Hello and welcome back to our regular morning look at private companies, public markets and the grey space in between.
This morning we’re digging into the current IPO market, asking ourselves how much damage WeWork really did to other companies hoping to go public. Is the IPO window closed, and if not, what sort of companies can still get out?
There’s some good news out today for late-stage startups looking to debut — along with a few impending tests regarding the market’s appetite for risk that we should understand as we head into 2020.
Bill.com’s good news
In terms of IPOs, Bill.com’s felt comfortably standard for 2019. Bill.com was a heavily venture-backed company that had raised just under $350 million while private across myriad rounds, and by the time it wanted to go public it still lost money.
At the same time, the company had a number of strengths. These include historically slim losses as a percent of revenue ($7.3 million in its most recent fiscal year, against $78.4 million in revenue), differentiated revenue sources (subscription income and rising interest payments), and improving gross margins (74 percent in its most recent quarter, up from a little under 72 percent in the year-ago period).
Those factors combined were sufficient to entice investors to price the company’s IPO far above its initial expectations of $16 to $18 per share. Instead, Bill.com raised its range once and then priced above the higher interval. At $22 per share, the company’s value rose by about 60% compared to its most recent private financing. (You can read more on the debut here.)
This matters as WeWork was said to have closed the IPO window for companies more focused on growth than profits. The way the market reality was discussed in venture circles seemed to indicate that WeWork’s implosion had slashed investor interest in growth, with public market players now favoring profits, or something close.
Bill.com’s most recent three-month period featured far-larger losses than its year-ago quarter, which mattered little in the end. The firm’s solid growth and moderate losses, it seems, were more than enough to secure a strong welcome to the public markets.
Yes, but…
You may be wondering why we just spent so much time explaining why a healthy company managed to go public. The goal, simply, was to point out that not only can companies still losing money and burning cash go public, they may even get a strong reception.
But what about companies in slightly less good shape? What does Bill.com’s IPO pricing indicate for Sprout Social, a company of similar size that’s going public this week which is also unprofitable, but growing more slowly (29.5% year-over-year in Q3 2019, compared to Bill.com’s 57%)?
Its pricing and debut will be a more interesting test. And luckily for us, it should price its shares this evening. (Even more fun, it targeted the same $16 to $18 per-share initial IPO price range that Bill.com initially had in its own sights.)
If Sprout Social manages to price in-range, we’ll have another data point in favor of the IPO window being comfortably open. It’s not surprising that Bill.com’s IPO priced well, but Sprout Social’s slower growth rate likely make its losses less palatable; if it can debut all the same we’ll know that the band of venture-backed companies that can public post-WeWork in the dead of December is wide.
That’s good news for illiquid unicorns and their backers, provided that their companies are at least as healthy as Chicago’s Sprout.
WeWork 2.0
Finally, we have one more test of the IPO market ahead of us.
China-based Ucommune is a co-working company with self-described “global impact and ambitions.” Claiming to be the “largest co-working space community in China,” Ucommune espouses “sharing, innovation, responsibility and success for all.” In its F-1 document, filed yesterday and setting in motion a possible US-listed IPO, Ucommune details comical levels of unprofitability and growth.
If all that sounds familiar, it should. It should feel similar to WeWork, which makes the timing of Ucommune’s IPO filing all the more amazing. WeWork’s pulled IPO was minutes ago, and here we are, staring down the filing of yet another coworking IPO?
The situation gets even better. Observe the following results:
- Ucommune Q1, Q2, Q3 revenue: $122.4 million
- Ucommune Q1, Q2, Q3 cost of revenue: $141.1 million (+209.9% YoY)
- Ucommune Q1, Q2, Q3 gross margin: -15.3%
The company wound up with an operating loss of $78.5 million in the first three quarters of this year and a net loss of $80.1 million in the same time period, which makes UCommune’s performance less bad than, say, what WeWork put up in 2018, when the company managed a net loss of $1.9 billion against $1.8 billion of revenue. But the numbers are still not very good? (Right? I’m not missing something here?)
Summing up
Bill.com’s IPO was a test of whether the market still had an appetite for companies with strong growth and moderate. The company’s public offering pricing indicates that it does.
Sprout Social’s IPO will test the market’s appetite for slower-growing, unprofitable companies. What we’re looking to see is how much of a revenue multiple deficit that Sprout winds up pricing at compared to Bill.com; the smaller it winds up being, the more open the IPO window will appear.
And when it comes to Ucommune, whether or not the IPO happens at all is the test; if Ucommune manages to go public in the US it will be indicate that WeWork truly was an anomaly, instead of an endorsement of the American coworking giant’s ability to spoil the whole punch bowl. But if Ucommune fails to debut, we’ll know for pretty much sure that loss-making coworking isn’t a good IPO bet after all and that the public markets are still only so willing to pay up for companies far, far from profitability.
Photo by Markus Spiske on Unsplash