With Casper’s public offering earlier this week, we’ve closed the book on the first two venture-backed IPOs of note in 2020. Casper, joined by One Medical, carried over $870 million of private capital, venture and otherwise, across the finish line.
Even though each IPO featured an unprofitable tech-enabled business that had posted sub-30% growth and gross margins under 50% (far more, in the case of One Medical), they wound up miles apart in terms of their market reception and resulting valuation, measured in revenue multiples terms.
So what can we learn from the two IPOs as we look ahead to other unicorn debuts in 2020? A great number of things that help set the stage for the rest of 2020’s IPO class. Let’s discuss three observations that stick out the most.
Tech-enabled businesses can secure high-flying valuations in public offerings
The surprise of the year so far has been the public market’s reaction to One Medical’s IPO. The company, today worth $3.13 billion, is trading at 11.3x times the top end of its 2019 revenue projections (the company has yet to close the books on its Q4 accounting).
That revenue multiple a few years ago would have been reserved for the highest-quality SaaS business replete with 80% gross margins — or better — and greater than 50% revenue growth. Today, One Medical can snag the same multiple despite recurring incomes that comprised less than one-fifth of its total net revenue, gross margins of 36% at best in 2019 and growth of no more than 30%.
But, don’t take my incredulity as negativity. Indeed, read it in the opposite tone; One Medical’s current revenue multiple is killer-good news for companies that aren’t built like top-decile SaaS companies but still want a greater than 10x trailing revenue multiple.
Lesson: There’s more demand out there for brand than we thought. That’s good news for lower-quartile unicorns, measured in accounting terms.
Lower-quality companies can go public if needed, at a cost
If One Medical bodes well for tech-enabled unicorns hoping to trade at technology valuations, Casper wrote the opposite story in the second half of this week.
Its slower growth rate and persistent unprofitability on both an adjusted and GAAP basis made it difficult for the firm’s gross margins that proved better than One Medical’s own. Despite posting nearly twice as much revenue in 2019 as One Medical, Casper is worth a fraction of its total.
Here’s the cost that Casper had to pay to go public:
- A drastic valuation cut from its final private valuation of more than 50%
- At its current valuation of $452.51 million, a revenue multiple of 1.03x at the upper end of its full-year 2019 guidance
But, hey, Casper is now public, it did provide liquidity for its shareholders and it added capital to its accounts in the process.
Lesson: There is a market for so-called “down IPOs.” Casper’s good first day was erased today in more negative trading, but the company did go public and raise capital, meaning that IPOs are an option even for unicorns that need cash.
The mispricing of IPOs continues
I’ve long found the debate about the pricing of IPOs a bit specious. However, the pricing of One Medical’s IPO looks awful in hindsight. After pricing at the low end of its range, One Medical is now worth 81.4% more. That’s an insane difference and one that implies that the yet-unprofitable unicorn could have raised lots more capital in its debut if it had been properly priced.
This sort of mistake gives more credibility to companies considering direct listings with fast-follow primary share sales. Why let some bankers price you if they so often get it wrong? If a CEO believes in their company — and they all do — why not float, let the market figure the value of the firm and then sell a bloc of equity worth $100 million?
Lesson: Large IPO pops, once cool, are now viewed as embarrassments. And the One Medical IPO shows how far the banking world can be from public investor sentiment. This makes the Asana direct listing choice a non-surprise.
Ready to talk about something else? Me too. More on this set of topics when we get our next S-1.