Freshworks, Toast IPOs Signal Hot Market

Shifting IPO Sentiment: Klarna's Delay Contrasted with Recent Successes

Recent reports concerning Klarna’s decision to postpone its initial public offering (IPO) appeared somewhat unusual yesterday. However, this hesitation to enter the public market now seems increasingly out of step with current trends.

Newly released pricing data from U.S.-based tech unicorn Toast and Indian tech unicorn Freshworks demonstrates that the IPO market is currently quite receptive to new listings.

Positive IPO Performance from Toast and Freshworks

Toast increased its initial IPO price range and ultimately priced its shares above the revised target. Similarly, Freshworks adjusted its IPO price expectations upwards and subsequently priced its offering above that higher valuation.

These outcomes strongly suggest a favorable environment for companies seeking to go public. Even a stable market debut for either company would signify substantial capital raised and a positive shift in valuation.

Analyzing Startup Valuations and the Payments Sector

Today, we will analyze the final pricing details, determining the current valuations of these companies. This assessment will provide insights into startup pricing, particularly within the competitive payments industry.

Furthermore, we will share a particularly amusing response received from a startup executive during our research.

Let's delve into the financial aspects of these developments.

Toast and Freshworks represent key indicators of the current IPO climate.

The IPO market is demonstrating a willingness to support new tech companies.

Both companies exceeded initial pricing expectations.
Even flat debuts would be considered successful fundraising events.

Freshworks and Toast IPO Pricing Analysis

Initially, Toast proposed an IPO price between $30 and $33 per share. Subsequently, the company adjusted its expectations, aiming for a price range of $34 to $36 per share. Ultimately, 21,739,131 shares were sold at $40 each, with underwriters holding an option to acquire an additional 3,260,869 shares at the IPO price. This debut could potentially generate up to $1.0 billion for the company.

Freshworks originally established an IPO price range of $28 to $32 per share. This range was later revised upwards to $32 to $34 per share. The company ultimately priced its shares at $36, offering 28,500,000 shares with an underwriter option for 2,850,000 additional shares. The total IPO proceeds could reach as much as $1.1 billion.

According to Renaissance Capital, Toast was valued at $17.9 billion based on a $31.50 per share price – the midpoint of its initial range – and Freshworks at $9.6 billion at $30 per share, also utilizing the midpoint of its first proposed pricing. These valuations were calculated using fully diluted share counts. Applying the IPO prices, Toast’s value rises to approximately $22.7 billion, while Freshworks reaches $11.5 billion, again considering fully diluted share counts.

It’s important to note that differing valuations may be observed, potentially stemming from calculations based on a simpler, more conservative share count. Such calculations are also legitimate.

Considering revenue multiples, the final IPO prices represent positive outcomes for both Toast and Freshworks. Toast, with $424.7 million in Q2 revenue, is valued at 13.4x its annual run rate. Freshworks, conversely, is valued at 32.5x its own run rate. This disparity reflects the distinct business models of the two companies.

Toast operates primarily as a payments and fintech company, whereas Freshworks is a more focused SaaS provider. SaaS businesses typically exhibit stronger gross margins and greater customer retention – due to their recurring revenue model – than those reliant on transaction-based income. Consequently, SaaS companies often command higher valuation multiples.

Despite these differences, both companies have secured robust valuations relative to their current revenue. Freshworks is poised to benefit from a top-tier SaaS multiple upon commencement of trading. Toast is achieving a lower-end software multiple, reflective of its predominantly fintech revenue streams. Both companies can be considered successful in their respective IPOs.

To gain further insight into Toast’s revenue multiple, The Exchange inquired with Toast CFO Elena Gomez regarding whether the company identifies more as a software or payments entity. This question was posed given the substantial revenue generated from the latter.

However, Gomez’s response proved less than illuminating, serving as an example of the often-guarded nature of executive commentary surrounding IPOs.

Her statement, while descriptive of Toast’s business achievements, did not directly address the initial inquiry.

The nature of conversations during IPO days often leads to similar outcomes, prompting consideration of a satirical piece on the topic.

A typical exchange might unfold as follows:

TechCrunch: Hello [CEO/CFO], could you share your perspective on pricing above the initial range and how the additional capital will be utilized in the short term?
[CEO/CFO]: An IPO represents merely one milestone in our long-term strategic vision. We are dedicated to building a company with enduring success.

This often elicits a conflicting response – a desire to express frustration coupled with understanding for the executive’s caution regarding potential SEC scrutiny. Therefore, continued questioning and dialogue are pursued, even if the resulting information remains somewhat ambiguous.

Returning to the core subject, the IPO market demonstrates a willingness to invest significantly in tech unicorn equity, as evidenced by the debut pricing of Freshworks and Toast. The question remains whether these companies will capitalize on this favorable environment. Further developments will depend on which companies choose to file for an IPO next.