Mattress flop

by Brenon Daly

Undeterred by other hobbling consumer tech unicorns, Casper Sleep is moving ahead with its Wall Street plans. The direct-to-consumer mattress seller set terms Monday for its upcoming IPO. Based on the initial pricing, Casper will be yet another ‘down-round’ IPO.

In the frothy private market, the self-described ‘pioneer of the sleep economy’ was able to convince investors that it was worth more than $1bn in its funding last March. Wall Street isn’t buying that. Casper and its eight underwriters have had to trim the company’s last-round valuation by about one-third, dropping it below rarified ‘unicorn’ status.

That price is based on the high end of the initial range, which is written in pencil by underwriters. Casper’s market debut is set for the first week of February. As it stands now, however, the company will almost certain face a discount when it lists on the NYSE, a reversal of the typical private-to-public valuation trendline.

Assuming it does trade that way, Casper will be the latest consumer tech IPO to sink underwater. As we noted in the IPO section of our recently published Tech M&A Outlook: Introduction, the high-profile trio of Pinterest, Lyft and Uber all finished 2019 (their first calendar year as public companies) valued lower than they had been in the private market. (See full report.)

Like that trio, Casper gives Wall Street investors plenty of reasons to be skeptical about its business. The money-losing company, which is somewhat known for its ‘napmobiles,’ spends more than one-third of revenue on sales and marketing. (More alarmingly, it was down to just $55m in cash at the end of September.) Given the public market’s shift away from subsidizing unproven B2C business models, once Casper does complete its IPO, it will almost certainly be looking up longingly at what it was once worth.

Figure 1:

Source: M&A Leaders Survey from 451 Research / Morrison & Foerster braves bleak market for unicorns

by Scott Denne is looking to break a two-month dry spell of business technology IPOs as the SMB-focused payments software vendor unveils its prospectus. The offering comes as many other new listings have struggled to retain their momentum following frothy debuts, darkening the outlook for companies like seeking to retain their unicorn status beyond their public offering.

With $121m in trailing revenue, could come to market with a similar topline as PagerDuty, the IT management software firm that teed off this year’s round of enterprise IPOs back in April when the market valued it at 23x. Since then, its valuation has sunk to 10x, the multiple that will need to fetch to retain the valuation from its last venture round. Landing a few turns higher seems doable, given that’s sales grew 63% from a year earlier, compared with PagerDuty’s 47% (at the time of its IPO), and that the latter’s losses were more than three times larger than the $12m trailing net loss posted.

Still, the company will be running up against the expanding opinion that many privately held unicorns are overvalued. In the most recent M&A Leaders Survey from 451 Research and Morrison & Foerster, 62% of respondents said they expect the average unicorn startup to carry a valuation on its first day of trading that’s flat or down from its last venture round. In the same survey a year earlier, only 39% predicted such an unwelcoming environment.

Figure 1: Expectations for unicorn debuts

Source: M&A Leaders’ Survey from 451 Research / Morrison & Foerster

Get rich or die trying

by Brenon Daly

As we saw in this week’s offering from Ping Identity, there’s virtually no middle ground for IPOs from the information security (infosec) market. More than any other tech segment, infosec prices its chosen few at astronomical heights, while relegating the rest to a far more earthbound valuation.

Broadly speaking, on a price-to-trailing-sales multiple, infosec IPOs inevitably come to market at either a high-single-digit valuation or at greater than 20x. Nothing in between. None of those deals that price at twice the low end, but half the high end. As a result, when we survey the IPO valuation landscape, we see a very unusual distribution: cybersecurity tends to stack up in two camel-like humps rather than a conventional bell shape.

According to our analysis, Ping is the ninth debutant from the infosec market on US exchanges in the past two years. (See our full preview on Pings offering.) The identity and access management vendor created some $1.6bn in (undiluted) market value in its IPO. That works out to about 7.5x its trailing sales of $215m through midyear.

Ping’s price-to-sales valuation slots right next to the current trading multiples of other recent infosec IPOs such as Tufin Software Technologies (6x), Tenable (7x) and SailPoint Technologies (7x). (SailPoint, like Ping, came public from a private equity portfolio, after being acquired for a fraction of its current valuation.) Similarly, Carbon Black, which came public last year, is being erased from the Nasdaq by VMware in a deal that gives the endpoint security provider a terminal value of 9x trailing sales.

Further out on the histogram of trading multiples, there are the vertiginous valuations of Okta (25x), which came public in 2017, as well as last year’s entrant Zscaler (20x). Both of those are bargains compared with CrowdStrike, which listed three months ago and currently trades at twice the multiple of either of the other highfliers.

Of course, valuation is always relative. Even as some of infosec’s recent debutants look longingly up at the market caps and multiples of others in the industry, there are whole sectors of IT that would gladly take the valuation of a ‘left behind’ infosec vendor like Ping. For a great number of tech startups, even the lowliest infosec valuation would be a trade up.

Figure 1: Infosec IPO valuations

Canis lupus unicornus

by Brenon Daly

A new breed of highly valued startup with the scientific name canis lupus unicornus has been spotted for the first time on Wall Street. Investors discovered the species as Datadog came to market and secured a stunning, multibillion-dollar valuation from the first trade. Unlike some of the other unicorns that have been trotted out recently, however, Datadog actually comes with a sturdy and attractive pedigree.

As we noted in our full preview of Datadog‘s offering, the infrastructure monitoring vendor has been extremely efficient in building its business: It burned through just $120m on its way to creating a company that is running right around breakeven even as it posts roughly 80% growth. We pencil out that its sales will be in the neighborhood of $350m in 2019, up from $200m in 2018.

Public market investors backed Datadog’s fast but fiscally responsible growth, pushing shares up to $40 in initial trading from the above-range price of $27. With an (undiluted) count of about 290 million shares outstanding, the vendor is valued at nearly $12bn. That puts Datadog’s price-to-trailing-sales multiple in the mid-40s, roughly matching the valuations of this year’s other high-flying IPOs, CrowdStrike and Zoom Video Communications.

Datadog’s IPO also vaults it ahead of virtually all of the companies it bumps into in what is an already a high-priced sector:

The vendor is trading at more than three times the value of rival New Relic, which has had a stumble recently.

It is worth almost as much as Dynatrace and Elastic combined.

And it is closing in on the market cap of Splunk, which will generate more than $2bn of revenue in its current fiscal year.

Figure 1: B2B tech IPO activity

Cloudflare’s scorching debut

by Scott Denne

The enthusiasm for enterprise technology IPOs continues unabated as Cloudflare rips past its private company valuation in its first day of trading. The network services provider priced above its range and jumped up from there when it opened on the NYSE, benefiting from a continued demand for new offerings.

Wall Street saw a few rough patches over the month between the time Cloudflare unveiled its IPO paperwork and the first day of trading – the S&P 500 dropped 2% on two separate days. Yet the overall direction has been in its favor, with that index having risen nearly 3% over the past four weeks and Cloudflare’s competitor Fastly, which had been one of the worst-performing enterprise IPOs of the year, rising more than 90% during that period, leaving today’s offering with a higher comp.

As we noted in our coverage of Cloudflares IPO filing, it needed to garner a 12x trailing revenue multiple to move past the price of its series D round. About an hour into trading, it could boast a 23x multiple. That takes Cloudflare well past Fastly, which trades at 16x, highlighting the public market’s penchant for growth. Cloudflare, the larger of the two, expanded its topline 48% year over year in its most recently reported quarter, compared with Fastly’s 34%.

Figure 1

Enterprise IPOs: $75bn and counting

by Brenon Daly

In the tech IPO market, selling to businesses is proving to be a good for business. Enterprise-focused companies have already created some $75bn of market value so far this year. And at least another $10bn is likely to get heaped on to the pile, as two startups selling into valuable segments of the IT market get set to hit Wall Street. Ping Identity and Datadog both filed their IPO paperwork late last week.

The market for B2B offerings is so strong that companies and their underwriters are working through the traditional summer holiday period. Why are the current batch of IPOs getting fast-tracked? One contributing factor is rising volatility and uncertainty on Wall Street.

A recent survey by 451 Researchs Voice of the Connected User Landscape (VoCUL) showed investors are increasingly worried about Wall Street. One-quarter of the respondents to last month’s VoCUL survey said they are more pessimistic about the current direction of the US equity markets than they were 90 days ago. The number of bearish respondents topped the 20% of respondents, who said they are more confident in the outlook.

Despite the gloomy forecast, Cloudflare put in its prospectus in mid-August, which was followed by two other startups throwing in late last week to join the ranks of the publicly traded tech companies.

Ping Identity: Ping is set to come public after an unusual private equity-backed recapitalization. Vista Equitys acquisition of the federated identity provider is also likely to prove lucrative, with Ping expected to be valued at five or six times the $600m that Vista paid three years ago. (451 Research will have a full report on the company and the filing on our site later today.)

Datadog: Already a unicorn in the private market, Datadog has pulled off the difficult – but highly valuable – trick of fast growth without huge losses. The IT monitoring startup is almost doubling revenue while approaching profitability. (451 Research will also have a full report on the company and the filing on our site later today.)

These B2B companies are proving a lot more attractive to IPO investors than the B2C companies that have already hit the market or are set to debut soon. For instance, Uber, which just reported a $5bn loss for the most recent quarter, is still below its offer price.

And even more red ink is set to gush in the consumer-tech IPO pipeline, with next month’s expected offering by the company behind WeWork. The We Company is, of course, a real estate operator. But it is nonetheless trying to pass itself off as a technology company, using the word ‘technology’ almost 100 times in its recently filed prospectus. However, no matter how glowingly it describes its business (‘space as a service’) or its mission (‘elevate the world’s consciousness’), it’s hard to imagine Wall Street buying into it.

B2B IPO activity

Cloudflare looks to stoke a flickering IPO market

by Scott Denne

Cloudflare, a network control specialist that unveiled its IPO prospectus this week, will need an enthusiastic reception to get over an already-rich private valuation and an uncomfortable comp. Through 2019, Wall Street has greeted new offerings from enterprise technology vendors with enthusiasm, extending double-digit valuations on the opening days of all new issues. And while there still seems to be plenty of appetite, the enthusiasm has tapered a bit with recent declines in the equity markets.

As Cloudflare looks to debut, it boasts 48% year-over-year topline growth through the first half of the year. And like all startups, that growth comes at a cost. In cranking out $234m in trailing revenue, the company chalked up a $91m loss, with few signs that it will be approaching profitability anytime soon. Unusually, it’s a surge in Cloudflare’s G&A expenses, not only sales and marketing costs, that’s eating away at profitability. In the first half, its G&A expenses were roughly equal to its R&D costs, each of which is about half of the $67m it spent on sales and marketing.

As we noted in a recent report on B2B tech IPOs, all recent issues have come to market with valuations north of 10x trailing revenue. And although most still trade well into double digits, the market has cooled a bit. Of the eight such offerings this year, five are down 10% or more from their opening prices. Even so, the valuations are still generous. Take Slack, for example. It’s down about 20% from its first day and trades at 38x trailing revenue.

For Cloudflare, though, the least generous valuation from this year’s crop belongs to a fellow networking services firm. Fastly, Cloudflare’s competitor in the CDN sector, is one of the few that trades with a multiple that’s in single digits after a 35% decline since its opening day in May. While Fastly trades at 7.5x, Cloudflare will need to get above 12x to top the valuation from its series D round. Despite a 5% dip in the S&P 500 this month, it should still get there. Cloudflare is about 40% larger than its rival, growing 10 percentage points faster and targeting a larger slice of the networking market.

B2B tech IPO activity

Dynatrace’s dynamic debut

by Brenon Daly

Dynatrace’s IPO represents the third major transition in recent years for the application performance management (APM) company. Like the other two, today’s shift has proved wildly lucrative. Dynatrace created more than $7bn in market value as it moved from private equity to public trading.

Although not unprecedented, Dynatrace’s partial swapping out of financial sponsor Thoma Bravo for Wall Street investors is still somewhat unusual. (Post-offering, the PE firm still owns about 70% of Dynatrace.) By our count, just three of the two dozen enterprise-focused technology vendors, including Dynatrace, that have gone public in the US since the start of 2018 have come from PE portfolios. Dynatrace raised roughly $570m in its offering, some of which will go toward paying down its nearly $1bn in debt, which, again, stands in contrast to the typical VC-fueled growth for most tech IPO candidates.

In many ways, the partial change in ownership for 14-year-old Dynatrace is the culmination of the other two changes, the first being a technology overhaul followed by a shift in business model. As we noted in our full report on the IPO, Dynatrace revamped its product a half-decade ago, integrating all of its monitoring into a single platform. (It no longer sells its legacy product, which it refers to as ‘classic,’ except to existing customers.)

As part of the transition to a platform, Dynatrace also changed how it sold its product, as well as how it accounted for those sales. Gone were licenses, in favor of subscriptions. And while the company has undeniably made progress in its transition to a new, more valuable business model, it has also been undeniably aided in its efforts by a rather expansive definition of ‘subscription’ revenue.

Accounting purists might have a hard time signing off on Dynatrace’s practice of including term and perpetual licenses, as well as maintenance and support revenue, all as subscription revenue. Basically, the company lumps all sales of its non-classic product – regardless of whether it is true SaaS or license-based – into the subscription line on its income statement.

Our quibbles about accounting are rather minor, and certainly didn’t stand in the way of professional investors, who have long since given up on GAAP, from rushing to buy newly issued shares of Dynatrace. The stock surged 60% shortly after its debut on the NYSE. With roughly 286 million (undiluted) shares outstanding, Dynatrace began life as a public company with a value of $7.4bn. That’s one-third more than the current value of APM rival New Relic, which has been public since Dynatrace first started its product transition some five years ago.

Europe’s increasingly global M&A ambitions

by Brenon Daly

As economic growth slows across Western Europe, tech acquirers there are increasingly looking to do deals outside their home market. The 451 Research M&A KnowledgeBase indicates 2019 is on pace for fewest number of ‘local’ deals (with both Western European acquirers and targets) in a half-decade. Based on our data, this year will see one-third fewer Continental transactions than any of the previous three years.

The slump in shopping comes as Western Europe weathers a broad slowdown that the International Monetary Fund recently said would rank the region as the slowest-growing of all the major economic regions around the globe this year. The IMF forecast that European economic activity would increase a scant 1.3% in 2019, half the comparable rate of the US.

We have noted how that has cut the overall tech M&A activity by acquirers based in the once-bustling markets of the UK, Germany and elsewhere. Collectively, Western Europe is the second-biggest regional buyer of tech companies in the world, accounting for roughly one of every four tech acquisitions announced globally each year, according to our data.

What’s more, the decline comes through sharpest in those deals that are closest. Western European acquirers have picked up fellow Western European targets in just 29% of the tech deals they’ve announced so far this year, our M&A KnowledgeBase indicates. That’s down from the five-year average of 32%.

Granted, the shift in shopping locations isn’t huge, but it is significant. Decisions on where to buy can swing hundreds of millions of dollars into and out of a local tech scene. Further, there’s a rather ominous implication about the politically fractured and economically sluggish Western Europe.

If we make the economically rational assumption that M&A dollars get spent where they can generate the highest return, then Western European tech acquirers don’t appear to be finding anything too attractive around home. On both an absolute and relative basis, they are shopping locally less often right now than at any point in the past half-decade. Instead, the M&A strategy for Western European acquirers is taking them more and more on the road.

PE, not just VC, joins the IPO parade

by Brenon Daly

The tech IPO parade continues, but with a twist. Rather than having its journey to Wall Street backed by truckloads of venture dollars, the first enterprise-focused company in the second half of 2019 to put in its S-1 is coming from a buyout portfolio. Dynatrace is a private equity-backed spinoff, not a VC-backed startup.

The planned offering by Dynatrace would be the latest move in a rather unconventional journey to the public market by the application performance monitoring (APM) vendor. Founded far from Silicon Valley, Dynatrace got its start in the sleepy Austrian town of Linz in 2005, taking in only $22m in funding before exiting to Compuware in July 2011 for $256m, or 10x invested capital.

Compuware itself was taken private by buyout firm Thoma Bravo three years later for $2.5bn, which, at the time, represented Thoma’s largest single transaction. Shortly after, Thoma spun off Dynatrace from its one-time parent and consolidated its new stand-alone APM holding (Dynatrace) with an existing one (Keynote Systems, which Thoma took private for $395m in June 2013).

After all that addition and subtraction, Dynatrace now looks to debut on Wall Street. That’s a trick that rival AppDynamics wasn’t able to pull off because Cisco Systems snapped the venture-backed company out of registration. Assuming Dynatrace does make it public, it would mark the first IPO in the fast-growing sector since New Relic went public in December 2014. (New Relic currently sports a $5bn+ market cap.)

But it certainly won’t be the last. Dynatrace’s sometime rival Datadog, which has raised $148m in venture backing, is thought to be eyeing an IPO of its own. (Subscribers to the Premium edition of the 451 Research M&A KnowledgeBase can see our full profile of Datadog, including our proprietary estimates for revenue for the past two years.) Meanwhile, subscribers to 451 Research’s Market Insight service can look for our full report on Dynatrace’s proposed offering on our site later today.