Discord Valuation & IPO News: Compass, Intermedia Cloud

TechCrunch Today: Y Combinator Demo Day and Beyond

Today’s focus at TechCrunch is heavily geared towards early-stage companies due to the current Y Combinator class’s demo day. However, significant news concerning companies at later stages of development has also emerged this morning.

We will cover these developments before delving into discussions about accelerators and potentially inflated pre-seed valuations.

The Exchange provides analysis of startups, market trends, and financial matters. It is published daily on Extra Crunch, with a newsletter available every Saturday.

Key Developments to Analyze

There are three primary topics requiring attention. Initially, we will examine the potential $10 billion acquisition of Discord by Microsoft. Discord, a well-funded unicorn, has secured substantial investment and is experiencing considerable revenue growth.

Our objective is to assess the reasonableness of the proposed price, determining if it accurately reflects the company’s value or if it is an undervaluation.

Secondly, Compass, a real estate technology firm, has established a price range for its initial public offering (IPO). We need to evaluate whether the anticipated valuation is justified.

This assessment will involve comparing the valuation to the company’s recent financial results.

Finally, Intermedia Cloud Communications has priced its IPO. We will briefly analyze the company’s operations and determine its current worth, as we are currently catching up on this debut.

A Substantial Agenda

The scope of these topics is considerable. However, addressing them promptly is crucial to avoid falling behind and appearing uninformed later. Let's begin!

A thorough review of these events is essential for understanding the current landscape of the tech industry and the financial dynamics at play.

Discord and Microsoft

It's noteworthy that Microsoft is demonstrating increasing proficiency in community building, a surprising development for a company primarily known for enterprise software and cloud solutions. The Xbox gaming platform has proven remarkably durable, GitHub continues to thrive under Microsoft’s ownership, and Minecraft remains successful under Redmond’s direction.

This indicates satisfaction among gamers, developers, and younger users with Satya Nadella’s leadership. Integrating Discord could potentially provide Microsoft with additional tools to enhance its existing communities, or to more effectively connect them. However, this is primarily a product-focused consideration, outside the scope of our analysis. Let's focus on the financial aspects.

Reports from The New York Times suggest that Discord has been in discussions with Microsoft regarding a potential acquisition valued at over $10 billion. This figure has gained widespread acceptance and will serve as the basis for our evaluation.

To assess the reasonableness of this potential sale price, we require revenue data. Fortunately, recent information is available: The Wall Street Journal indicated earlier this month that Discord achieved $130 million in revenue in 2020, a significant increase from approximately $45 million in 2019.

While a tripling of revenue is unlikely this year, it’s reasonable to project that the community chat application could generate around $200 million in revenue for the current year. A $10 billion valuation would equate to Microsoft paying roughly 50 times the company’s projected revenue. Even with a revised 2021 revenue estimate of $250 million, the implied multiple decreases to 40x.

Regardless, Microsoft is contemplating a substantial premium for growth should it proceed with a $10 billion acquisition of Discord. However, given the company’s strong market position and valuation, such a gamble – representing 0.56% of its $1.78 trillion market capitalization – appears justifiable, particularly considering Discord’s established consumer appeal. Furthermore, Discord’s current growth trajectory suggests a limited risk of immediate asset write-downs.

Discord’s recent funding round saw investors contribute $100 million at a $7 billion valuation. Therefore, it remains uncertain whether these investors would be satisfied with a $10 billion exit.

Key Financial Considerations

• Valuation: Potential acquisition price exceeding $10 billion.
• Revenue Growth: Discord’s revenue increased from $45 million (2019) to $130 million (2020).
• Revenue Multiple: Microsoft potentially paying 40x-50x forward revenue.

The potential acquisition highlights Microsoft’s strategic interest in expanding its community engagement capabilities. Discord represents a valuable asset in this regard.

Investor Perspective

Existing investors may seek a higher return than a $10 billion valuation would provide, given their previous investment at a $7 billion valuation. This could influence the negotiation process.

Initial Public Offerings: A Market Overview

Currently, two initial public offerings (IPOs) are drawing attention. We will begin with an analysis of Compass’ offering. A detailed review of the company’s financial performance can be found here. This discussion will focus specifically on the proposed pricing structure.

According to the updated S-1/A filing, Compass anticipates pricing its IPO between $23 and $26 per share. Considering its Class A, Class B, and Class C shares outstanding following the debut, alongside the 5.4 million shares allocated to underwriters, Compass will have a total of 403,325,950 shares outstanding post-IPO.

This results in a straightforward IPO valuation range of $9.28 billion to $10.49 billion for the company. Renaissance Capital estimates that, at the midpoint of the current IPO price range, Compass’ fully diluted valuation would reach $12.5 billion.

Given Compass’ relatively low profit margins, decelerating growth, and substantial unprofitability, these figures appear quite favorable. The company is projected to generate over $1 billion in capital through its public offering.

Next is Intermedia Cloud Communications, a company previously unknown to us. The S-1/A filing is available for review here, but essentially, the company provides unified communications as a service (UCaaS). Even the abbreviation is cumbersome. The core concept is offering companies a comprehensive suite of communication tools rather than individual, separate solutions.

However, Intermedia Cloud Communications isn’t demonstrating exceptional business performance. Revenue growth from 2019 to 2020 was minimal, increasing from $240.5 million to $251.6 million. Simultaneously, net losses escalated from $5.5 million to $21.7 million during the same period.

A contributing factor to these losses is the company’s significant debt, totaling approximately $250 million. When did this debt originate?

Predictably, the debt accumulation coincided with a private equity acquisition. Intermedia Cloud Communications intends to utilize IPO proceeds to reduce its debt burden. But what is the appropriate valuation for a UCaaS provider experiencing sluggish growth and increasing losses, while burdened by substantial debt?

Renaissance Capital values the company at approximately $1.5 billion, calculated on a fully diluted basis. Why is this valuation comparatively low relative to its revenue? A more pertinent question is: What justification exists for investing in a company with limited growth and escalating losses, constrained by debt obligations that restrict cash flow? The company’s adjusted subscription gross margins are also not particularly strong.

That concludes our overview of Intermedia Cloud Communications.

Having surpassed the 1,000-word threshold, we have reached our space and topic limit. We can now transition our focus to Y Combinator and proceed with further analysis.