SaaStr Annual 2024: The Real Data on What it Takes to Go Big and Eventually IPO with Meritech Capital

The Road to IPO in 2024 and Beyond walks through the well-trodden path of this important milestone—the initial public offering (IPO). We'll delve into the past and review what it took for the previous 150+ SaaS companies to go public by exploring the reasons for going public, the metrics that matter, and what companies must do to see success as public companies.

1. The Real Data on What it Takes to Go Big and Eventually IPO Cathy Choi Partner Meritech Capital Alex Clayton Partner Meritech Capital

2. The Road to IPO by Meritech As software companies and their boards are asking the questions “ When can I IPO? ” and  “How big do you need to be to IPO?” , the following puts the size, performance, and qualitative factors of past SaaS IPOs in context and what it means for the future. Today, we will address: What matters qualitatively and quantitatively? How have recent SaaS IPO metrics trended over time? What does it take today? How do you maintain success post-IPO?

3. Table of Contents Introduction Qualitative Factors For An IPO Metrics That Matter What Matters After The IPO

4. II. Qualitative Factors For An IPO

5. Going IPO is a well-trodden road...there have been almost 200 of them since 2012

6. …and apart from the ZIRP-time frame, only ~20/year Note: N=198 SaaS companies with IPOs 2012-2024. Source: Goldman Sachs ECM Data (August 2024).

7. What are the Key Considerations? Have a clear story. Is it easy to get your grandma excited about it? Are you a market leader? Can you become a multi-product platform? Are there proof points to support your vision? F ast growth + scale + strong efficiency. Is your growth rate durable? What’s the path to profitability? Are you a Rule of 40 business? Do you have favorable unit economics that can sustain as you scale? Operational excellence. You need to have excellent offense (product & engineering, sales, marketing/comms, success)  and  defense (strategic finance / FP&A, compliance, legal, people) Predictability. Can you consistently “beat and raise” on both the top and bottom lines? ~ 80 % of SaaS companies beat Wall Street guidance on a quarterly basis A valid “business” reason to go public. This can include: capital to support growth or M&A, v alidation for enterprise accounts, marketing for customers / hiring, liquidity for shareholders

8. III. Metrics That Matter For An IPO

9. Going public still takes ~10 years from founding  IPO… Note: N=135 SaaS companies with IPOs 2009-2024 tracked by Meritech Benchmarking. Source: Company filings and Wall Street research. 2 2 3 7 11 6 5 12 10 10 10 20 33 2 2 Number of IPOs:

10. …but companies are bigger recently than in the past Note: N=135 SaaS companies with IPOs 2009-2024 tracked by Meritech Benchmarking. Implied ARR defined as quarterly total revenue multiplied by four. Source: Company filings and Wall Street research. 2 2 3 7 11 6 5 12 10 10 10 20 33 2 2 Number of IPOs:

11. And are growing a bit slower as ARR scale has increased Note: N=135 SaaS companies with IPOs 2009-2024 tracked by Meritech Benchmarking. Source: Company filings and Wall Street research. 2 2 3 7 11 6 5 12 10 10 10 20 33 2 2 Number of IPOs:

12. Net retention is going up slightly, but stable 2 3 7 11 6 5 12 10 10 10 20 33 2 2 Number of IPOs: Note: N=135 SaaS companies with IPOs 2009-2024 tracked by Meritech Benchmarking. Defined as reported net dollar retention or dollar-based net dollar retention (or expansion) figure. Source: Company filings and Wall Street research.

13. Cash required is increasing dramatically with larger scale 2 2 3 7 11 6 5 12 10 10 10 20 33 2 Number of IPOs: Note: N=135 SaaS companies with IPOs 2009-2024 tracked by Meritech Benchmarking. Net Cash Burn to IPO defined as cash & cash equivalents at IPO minus total equity capital raised minus debt at IPO. Source: Company filings and Wall Street research.

14. Free cash flow requirements increasing post-ZIRP Note: N=135 SaaS companies with IPOs 2009-2024 tracked by Meritech Benchmarking. Free cash flow defined as last twelve months cash flow from operations minus capital expenditures and capitalized software costs. Source: Company filings and Wall Street research. 2 2 3 7 11 6 5 12 10 10 10 20 33 2 2 Number of IPOs:

15. Companies need growth AND free cash flow Note: N=135 SaaS companies with IPOs 2009-2024 tracked by Meritech Benchmarking. Rule of 40 defined as Implied ARR Growth + LTM free cash flow margin. Source: Company filings and Wall Street research. 2 2 3 7 11 6 5 12 10 10 10 20 33 2 2 Number of IPOs:

16. Market caps are now in the billions at pricing… Note: N=135 SaaS companies with IPOs 2009-2024 tracked by Meritech Benchmarking. Market Cap defined as fully-diluted equity value at IPO price. Source: Company filings and Wall Street research. 2 2 3 7 11 6 5 12 10 10 10 20 33 2 2 Number of IPOs:

17. …but multiples are in line with historical averages Note: N=135 SaaS companies with IPOs 2009-2024 tracked by Meritech Benchmarking. Calculation uses market cap @ IPO and Q0 implied ARR. Source: Company filings and Wall Street research. 2 2 3 7 11 6 5 12 10 10 10 20 33 2 2 Number of IPOs:

18. Select Post-ZIRP SaaS IPOs Metrics and Performance Note; Rubrik ARR defined as Subscription ARR only. Stock price and implied ARR multiple as of August 23, 2024. Share price delta based on IPO close price. NTM ARR % growth based on consensus estimates at IPO. Rule of 40 is defined as Implied ARR % YoY Growth + LTM Free Cash Flow Margin. Source: Company filings. Trading Metrics & KPIs IPO Date Market Cap at IPO ($M) Implied ARR Multiple (Today) Implied Burn to IPO Share Price Since IPO Financial Metrics at IPO Quarter Implied ARR ARR % YoY Growth NTM Revenue % YoY Growth Gross Margin Net Retention Rate LTM Free Cash Flow Margin Rule Of 40   Apr-2024 $5.6B 7.1x $723M (6%)   $784M 47% 19% 77% 133% (4%) 43%   Jul-2024 $4.6B 11.3x N/A 10%   $480M 34% 24% 69% 118% 11% 45%   Sep-2023 $7.6B 10.3x $16M (3%)   $658M 51% 20% 77% 119% 8% 59%

19. Bottom Line: Where do you need to be? Note: N=77 SaaS companies with IPOs 2018-2024 tracked by Meritech Benchmarking. Implied ARR defined as the last quarter’s total revenue multiplied by four. Free cash flow is defined as cash flow from operations minus capital expenditures and capitalized software costs. Rule of 40 is defined as Implied ARR % YoY Growth + LTM Free Cash Flow Margin. All financial figures are non-GAAP which adjusts for items such as stock-based compensation, amortization of intangibles, and other one time and/or extraordinary expenses and on a LTM basis. Source: Company filings. Median Top Quartile     Implied ARR ($M)   $243   $412     Implied ARR % YoY Growth   42%   57%     Market Cap at IPO ($M)   $4,194   $7,513     Implied ARR Multiple at IPO Pricing   13.7x   23.1x     % Gross Margin   75%   84%     % Operating Margin   (6%)   8%     % FCF Margin   (7%)   7%     % Rule of 40   36%   59%     Net Revenue Retention   119%   127%     Years to IPO   11.9   9.3     Implied Burn to IPO ($M)   ($220)   ($97) All 2018+ IPOs Meritech Target Range      $400+   30%+      $3,000 – $5,000      8x – 12x     70% – 85%      (20%) – 20%       (10%) – 20%      40% – 60%     115%+      -      As little as possible 

20. What matters to get public today? ARR at IPO has increased, while time from founding  IPO remains steady . ARR growth has slowed recently as free cash flow also in focus You need some scale (i.e., likely ~$400M in ARR), otherwise would need extraordinarily high revenue growth and/or strong unit economics You do not need to be FCF positive to IPO , but need a path for it. Must be a rule of 40 company, though, at least Multiples are now at historical norms. No matter how great you are, hard to trade at more than 10x ARR…but that does mean billions of dollars of market value You must be great and stand above the crowd – the market can only absorb ~20 IPOs per year

21. IV. What Matters For Success After The IPO?

22. No correlation to valuation multiple and size R² = 0. 0928 Note: N=139 SaaS companies with IPOs 2004-2024 tracked by Meritech Benchmarking. Excludes outliers CRM, ADBE, INTU. Source: CIQ as of August 23, 2024.

23. Durable growth (and not fast) is the key ingredient R² = 0.7449 R² = 0.0276 MOIC is highly correlated to how much revenue has grown in absolute amounts from IPO. There is essentially zero correlation to the revenue growth CAGR. Note: N=139 SaaS companies with IPOs 2004-2024 tracked by Meritech Benchmarking. Excludes outlier CRM. Source: Company filings. CIQ as of August 23, 2024.

24. Multi-product approaches enable durable growth (and market appreciation!) Marketing Hub ARR (Q2'14) Incremental ARR from Marketing Hub Incremental ARR from Sales Hub (Launched 2014) Incremental ARR from Service Hub (Launched 2018) Incremental ARR from CMS Hub (Launched 2020) Incremental ARR from Operations Hub (Launched 2021) Incremental ARR from Commerce Hub (Launched 2023) Total Implied ARR (Q2'24) Note: All implied ARR at or before IPO assumed to derive from Marketing Hub. By-product implied ARR and total implied ARR based on equity research estimates Q3’23. Assuming new products trade at same ARR multiple of entire company. Source: Company filings and Wall Street research. Market cap as of August 23, 2024. 93% 101% 102% 115% 104% Overall NDR Evolution by Year 7x NTM Rev, $868M Market Cap at IPO 9x NTM Rev, $26B Market Cap Today At today’s current implied ARR multiple of ~10x, HubSpot has added ~$11B in market cap from new products

25. Durable (Higher) Growth Example: 49% ARR Growth CAGR from IPO Year Note: Implied ARR and Implied ARR Growth % are as of the last valid trading day of that calendar year. Source: Company filings.

26. Durable (Slower) Growth Example: Note: Implied ARR and Implied ARR Growth % are as of the last valid trading day of that calendar year. Source: Company filings. 20% ARR Growth CAGR from IPO Year

27. Durable growth (not just high growth) is most important (Higher Growth) (Slower Growth) Years Public 6  15 Implied ARR at IPO $502 M  $46M Implied ARR Today $3,647M  $614M ARR CAGR (IPO to Today) 49%  20% Share Price MOIC from IPO 8.0x 17.1x Note: Share Price MOIC as of August 23, 2024. Source: Company filings. Huge returns! Also huge returns!

28. “Beat and Raise” = Predictability Note: Analysis examines select software universe of companies with varying growth and profitability profiles. Source: Goldman Research based on company filings, FactSet; Market data as of June 2024. Results vs. Consensus SaaS companies typically beat consensus estimates and raise guidance for the next quarter, which signals strong business momentum and predictability. 1.9% 3.0% 1.3% Pre-COVID Median Beat COVID Median Beat Post- COVID Median Beat On average, ~80% of companies beat consensus pre-COVID. On average, ~90% of companies beat consensus. Companies generally reduced guidance during this period. Post-COVID, back to ~80% of companies beating consensus. However, companies are beginning to reduce guidance again. Irrespective of market conditions, almost all companies beat and raise revenue guidance

29. Key Takeaways: After Your IPO Absolute scale irrelevant (today) for valuation multiple Durable long-term revenue growth matters ; it’s about time in market, not market timing. Cannot durably grow without strong unit economics, though Successful multi-product strategies grow TAM and increases efficiency Absolute pace of revenue growth, (i.e., revenue CAGR) since IPO, has little relationship to share price returns. All about growth durability Must beat and raise , i.e., predictability

30. Key Takeaways

31. To get public, you need to have it all – great story, team, market, growth and efficiency, predictability and a great reason to do it. Only ~20 SaaS co’s per year can make it out. Ask yourself – why do public market investors *have* to own my stock vs. all the other great public SaaS companies? You also need to be at least ~$400M+ in ARR; otherwise, you need to be a super fast grower (50-60%+) or highly profitable. Need to be at least a rule of 40 company Regardless of private market valuation, expect to be worth ~10x ARR. A “down-round IPO” irrelevant over the long-term Need to grow durably and predictably, and beat your guidance If you have it all, can see massive returns in the public markets – Salesforce up almost 100x since IPO The Final Word from Meritech:

32. Meritech Analytics We track quarterly financial and trading metrics for 150+ public and previously acquired SaaS companies. See more at: meritechcapital.com/benchmarking/comps-table

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