There has been a lot written of the lack of tech IPO’s this year and the implications for venture investing. The thinking goes that if VC funds can’t get liquidity on their investments via IPO’s, they’re less likely to invest in startups going forward, constricting capital for cash dependent startups. When Dell’s cyber security firm SecureWorks IPO’d last week, many were hoping a successful IPO could re-ignite the IPO market overall and put to rest concerns about venture funding going forward. Well, so much for that.
The IPO was a dud. SecureWorks priced at $14, below the bottom of its range of $15.50+ and opened the day even lower at $13.89. It also cut the number of shares it was offering from 9 million to 8 million. All told, SecureWorks raised $112mm which was 20% lower than the lowest expectation. Furthermore, given 78mm shares outstanding after the open, $40mm in cash, and $28mm in debt, the enterprise value was $968mm for a revenue multiple of only 3.69x. So what’s it mean for startups? Well, nothing:
-Keep in mind, $13bln was raised by venture firms in Q1, which is the most since 2000. Although there may not be IPO’s right now, venture funds have lots of capital to deploy, especially for companies in later rounds.
-No venture fund looks solely to IPO’s for their exit. Most invest with an eye towards M&A as the most likely outcome, so the IPO market isn’t a good barometer of success for VC investing.
-SecureWorks is a real business with 4,100 clients in 61 countries, but not without its challenges. Revenue in 2015 was $262mm 80% of which is recurring, but revenue growth from 2014 to 2015 was only 27% (up from 19% in 2014). Despite a 105% retention rate, the business is burning cash, with an operating loss in the first 9 months of 2015 of -$84mm and free cash flow of -$13mm. There is material customer concentration with 12% of revenue being derived from Bank of America and 38% of revenue being derived from the financial services industry overall. All of these issues are reflected in the Company’s revenue multiple at the open which was approximately 3.69x.
In conclusion, the soft IPO market minimally impacts startups’ ability to raise money, if at all (although admittedly, valuations will be impacted). That said, suppose I’m wrong and 2016’s weak IPO market really will impact venture investing. As a startup, your goal needs to be to build a real business as cash efficiently as possible no matter what the environment so that you’re not beholden to VC to thrive or even survive.