAGR since going public in 2019.
• 17:30
  SPEAKER_01: And they're approaching $4 billion of ARR.
• 17:35
  SPEAKER_01: Now we have an example on the other side of the spectrum,
• 17:38
  SPEAKER_01: a company called SPS Commerce,
• 17:40
  SPEAKER_01: which is in the supply chain space.
• 17:42
  SPEAKER_01: This is also a very unique and impressive company.
• 17:45
  And we use this durable grower example because they've been
• 17:47
  doing it in a much slower way.
• 17:50
  SPEAKER_01: And while CrowdStrike was growing at 100% multiple years in a row,
• 17:54
  SPEAKER_01: up to 500 million of ARR,
• 17:56
  SPEAKER_01: SPS Commerce went public in 2010 at around 50 million of ARR.
• 18:02
  SPEAKER_01: And for 15 years, they've grown their ARR at a 20% CAGR.
• 18:08
  SPEAKER_01: This is the power of compounding.
• 18:11
  SPEAKER_01: They never actually grew faster than 35% in a single year,
• 18:15
  SPEAKER_01: while CrowdStrike was growing at 100% multiple years in a row.
• 18:19
  So we wanted to show these examples because durable growth and
• 18:23
  not just high growth
• 18:25
  SPEAKER_01: is most important for long-term returns in the public markets.
• 18:29
  So we put CrowdStrike and SPS Commerce next to each other and
• 18:32
  plotted and showed
• 18:33
  SPEAKER_01: you a table with some of their metrics.
• 18:35
  SPEAKER_01: CrowdStrike's been public for six years, SPS for 15 years.
• 18:40
  SPEAKER_01: Implied ARR to IPO, CrowdStrike was much bigger when they went public.
• 18:44
  SPEAKER_01: SPS Commerce was only 50 million.
• 18:47
  Again,
• 18:47
  as Cathy showed 15 years ago,
• 18:49
  companies were going public at smaller scale.
• 18:52
  SPEAKER_01: CrowdStrike is much bigger than SPS today at almost $4 billion.
• 18:57
  SPEAKER_01: SPS is about $600 million of ARR.
• 19:00
  And you can see they've been growing in very different revenue CAGRs,
• 19:03
  50% to about 20%.
• 19:06
  SPEAKER_01: And look at the bottom in red.
• 19:08
  SPEAKER_01: This is the share price multiple of invested capital since IPO.
• 19:12
  SPEAKER_01: CrowdStrike has obviously seen huge returns.
• 19:15
  SPEAKER_01: They're up 8x since 2019.
• 19:18
  SPEAKER_01: Look at SPS Commerce.
• 19:19
  SPEAKER_01: They're up 17x from when they went public in 2010.
• 19:23
  This is a great example and the power of compounding and the
• 19:27
  power of durable growth,
• 19:29
  and that is the key ingredient to share price returns in the
• 19:32
  public markets.
• 19:35
  SPEAKER_01: Here is another very important fact pattern that public companies,
• 19:39
  SPEAKER_01: SaaS companies need to implore.
• 19:41
  SPEAKER_01: Predictability, the classic beat and raise.
• 19:45
  Public SaaS companies typically beat consensus estimates and
• 19:49
  raise guidance for the
• 19:50
  SPEAKER_01: subsequent quarter,
• 19:51
  SPEAKER_01: which signals strong business momentum and predictability.
• 19:55
  We went back and looked at results versus consensus,
• 19:58
  both pre-COVID,
• 20:00
  during COVID,
• 20:01
  and today.
• 20:02
  SPEAKER_01: And irrespective of all market conditions,
• 20:06
  SPEAKER_01: 80% of the time,
• 20:08
  SaaS companies are beating current quarter guidance and raising
• 20:12
  the subsequent
• 20:12
  SPEAKER_01: quarter guidance.
• 20:14
  SPEAKER_01: So if you wanna be a public company,
• 20:16
  you need a predictable business so that you can show the street
• 20:19
  that you can
• 20:19
  SPEAKER_01: continually beat your numbers.
• 20:23
  SPEAKER_01: So what are some key takeaways after you go public?
• 20:26
  SPEAKER_01: You've probably grown to a business that's multi-hundred millions of ARR,
• 20:29
  SPEAKER_01: you're public now,
• 20:30
  SPEAKER_01: and what really matters?
• 20:33
  Your absolute scale,
• 20:34
  at least today,
• 20:35
  is irrelevant for valuation multiple.
• 20:37
  SPEAKER_01: Cathy showed you,
• 20:38
  there is no relationship between actual size of revenue or ARR
• 20:43
  and your valuation multiple.
• 20:46
  SPEAKER_01: Durable long-term revenue growth matters.
• 20:49
  SPEAKER_01: It's about time in market and not market timing.
• 20:53
  SPEAKER_01: You also can't grow durably without strong unit economics.
• 20:59
  SPEAKER_01: Successful multi-product strategies,
• 21:01
  SPEAKER_01: as we showed you with HubSpot,
• 21:02
  SPEAKER_01: can grow your TAM and increase efficiency over time.
• 21:06
  SPEAKER_01: And the absolute pace of revenue growth or revenue CAGR,
• 21:10
  SPEAKER_01: compound annual growth rate,
• 21:12
  SPEAKER_01: since IPO has little to no relationship to share price returns,
• 21:17
  SPEAKER_01: it's all about growth durability.
• 21:20
  SPEAKER_01: And you have to beat and raise.
• 21:22
  SPEAKER_01: Your business must be predictable.
• 21:24
  SPEAKER_01: You have to tell investors that you're not only gonna say,
• 21:27
  SPEAKER_01: you're not only gonna do what you say you do,
• 21:29
  SPEAKER_01: you have to do better than that consistently over time.
• 21:35
  SPEAKER_01: So we walked you through a lot of graphs,
• 21:37
  SPEAKER_01: a lot of numbers today,
• 21:38
  SPEAKER_01: and want to leave you with some key takeaways,
• 21:41
  SPEAKER_01: what really matters.
• 21:43
  SPEAKER_01: Here's the final word from us here at Meritech.
• 21:47
  SPEAKER_01: To get public, you have to have it all.
• 21:50
  SPEAKER_01: You need a great story,
• 21:51
  SPEAKER_01: team,
• 21:52
  SPEAKER_01: growth and efficiency,
• 21:54
  SPEAKER_01: end market,
• 21:55
  SPEAKER_01: predictability,
• 21:56
  SPEAKER_01: and a great business reason to do it.
• 21:58
  SPEAKER_01: It's very hard work.
• 22:00
  It takes at least a year before you even say you want to go IPO
• 22:04
  if you can to do it.
• 22:05
  SPEAKER_01: It's an inordinate amount of work.
• 22:08
  SPEAKER_01: And only 20 SaaS companies per year can actually make it public.
• 22:12
  SPEAKER_01: We don't think this number is gonna go higher than this anytime soon.
• 22:15
  And so you need to ask yourself,
• 22:17
  why do public market investors have to own my stock?
• 22:21
  SPEAKER_01: There's 100 plus other great SaaS companies that are already public.
• 22:24
  You need to have a compelling story as to why they're gonna buy
• 22:27
  your stock over someone else's.
• 22:31
  SPEAKER_01: We also think you need to probably be at least 400 million of ARR,
• 22:36
  SPEAKER_01: otherwise you've gotta be a super fast grower,
• 22:38
  SPEAKER_01: probably at least 50 to 60% a year,
• 22:41
  SPEAKER_01: or highly profitable.
• 22:43
  SPEAKER_01: And you have to be at least a rule of 40 company,
• 22:45
  SPEAKER_01: which is the sum of your revenue growth and free cash flow margin.
• 22:51
  SPEAKER_01: And regardless of private market valuation,
• 22:54
  SPEAKER_01: at least in today's interest rate environment,
• 22:56
  SPEAKER_01: companies cannot expect to be worth more than 10 times ARR.
• 23:01
  SPEAKER_01: And the down round IPO is actually irrelevant over the long term.
• 23:06
  You've seen companies like SPS Commerce that are up almost 20x
• 23:10
  from when they went
• 23:10
  SPEAKER_01: public because they grew durably over time.
• 23:14
  SPEAKER_01: Back to my next point.
• 23:17
  SPEAKER_01: Need to grow durably and predictably and beat your revenue guidance.
• 23:23
  And lastly,
• 23:24
  if you have it all,
• 23:26
  you can see massive returns in the public markets.
• 23:29
  We talked to you about CrowdStrike,
• 23:30
  which is up over 8x since they went public.
• 23:33
  SPEAKER_01: SPS Commerce is up almost 20x since they went public.
• 23:37
  SPEAKER_01: Salesforce is up 100x since they went public in their IPO 20 years ago.
• 23:42
  SPEAKER_01: So if you can do all these things and grow durably,
• 23:45
  SPEAKER_01: you can see incredible returns as a public company.
• 23:50
  SPEAKER_01: And lastly, Meritech, we are a late-stage venture and growth firm.
• 23:54
  SPEAKER_01: We've had over 60 IPOs.
• 23:56
  SPEAKER_01: We spent a lot of time thinking about software metrics.
• 23:59
  SPEAKER_01: And here on our website,
• 24:01
  we have the largest free repository of public software
• 24:05
  information if you're
• 24:06
  SPEAKER_01: interested in checking it out.
• 24:07
  SPEAKER_01: So thank you so much.
• 24:09
  SPEAKER_01: Really appreciate everyone coming here today.
• 24:11
  SPEAKER_01: You have a great day.
• 24:13
  SPEAKER_01: Thanks, Scott.