Klaviyo could break the unicorn IPO logjam


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Last Friday, two venture-backed companies filed to go public. Grocery delivery service Instacart dropped its Form S-1 filing along with Klaviyo, a marketing software company from Boston.

We dug into Instacart’s filing on Friday but didn’t have time to also spelunk into Klaviyo’s IPO filing. We’re going to do that today, because Klaviyo’s IPO moment perhaps matters more than it would in another time.

Here’s an inside look at Klaviyo’s origins, how it’s grown over the years, the trade-offs it made, how email marketing is evolving, and more:

The Klaviyo EC-1

Sure, Klaviyo has raised hundreds of millions of dollars and was last valued at nearly $10 billion, but what this IPO does for other companies could prove more important than the money it raises for Klaviyo itself.

The American IPO market has been moribund and generally stuck in a quagmire for about 18 months now. Declining tech valuations on the stock market and changing investor sentiment put IPOs on hold. Meanwhile, the venture market contracted, especially the late-stage venture market, squeezing unicorns and leaving their investors unable to cash out.

To get things rolling again, everyone’s been saying that tech companies need a winning IPO to be inspired by. But given the significant uncertainty in the market, no one wanted to take the first step.

A champion was needed. A company with enough strength and fortitude to be the first to go public and pave the way so other companies could follow. Instacart fit the bill only partially since it’s more of a delivery company than a pure-play software business. Klaviyo, however, is a shockingly efficient software business that is profitable and growing quickly.

This company could be the torch bearer tech startups have been waiting for. Let’s dig into its IPO filing this morning to figure out how it’s grown.

How quickly is Klaviyo growing?

Klaviyo’s not been sleeping on growth despite its size. The company saw revenue in 2022 increase by 63% to $472.7 million from $290.1 million in 2021. And the company has only continued to scale, driving a 54% increase in its top line to $320.7 million in the first half of 2023 from $208.3 million a year earlier.

This growth is impressive, but so is its scale. The company did not go public in 2021, when its revenue almost reached the $300 million mark — kind of wild if you think about it. After all, venture capital is designed to help kick up companies’ growth curves and help them become large enough to go public as soon as possible. But things have changed now, and it’s par for the course for companies to hold off on going public even when they are clearly big enough to do so.

In Klaviyo’s defense, it kept growing rapidly while becoming profitable, so its patience did pay off.

How much did that cost?

So, how much capital did Klaviyo burn to reach its current scale? Not much, apparently. Quoting from its S-1 filing (emphasis ours):

Since we were founded in Boston, Massachusetts, by Andrew Bialecki and Ed Hallen, we have been able to reach significant scale, with revenue of $472.7 million for the year ended December 31, 2022. Efficiency is part of our DNA. We have raised $454.8 million in primary capital since our inception, of which we have utilized only $15.0 million in the operation of our business as of June 30, 2023, which is net of the $439.8 million of cash, cash equivalents, and restricted cash on our balance sheet as of June 30, 2023, and capital used for share repurchases and tender offers.

I have never seen a venture-backed software company operating this cleanly. You’d expect a Series A company to say it’s burned $15 million, not a late-stage company that is about to go public.

But minimal spending isn’t the same thing as profitability. The most widely accepted accounting standards (GAAP) require companies to count certain noncash costs in their profitability calculations, including share-based compensation expenses.

That means we can spot some red ink in Klaviyo’s P&L sheet: In 2021, the company charted a GAAP net loss of $79.4 million, which narrowed to $49.1 million last year. The company’s results have been perkier recently, though. In the first half of 2022, Klaviyo reported GAAP net loss of $24.6 million and managed to get into the black with a profit of $15.2 million in the first six months of this year.

Klaviyo also had just over $57 million in operating cash flow in H1 2023. In short, the company’s more or less bulletproof.

Any possible downsides?

When poring through a Form S-1, we usually aim to arrive at the truth of a company: the good, the bad and the ugly. However, when we sat down with Klaviyo’s filing this morning, we struggled to find much to nitpick.

What about net retention? We don’t see any issues with net retention around 119%.

What about gross margins? They’re fine, and improving: “We grew our gross profit 67.4% year-over-year, from $205.9 million in 2021 to $344.7 million in 2022, representing gross profit margins of 70.9% and 72.9%,” the filing said.

What about dual-class shares? We finally found something to quibble over. Existing shareholders own Series B shares, which command 10 votes apiece. Shareholders who buy stock in the IPO will get Series A shares, which are worth one vote. In short, the company is going public but not sharing much control. That will change in the future:

All outstanding shares of Series A common stock and Series B common stock will convert automatically into shares of a single series of common stock on the earlier of the date that is seven years from the date of this prospectus or the date the holders of at least 66 2/3% of our Series B common stock elect to convert the Series B common stock to Series A common stock. The purpose of this provision is to ensure that following such conversion, each share of common stock will have one vote per share and the rights of the holders of all outstanding common stock will be identical.

So, about seven years from now, Series A and B stock will have similar voting power. That isn’t terrible, but it’s not great either. It’s a little weird to see a company this strong be worried about traditional governance, but if startup land’s last decade has been characterized by anything, it was startups and their backers’ love of control.

Still, it feels unlikely such quibbles will harm the company’s momentum or its IPO. After all, we’ve seen worse before (looking at you, Snap).

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