Cava’s sensible IPO ambitions could spur more companies to go public

Even as the technology industry and investors wait for heavily venture-backed companies like Turo, Reddit and Instacart to go public, Cava is heading out and powering its own debut.

The company set an initial IPO price range this week, indicating what it may be worth once it’s public. This is also a chance for us to check our valuation estimates.

Cava intends to sell 14.4 million shares between $17 and $19 each. The IPO will raise hundreds of millions of dollars. (Note that if Cava’s underwriters exercise their option to purchase more equity at the IPO price, that number could go up to 16.6 million shares.)

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Cava, a fast-casual chain that serves Mediterranean food, may seem like an odd choice for TechCrunch to cover. However, the company has raised extensive private capital, including venture funds, and is worth more than $1 billion. This IPO will recycle funds currently locked up in its illiquid shares back to investors, and that matters for the companies that do come under the ambit of our usual coverage.

That said, Cava sits neatly next to other tech-enabled businesses that have gone public in recent years. I’m thinking about names like Sweetgreen, and Rent The Runway, even if the latter has a very different business model.

If you want to learn how Cava has grown and operates its business, head here. This morning, we’re digging into the company’s valuation.

Is it better to have “tech-enabled” in your description?

I was chatting recently with the CEO of a multibillion-dollar startup about what went wrong during the 2020-2021 venture capital bubble. In their view, one of the core issues was the homogenization of revenue and how it was valued.

Not all revenue is equal. Sales that result in low gross margins is worth less than revenue that comes with high gross margins. What’s more, a company that brings in recurring revenue is worth more than one that does not. The holy grail, therefore, is high-margin recurring revenue that rises over time, often referred to as net-dollar retention. That’s what many tech companies boast of and can achieve.

So when money was cheap due to low interest rates, these various tiers of revenue were squashed together. That led to a lot of companies being valued as if they were making high-gross margin, recurring revenue that increased with time. Like enterprise software businesses, in other words.

But that collective mania faded when the economy soured, and valuation bands have now separated once again. Sweetgreen went public in late 2021 with a price/sales multiple of 15x — a metric that rises with both revenue quality and the pace of revenue growth. That multiple rests at 2.4x today, per YCharts. Rent the Runway is another good example: It was listed in late 2021 with a price/sales multiple of nearly 8x, but it’s just over 0.5x today.

Basically, investors valued those companies one way when everything was looking rosy, and then quickly backtracked after they sobered up.

This brings us to Cava. Before the company priced its IPO, we calculated its valuation using Sweetgreen’s recent financial results and valuation metrics. After noting that Sweetgreen’s prices/sales multiple was at 2.1x at the time, we wrote:

If we apply that multiple to Cava’s Q1 fiscal 2023 revenue (annualized), we get a valuation marker of $1.62 billion. However, since Cava reported better net margins and positive adjusted EBITDA in Q1 2023 than Sweetgreen (which had an adjusted loss), you could infer that investors would be willing to pay a higher multiple for Cava.

What’s more, Sweetgreen’s same-restaurant sales grew just 5% in the first quarter, far less than Cava’s 28.4%. If we assume a multiple of 3x its annualized Q1 fiscal 2023 revenue, Cava would be worth $2.44 billion

A bracket of $1.62 billion to $2.44 billion gives us a midpoint estimate of $2.03 billion.

And what is Cava worth, per its latest filing? At $17 per share, it’ll be worth around $1.89 billion ($1.93 billion fully diluted); at $18, the midpoint of its valuation range, it’ll be about $2 billion ($2.04 billion fully diluted); and at $19 per share, the peak of its current IPO range, around $2.12 billion ($2.16 billion fully diluted).

We got close, in other words.

The Cava IPO will not unlock an ocean of parked venture capital dollars. It will make some cash available again, but as we noted last time, the IPO likely is more valuable for its potential signaling power. If Cava’s IPO prices and trades well in its early days, it could help build confidence in the public markets and around public debuts.

Given that many tech startups are stuck twiddling their thumbs as they wait for the halcyon days of sky-high valuations to return, some proof of success from a company that’s actually doing something could go a long way.

More when Cava formally prices.