It’s been almost 10 years since salesforce.com’s IPO on June 23, 2004. Earlier this year we decided to take a look at every SaaS IPO since then, in what we considered to be the first decade of IPOs in a new era of enterprise software. So far, there have been 40 IPOs, most of which were completed in only the past 30 months.By limiting the scope of our study, we excluded three important SaaS companies: Concur, Ultimate Software and Webex ($12B+ market cap). These companies went public before 2004 and mostly built their SaaS businesses after they were public with a hybrid model during multi-year transition periods. We also excluded companies such as VMWare, Splunk, Tableau and Solar Winds ($48+B market cap) which are not in the SaaS sector and/or have hybrid models.
Initially, our focus was to support the upcoming 2014 budgeting process of our late stage SaaS portfolio companies but it gradually grew in scope. As we got deeper into the project, we learned some surprising lessons that we wanted to share through several blog posts in the coming weeks. This first post will provide an overview of the project and the first surprising finding.
Database and Project Overview
We input key financial data such as Revenues, Cost of Goods, Sales & Marketing and other expenses from SEC filings and annual reports into a database along with the timing of key milestones such as founding dates, the first time a company recorded $10, $30 and $50 million in revenues, IPO filing and pricing dates, valuations and timing of M&A exits (post-IPO), etc.
Of the 40 companies, only six were valued at more than a billion dollars at the time of IPO. Over time, most have since surpassed the billion dollar threshold and many more are on the way. Among the 18 companies that are still valued at under a billion, 50% have market caps greater than $700 million.
Eventually, we believe more than two thirds of these companies will surpass a billion dollars in enterprise value. That’s a pretty impressive feat if you believe the odds of any startup reaching a billion dollar valuation is less than 1 in 1,500 (0.07%).[ref]Industry estimate based on several recent blog posts including one about the unicorn club which talks about startups that have reached a billion dollar in market value.[/ref]
The First Surprise: It took 10+ years
The first surprising finding from our study was that it took on average 9.7 years from founding to IPO. After the Great Recession of 2008-2009, the average time to IPO increased even further to 10.4 years.
At first, we thought that the best companies, the 22 “Saas unicorns“[ref]SaaS companies which are valued at more than one billion dollars.[/ref] which are responsible for the vast majority of the market value would be different. However, even among unicorns almost half took 10+ years and six took 12+ years to get to IPO.
The data also showed that the longest and perhaps hardest part of the journey was getting to the first $30 million in revenues. In the case of, Cornerstone-On-Demand (CSOD), it took 10 years and then another 2 years to IPO. Now, only 4 years later the company is at a $200 million revenue run-rate and valued at more than two and a half billion dollars. Patience certainly would have paid off for investors but the problem is that VC funds have limited lives. What entrepreneur or investor can hold on for so long (14 years in the case of CSOD)?
Given that even an extremely successful investment in a SaaS company may not provide liquidity fast enough for early investors, how can the VC industry overcome the fundamental structural challenges of investing in the SaaS industry? Our next post will explore some of the ways in which VCs and entrepreneurs seem to be reacting to this challenge.