IPO Market Activity: Olo and DigitalOcean

The initial public offering (IPO) market is currently experiencing a period of heightened activity. Both Olo and DigitalOcean have recently made notable moves regarding their potential public debuts.

Olo has adjusted its IPO price range upward, a development that wasn't entirely unexpected. This adjustment reflects the company’s strong revenue growth and consistent profitability.

DigitalOcean, meanwhile, has provided initial insights into its potential valuation. Analyzing its growth strategy requires a more detailed examination, as it differs from typical models.

Analyzing Pricing Intervals

We will assess both companies’ proposed pricing, utilizing standard valuation methods. These include revenue multiples, comparisons to similar publicly traded companies, and a general assessment of their market positioning.

For clarity, we will proceed in alphabetical order, beginning our analysis with DigitalOcean, the cloud infrastructure provider.

DigitalOcean: A Closer Look

DigitalOcean’s approach to expansion is unique within the cloud infrastructure space. Its business model necessitates a nuanced evaluation compared to traditional SaaS companies.

Understanding its revenue streams and growth trajectory is crucial for determining a fair valuation. We will examine key metrics to assess its potential market performance.

Olo: Growth and Profitability

Olo’s decision to increase its IPO range is directly linked to its impressive growth figures. The company has demonstrated a clear path to profitability, attracting investor interest.

Its strong financial performance positions it favorably within the competitive landscape. A detailed review of its financials will further illuminate its valuation.

DigitalOcean’s Proposed IPO Pricing

Based on its S-1/A filing, DigitalOcean anticipates its initial public offering (IPO) will be priced within a range of $44 to $47 per share. This pricing represents a significant return for the company’s early investors.

Specifically, investors from the 2020 Series C funding round initially acquired shares at approximately $10.59 each. Andreessen Horowitz, a leading investor in the company’s Series A round, secured shares at a price slightly exceeding $2.

IA Ventures, which spearheaded DigitalOcean’s seed funding, reportedly invested just $0.26 per share during the 2012-2013 period. This early investment is poised to yield substantial gains.

Valuation Metrics

Following the IPO, DigitalOcean will have a simple share count of 105,303,340. This figure could rise to 107,778,340 if underwriters exercise their option to purchase additional shares.

Consequently, at a price of $44 to $47 per share, the company’s valuation is estimated to be between $4.72 billion and $5.07 billion, inclusive of shares allocated to underwriters.

The fully diluted valuation is projected to be even higher. Renaissance Capital estimates a diluted valuation of $5.6 billion at the midpoint of the IPO price range.

This figure increases to nearly $5.8 billion when calculated at the $47 per share upper limit.

Revenue and Growth Analysis

DigitalOcean reported $87.5 million in revenue during the fourth quarter of 2020. This performance translates to an annual run rate of $350 million.

The company’s valuation, based on this revenue, suggests a multiple of 14.5x at the high end of the nondiluted range, and approximately 16.5x at the upper limit of its diluted valuation.

While these multiples appear somewhat elevated, it’s important to consider the company’s growth trajectory. DigitalOcean’s growth rate is currently linear, demonstrating a deceleration in percentage terms.

The company experienced approximately 26% growth from Q4 2019 to Q4 2020. Coupled with gross margins of 56%, the market appears receptive to DigitalOcean’s IPO.

Comparable Companies

For comparative analysis, companies like Anaplan and PagerDuty exhibit similar growth rates and valuation multiples. These can serve as benchmarks for further research.

Overall, the DigitalOcean pricing is not inexpensive, but this is unsurprising given the current favorable conditions within the IPO market.

Olo Adjusts IPO Price Range Upward

The recent increase in Olo’s initial public offering (IPO) price range was widely anticipated. As previously noted by Extra Crunch upon the announcement of the initial interval:

Our initial reservations have been set aside.

The revised price range for Olo’s IPO now extends from $20 to $22 per share, a rise from the earlier estimate of $16 to $18. With the continued offering of 18 million shares, the total capital raised through the Olo IPO is projected to be between $360 million and $396 million. The underwriting banks involved possess an option to purchase an additional 2.7 million shares.

Following its market debut, Olo will have a total of 142,012,926 shares outstanding. This figure increases to 144,712,926 when including the shares available through the greenshoe option. The company’s straightforward IPO valuation, factoring in the underwriters’ potential purchases, ranges from $2.89 billion to $3.18 billion. Calculations suggest a potential fully diluted valuation reaching as high as $4.2 billion, although most analysts currently focus on a non-diluted valuation.

Considering the company’s approximately $122.2 million run rate at the close of 2020, these figures indicate substantial multiples. This is particularly noteworthy given the decline in the company’s reported GAAP profits during the final quarter of 2020, following two prior quarters of profitability.

Despite this, Olo experienced growth exceeding 100% in Q4 2020 compared to the same period in the previous year, even as its net loss increased by approximately $1 million.

A point of concern, perhaps.

Olo boasts strong blended gross margins in the 80% range, a highly favorable position. Furthermore, the company has consistently generated positive operating cash flow over several years. Olo is demonstrably healthy and experiencing rapid expansion, and will soon have significant capital from the IPO proceeds. This represents a compelling investment opportunity, with the primary question being whether individual investors will be willing to pay a premium relative to revenue compared to larger institutional investors who will receive IPO allocations.

The company is scheduled to finalize pricing tomorrow after market close, with trading expected to commence on Wednesday. We will continue to monitor developments.

Early Stage: A Premier Event for Startups

Early Stage is a leading event providing practical guidance for startup entrepreneurs and investors. Attendees will gain insights directly from successful founders and venture capitalists regarding business development, fundraising, and portfolio management.

The event covers all facets of building a company, including:

• Fundraising
• Recruiting
• Sales
• Product-Market Fit
• Public Relations
• Marketing and Brand Building

Each session incorporates audience participation, allowing for questions and discussion. Utilize the code “TCARTICLE” at checkout to receive a 20% discount on tickets here.