Unicorn IPOs: Q3 Surge Expected After Quiet Q2

Market Fluctuations and Emerging IPOs

Public equity markets are inherently dynamic, offering both opportunities and challenges. This morning, Box, a provider of enterprise cloud storage and productivity solutions, found itself in a public disagreement with shareholders concerned about its recent performance and strategic choices.

While Box navigates the complexities of being a publicly traded company, numerous other organizations are actively pursuing initial public offerings (IPOs).

A Shift in IPO Timing

The pace of IPO announcements experienced a temporary slowdown in the early weeks of the second quarter. Industry observers had predicted this, noting that the first, third, and fourth quarters of 2021 would likely see a higher volume of public debuts.

This expectation was based on the typical timelines for financial reporting and accounting procedures.

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Consequently, the second quarter’s IPO activity felt comparatively subdued following the brisk pace of the first quarter. Furthermore, the surge in Special Purpose Acquisition Companies (SPACs) is demonstrating signs of deceleration.

Recent IPO Developments

Despite these trends, several companies have proceeded with their plans to go public. Squarespace, an online hosting and website building platform, has submitted its filing and detailed its intentions for a direct listing.

Its decision to pursue a direct listing warrants examination in light of recently released financial data regarding its performance.

Additionally, Expensify has confidentially filed for an IPO. The planned merger between SmartRent and a SPAC also remains noteworthy.

International IPO Success

The recent IPO of Darktrace in the United Kingdom adds another dimension to the current landscape. Following a challenging start for tech IPOs in the UK market, Darktrace is now exhibiting positive results.

Let's delve into these IPOs to gain a comprehensive understanding of the current state of unicorn liquidity.

• Box is facing shareholder scrutiny regarding performance.
• The second quarter saw a slower pace of IPOs compared to the first.
• Squarespace is pursuing a direct listing.
• Expensify has filed for a confidential IPO.
• Darktrace’s UK IPO is showing promising results.

Squarespace’s Direct Listing Strategy

Initial analysis of Squarespace’s IPO filing required us to extrapolate full-year results due to a lack of quarterly data. This prompts two key questions: What motivates Squarespace’s choice of a direct listing over traditional IPO methods, and what insights do its detailed operating results offer regarding this decision?

A direct listing typically suggests the company doesn't require additional capital for operations. Squarespace currently holds a substantial cash reserve of $183.3 million.

However, possessing cash alone isn’t sufficient; sustained cash burn can negate this advantage. Fortunately, Squarespace demonstrates positive operating cash flow. The company also reports its unlevered free cash flow, defined as cash from operations less capital expenditures and interest payments, net of tax benefits. In Q1 2021, this figure reached $51.8 million.

While slightly lower than the same period last year, this amount underscores the feasibility of a direct listing for Squarespace – a combination of ample cash reserves and consistent cash generation.

Let's examine the company’s quarterly performance data from recent years, including the Q1 2021 results:

Two observations stand out from this data. Firstly, Squarespace exhibits consistently strong quarter-over-quarter revenue growth. Even the initial stages of the COVID-19 pandemic didn't impede revenue increases, although Q1 2020 showed comparatively slower sequential growth.

Secondly, despite achieving GAAP net income throughout 2019 and during two quarters of 2020 – benefiting from roughly $20 million in quarterly marketing cost reductions – the company has since returned to GAAP losses. This shift is attributable to increased marketing expenditure, rising from $59.7 million in Q3 2020 to $98.0 million in Q1 2021.

Typically, for a B2B SaaS enterprise, such spending would be justified by the pursuit of long-term, positive net dollar retention. However, Squarespace’s explanation for this increased investment, as detailed in its S-1/A filing, differs somewhat.

Here’s how the company explains the situation:

This indicates that while Squarespace customers may not demonstrate the typical long-term positive net retention seen in other businesses, they continue to generate revenue over an extended period. Therefore, the recent marketing investments can still be considered strategic investments in future cash flows.

In conclusion, Squarespace is experiencing robust growth, generating significant cash, and possesses a track record that could attract investors. Further analysis will be possible once a reference price is established for the direct listing, allowing for updated valuation assessments.

Expensify’s Initial Public Offering

Early in March, discussions with Expensify leadership were abruptly halted during a series of scheduled interviews. The reason for this silence is now clear: the company was preparing to file for an Initial Public Offering (IPO). Considering its trajectory, this move to become a publicly traded expense management company after 13 years isn't unexpected.

As previously noted when Expensify surpassed $100 million in Annual Recurring Revenue (ARR) last November, it presented a strong profile for an IPO, largely due to its distinctive performance indicators. Several metrics stand out when evaluating the company’s success.

For instance, the company has generated over $215 million in lifetime revenue, while maintaining a relatively lean team of just 130 employees. Furthermore, Expensify experienced substantial revenue growth, increasing by 283% from 2018 to 2020, even amidst the challenges posed by the COVID-19 pandemic.

However, perhaps the most remarkable statistic is the relationship between its revenue and the capital it has raised. Crunchbase data indicates Expensify secured a total of only $38.2 million in funding. Notably, the company proactively repurchased equity from some investors, effectively reducing the total amount of capital raised.

The competitive landscape for Expensify has evolved since its early days, when it primarily faced established companies like SAP Concur and Intuit, or even the ubiquitous use of spreadsheets. The market has since embraced bottom-up SaaS solutions, leading to the emergence of more direct competitors.

Companies like Divvy, which secured $165 million in funding at a $1.6 billion valuation in January, now present significant competition. More recently, Brex signaled its intention to challenge Expensify’s market position with the introduction of Brex Premium, as discussed in a recent interview with Brex CEO Henrique Dubugras.

Expensify has demonstrated foresight, anticipating these competitive pressures and launching its own corporate card in 2019. This proactive step positions the company to navigate the evolving market dynamics and maintain its standing in the expense management sector.

SmartRent’s Merger with Fifth Wall

Let's quickly review SmartRent, a proptech firm. The company is set to merge with Fifth Wall Acquisition Corp. I, resulting in a combined equity valuation of $2.2 billion.

SmartRent can be viewed as a competitor to Latch, another proptech company becoming public through a SPAC merger. A key detail regarding SmartRent’s public debut is its timing; the company was operating with a negative gross margin in 2020.

Specifically, SmartRent reported a gross profit of -$3 million on revenue of $53 million for the year 2020. However, projections indicate a substantial improvement, with an anticipated $15 million in gross profit for 2021 from $119 million in revenue.

This projected turnaround may seem surprising. Discussions with Latch suggest a lengthy installation period for deals, due to the time required for construction. SmartRent may face similar timelines.

The company states that 80% of its units for 2021-2022 are already contracted, suggesting its revenue growth is likely to materialize. This indicates the projected growth isn’t merely speculative.

The investor deck can be accessed here for more in-depth information. For our current analysis, the timing of the merger announcement is significant, occurring during a period of reduced IPO activity.

Key Takeaways

• Valuation: The merger values SmartRent at $2.2 billion.
• Competition: SmartRent is a direct competitor to Latch in the proptech space.
• Financials: The company transitioned from a gross-margin negative position in 2020 to projected profitability in 2021.
• Revenue Growth: A significant portion of future units are already committed, supporting revenue projections.
• Timing: The announcement coincided with a slowdown in initial public offerings.

Understanding these points is crucial when evaluating SmartRent’s position within the evolving proptech landscape. The company’s ability to execute on its projected growth will be a key factor in its success.

Future Outlook

A period of reduced activity doesn't signify a complete stop, therefore it may be prudent to anticipate further IPO announcements. Should this current phase represent the calmest period, the level of activity expected in Q3 2021 will likely be considerably higher.

Indeed, companies ranging from Egnyte to Databricks could potentially submit their IPO filings before the year concludes. The prevailing market conditions suggest this is a viable path for many.

Consequently, preparation is key. The initial public offering landscape is poised to become significantly more dynamic in the coming months.