It’s demo day for the current Y Combinator class, so we’ll have a largely early-stage focus at TechCrunch today. But there’s also a host of late- and super-late-stage news this morning that matters.
Let’s get to all of it before we start to talk accelerators, overheated pre-seed valuations and the like.
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There are three things to discuss. First, the possible $10 billion exit of Discord to Microsoft. Discord is a well-financed unicorn that has raised oodles of capital and reportedly sports rapidly expanding revenues. Our goal will be to vet whether the price tag in question makes any sense, or if it is too low.
Second: Real estate tech company Compass has set an IPO price range we need to explore. Is its resulting valuation strong? Does it line up with its recent financial performance?
And, third, Intermedia Cloud Communications has priced its IPO. We’re behind on this entire debut, so we’ll take a second to riff on what the company does and what it is worth.
It’s a lot. But if we don’t get through it all now, we’ll fall behind and feel silly later. Let’s get to work!
Discord and Microsoft
Microsoft might be getting good at community, which is an odd thing to say about the enterprise software and cloud computing giant. The company’s Xbox gaming ecosystem has survived the test of time, Github is doing fine under Microsoft’s auspices, and Minecraft seems unharmed by Redmond’s stewardship.
That means gamers, developers and kids are all content to hang with Satya Nadella and company. Adding Discord to the mix might give Microsoft even more tooling to augment its existing communities, or perhaps tie them more closely together. But that’s all product news, which isn’t our remit. Let’s talk numbers.
The New York Times reported that Discord has “held deal talks with Microsoft for a transaction that could top $10 billion.” That figure has been widely reported, so we’ll use it for our work.
With a possible valuation in hand, we need revenue numbers to figure out if the possible sale price makes any sense. Happily, we have somewhat fresh numbers: The Wall Street Journal reported earlier this month that Discord “generated $130 million in revenue [in 2020], up from nearly $45 million in 2019.”
Discord won’t manage to triple again this year, but it seems fair to say that the community chat app could do $200 million in top line this year. At a $10 billion valuation, Microsoft would be paying about 50x the company’s forward revenue. If we raise our Discord 2021 revenue estimate to $250 million, its implied forward multiple falls to 40x.
No matter what, Microsoft is considering paying sharply for growth if it doles out $10 billion for Discord. But at the same time, so what? Shares of the software giant are richly valued, and it can afford to make a gamble worth 0.56% of its market cap on a known consumer hit (calculated using a $1.78 trillion market cap for Microsoft). And as Discord is growing nicely, the risk of near-term write-downs could be limited.
Discord’s most recent investors last put $100 million into the company at a $7 billion valuation, so it’s less clear whether they will be content with a mere $10 billion exit.
The IPO market
And then we have two IPOs. We’ll start with Compass’ deal. If you need a run-through of the company’s financials, head here. Today we’re just talking pricing.
Per its new S-1/A filing, Compass expects to price its IPO between $23 and $26 per share. Counting its Class A, Class B and Class C shares that will be outstanding after its debut, along with the 5.4 million shares that it intends to reserve for its underwriters, Compass will have 403,325,950 shares outstanding after its debut.
The company’s simple IPO valuation range, then, is $9.28 billion to $10.49 billion. IPO watchers Renaissance Capital calculate that, at the midpoint of its current IPO price range, Compass would be worth $12.5 billion on a fully diluted basis.
For the low-margin, growth-slowing and deeply unprofitable Compass, those numbers look pretty damn good. The company could raise more than $1 billion in its public debut.
Then there’s Intermedia Cloud Communications, a company that is net-new to your humble servant. You can read its S-1/A filling here, but the gist is that the company sells unified communications as a service, or UCaaS. Even I hate that acronym. But the idea is that some companies won’t want to buy point solutions for their communications work; they want a suite of tools that work in concert. In theory, that’s UCaaS.
Regardless, Intermedia Cloud Communications isn’t a stellar business. It barely grew from 2019 to 2020, inching its revenues from $240.5 million to $251.6 million. Its net losses over the same period rose from $5.5 million to $21.7 million.
One reason why the company loses money is that it has around a quarter of a billion dollars in debt. When did that debt come to be?
We are party to a first lien credit agreement, dated July 19, 2017 and amended on July 24, 2018, July 31, 2020 and February 18, 2021 (Credit Agreement) with Toronto Dominion (Texas) LLC as administrative agent and the lenders set forth therein, providing for a $273 million term loan (Term Loan Facility) and $52 million revolving credit facility (Revolving Credit Facility). As of December 31, 2020, we had no amounts outstanding under our Revolving Credit Facility. As of December 31, 2020, the effective interest rate for the Term Loan Facility was 8.41%.
As you expected, that’s when private equity bought the company. Yuck. Intermedia Cloud Communications does intend to pay down some of its debt with IPO proceeds. But what is the value of a slowly growing and increasingly unprofitable UCaaS player? Let’s find out.
Per Renaissance Capital, about $1.5 billion! And that’s on a fully diluted basis. Why is its valuation so low compared to its revenue base? A better question is this: Why would you pay more for a company that is barely growing and losing increasing sums of money while artificially incurred debt limits its free cash flow? The company doesn’t even have strong subscription gross margins on an adjusted basis.
Anyway, that’s Intermedia Cloud Communications.
And with that, just over the 1,000-word mark, we’re out of space and topics. We can now pivot to Y Combinator and get on with it.