Earlier this month, The Exchange took a look at quieter companies that have been growing consistently before, during and after the 2021 venture capital peak. The startups and unicorns that didn’t raise at 50x or 100x ARR last year may be the companies most ready to kick open the IPO window at some point in the future.
Quite a number of you were enthused by the coverage of less-flashy private tech companies, so we’re taking another look at this startup cohort this morning.
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To further our conversation, I spoke with Derek Ting, the CEO of TextNow, which crossed $100 million in annual revenue — not merely in run-rate fashion — and has a very interesting venture capital history. We’ll also go over how to open the IPO window when the market stops falling by full percentage points every day.
Turning the clock back, you may recall that this column once had a regular series of posts looking at private companies that had reached the $100 million ARR threshold. We got bored of the topic after a number of cycles, as it turned out that most former startups that reached nine figures of revenue wound up looking and sounding rather like one another.
At the time, we meant that as a 99% compliment and 1% diss. Today, it feels more like an utter accolade. Let’s talk about it.
What’s TextNow and how’s it doing?
TextNow is a consumer phone and text service that offers a zero-cost service with advertising and various tiers that do not include ads. TechCrunch first covered the company back in 2011, when it raised around $1 million. The company has now raised around $1.5 million in total — that is not a typo; we did not mean to type billion.
The Exchange last mentioned TextNow last year when it reached a $100 million annual run-rate. Per the company, it closed out 2020 with $62 million in total revenue and $103 million in 2021. That puts TextNow far above the $100 million run-rate mark today, and as it has hired a CFO, is an IPO candidate as soon as the market welcomes such transactions again.
How did TextNow not need to raise several hundred million dollars?
We wanted to learn how TextNow had done what seems nearly impossible for most venture-backed companies — grow to public-market scale without the need to raise and spend tectonic sums of money. Per Ting, the answer is somewhat pedestrian. He said that TextNow focused on unit economics ahead of scaling, adding that the more that the company grew, the less it needed external capital.
In business terms, that’s called operating leverage, or simply being able to make more money as the business grows. Many startups actually demonstrate negative operating leverage for much of their private-market lives, with expanding operating deficits as they scale top line. The idea there is that with external capital, startups can spend far in advance of scale, allowing them to capture market share and strangle would-be competitors from challenging them in a new or rapidly growing market category.
TextNow has shown that isn’t the only way to go about building.
How did the company manage to grow without needing to spend heavily on marketing? We asked Ting, curious how the company’s customer acquisition costs didn’t necessitate raising more external capital. Per the CEO, the company had strong product-market fit from the offset, and after making sure its users were real, stayed disciplined about growth. TextNow wanted to grow, Ting explained, just not at all costs.
TextNow went to market with a product that customers wanted, focused on its unit economics and did not grow ahead of its ability to generate gross profit (we’re simplifying, but that’s close enough). Shocking, right?
While it may appear that we have managed to uncover a business case that follows bog-standard corporate advice, there’s actually a little bit more to see here. Sure, TextNow is much like other companies that we’ve covered in our notes on well-scaled private tech companies, but its ability to get to where it is sans marketing spend financed with equity says something a bit more:
- Consumer-facing startups that have real product-market fit can get away with far less marketing spend than we might have thought.
- Enterprise sales are more expensive, which means that we should likely not expect similar results from that cohort.
But TextNow has shown that it is possible to build a nine-figure tech business sans mountains of cash. Zapier is another example of a startup that raised single-digit millions and scaled to nine figures in top line. There aren’t that many more than I can summon to mind, frankly.
But no matter if it took $1 million or $250 million to get there, the $100 million revenue threshold is back in vogue. Last year, hard revenue results got a bit lost in the buzz, when flashy round sizes and huge valuation gains were the marquee events.
Don’t forget that only around one in six unicorns has reached a $100 million run rate. These companies are still the minority. And those that have reached the revenue milestone without a similar history of raising venture capital are the real outliers. (You could even call them, I don’t know, unicorns, thanks to their vanishing rarity.)
There’s a final level of rarity, however, that we have yet to see in action. There will come a private-market company that opens the IPO window in a material capacity. More than what we discussed yesterday. It’s always risky to predict, but I would be willing to wager someone a fancy coffee that one of the $100 million ARR companies that we’ve discussed will be the first out the gate. Why? Because they have the easiest-to-explain businesses, and investors won’t want to restart the tech IPO cycle with something hard to grok, yeah?
Ting said that his company’s user growth is going better than expected, though there are some advertising headwinds in the market that TextNow is seeing. So that’s a plus-minus look at the company’s market. All we need, then, for TextNow to perhaps be the first IPO in the next cycle — Ting said his company has discussed going public internally, which is not a surprise — is for the advertising market to regain its footing.
The CEO said that he doesn’t think that going first would stop TextNow from going public. So cross your fingers — we have a possible logjam breaker here.