Backblaze IPO: Proof You Don't Need VC Funding

Backblaze IPO: A Different Path to Public Offering

Facebook's recent shift towards a metaverse focus hasn't resolved its issues with public trust, but today our attention turns to a different IPO – that of Backblaze.

Backblaze is a software company specializing in storage solutions, and it may not be widely known. Prior to reviewing its IPO documentation, my familiarity with the company was limited, almost leading me to feature it in a weekend newsletter instead.

A Unique Funding History

However, several aspects of Backblaze’s filing warrant a closer examination. We’re taking a detailed look at its approach to growth and financial performance.

Based in San Mateo, California, Backblaze has a remarkably modest venture capital history. This is largely due to its consistent profitability. According to Crunchbase data, the company secured only a small number of millions in funding during its private operation.

The company’s filing confirms this, serving as a reminder that building a company ready for an IPO doesn't necessarily require massive external investment.

Examining Growth and Margins

Our analysis will focus on understanding how Backblaze achieved its current scale without substantial venture capital losses. A key area of investigation will be its gross margins.

Given that Backblaze provides storage services, it’s reasonable to assume its gross margins might be relatively modest. However, we will verify this assumption.

The Competitive Landscape

We will also revisit a topic discussed previously: the position of specialized cloud infrastructure providers in relation to the major public cloud companies.

This will allow us to assess how Backblaze may fare against larger competitors in the cloud storage market.

Let's proceed with the analysis!

How Backblaze Achieved IPO Scale While Remaining Financially Prudent

Backblaze operates with two primary offerings, both built upon its foundational “storage cloud” – essentially, a substantial reservoir of online storage capacity. The company provides B2 Cloud Storage, a developer-focused tool offering API access for data backup and integration with content delivery networks (CDNs). Its other product, Computer Backup, delivers straightforward backup solutions for individual or multiple computers.

Backblaze’s target customer base encompasses both individuals and businesses of varying sizes and across diverse industries. However, the company identifies a particularly strong resonance with mid-market organizations, specifically those employing fewer than 1,000 individuals.

This context is crucial as it leads us to consider the central question: How did Backblaze attain an annual run rate exceeding $60 million (as of H1 2021 data) without relying heavily on venture capital funding?

A key insight lies in the following:

Initial review of the company’s S-1 filing revealed a surprising statistic, initially dismissed as an unconventional non-GAAP metric. However, it became clear that generating online demand through native content is a significant driver for Backblaze, making the “blog readers” metric genuinely important.

Here’s how the company describes its sales approach:

The company’s extensive history of content creation has enabled it to successfully scale its software business within a segment beyond the typical small-to-medium business (SMB) market. This was a notable observation.

How do Backblaze’s storage solutions and its sales strategy combine to generate financial outcomes? Let's examine the data:

The data presents a comprehensive overview of the company’s financial performance. Observe the rate at which Backblaze increased its revenue in 2020 compared to 2019, and then compare that growth to the first half of 2021 versus the same period in the prior year.

Analyzing each expense category over time reveals how rising costs impact net losses. The increasing deficits coincide with Backblaze’s expansion of sales and marketing efforts, which initially appears counterintuitive given the success of content marketing. This suggests a shift in targeting larger customer accounts.

Backblaze explains this evolution:

This makes sense. Attracting larger clients can lead to improved net retention rates, an area where Backblaze has recently experienced some decline in its performance:

A decrease from 116% in the first half of 2020 to 110% in the first half of 2021 isn’t critically concerning, but it’s not ideal. Backblaze faces inherent challenges due to its focus on smaller companies, as reflected in its gross retention metrics, but overall performance remains satisfactory.

Positively, Backblaze has consistently increased its “annual average revenue per user” over time, rising from $92 in Q1 2019 to $133 in Q2 2021. This growth has been linear. While the figure remains modest, the trend is encouraging.

These factors contribute to a company that has consistently generated positive operating cash flow throughout the periods examined (2019, 2020, H1 2020, and H1 2021). However, its investing activities, particularly “infrastructure deployments,” have occasionally resulted in modest cash consumption.

Let’s now consider revenue scale and quality.

Evaluating Backblaze’s Revenue Performance

When assessing a company of Backblaze’s scale – which is relatively modest for a firm considering an initial public offering – understanding the quality of its revenue is paramount. The strength of Backblaze’s revenue stream will significantly influence its prospects for a successful IPO. Revenue bases characterized by high margins and consistent, recurring income are more likely to attract public investors. Conversely, lower-margin, one-time revenue streams may face greater challenges.

Let's begin with an examination of the company’s gross profit metrics. The following data is sourced directly from the S-1 filing:

These gross margins, as depicted above, are demonstrably and precisely satisfactory. The slight increase in Backblaze’s gross profit as a percentage of revenue during Q2 2021 is encouraging. However, both figures align with historical trends, suggesting limited substantial shifts in this area are anticipated.

Turning our attention to revenue recurrence, here’s what Backblaze reports:

A closer look at the data, extracted from the company’s S-1 filing, reveals the following:

The revenue model is predominantly subscription-based, with a component of on-demand pricing related to storage. This indicates a high degree of stability in recurring revenue. Data retention is a key aspect of backup solutions, as companies rarely delete their stored information.

Consequently, it is reasonable to classify the majority of Backblaze’s revenue as recurring.

The company’s margins are moderate when compared to typical SaaS businesses, but are competitive within the infrastructure-as-a-service sector. Furthermore, these revenues are largely recurring. In totality, this represents a favorable combination given the nature of the company’s offerings. (Comparisons to Twilio’s financial metrics can be made, though with appropriate caution.)

Determining a precise valuation for Backblaze presents a challenge. Revenue growth of 24% between the first halves of 2020 and 2021, while positive, does not indicate exceptionally rapid expansion. However, if investors believe that increased investment in sales and marketing, coupled with a greater emphasis on larger customer accounts – evidenced by a shift towards lightly sales-assisted customer acquisition – will lead to accelerated revenue growth, a compelling case can be made for Backblaze’s future potential and attractive long-term cash flow.

I will refrain from offering a specific valuation for Backblaze, as I prefer to avoid public miscalculations.

Backblaze demonstrates that viable cloud-based solutions exist outside the dominant offerings of AWS and Azure, specifically targeting business clients. It might be assumed that Amazon and Microsoft had already saturated this market. However, it appears that AWS and its competitors are primarily focused on enterprise-level customers, leaving an opportunity for Backblaze to serve the small and medium-sized business (SMB) and midmarket segments. This suggests that the cloud infrastructure market may have more room for additional competitors than previously thought.