Rent the Runway IPO: A Bullish Sign for Unicorns

Rent the Runway IPO: Initial Public Offering Analysis

Trading has commenced this Wednesday for Rent the Runway stock, marking its debut on the public markets.

The company’s initial pricing settled at $21 per share, resulting in a valuation of $1.33 billion based on outstanding shares and approximately $1.47 billion when considering fully diluted shares.

Considering the company was last valued at roughly $1 billion in 2019, these figures might initially appear unremarkable.

However, we believe these valuations are positive indicators.

Initial Reactions and Market Sentiment

Previous reporting by TechCrunch regarding the Rent the Runway IPO filing and pricing demonstrated a degree of skepticism and pessimism.

Despite this, investor demand proved sufficient not only to allow the IPO to move forward but also to secure pricing at the upper end of the projected range.

Implications for the Unicorn Landscape

This outcome suggests a potentially positive trend for other privately held unicorn companies.

The successful pricing indicates a willingness among public investors to support innovative business models within the evolving retail sector.

It challenges earlier negative sentiment and highlights the potential for growth in the subscription-based apparel market.

The strong investor interest could pave the way for further IPOs from other high-growth, privately held companies.

Rent the Runway’s performance will be closely watched as a bellwether for future offerings.

Technology Companies vs. Tech-Enabled Businesses

A company developing software is inherently a technology company. Similarly, an online commerce platform qualifies as a technology-based enterprise. However, a business that simply utilizes e-commerce as a sales channel doesn't fit this definition; it is better described as tech-enabled.

This distinction is significant. Companies classified as pure technology ventures often achieve valuations of 40 to 50 times their annual revenue in current market conditions. Conversely, businesses merely leveraging technology for distribution typically command lower valuation multiples.

The Role of Gross Margins

The primary driver behind this difference lies in gross margins. Technology companies generally exhibit robust gross margins due to their innovative use of technology. This allows them to disrupt existing processes, offering solutions that are faster, more affordable, or more efficient. Software exemplifies this, as does a physical product that fundamentally alters established economic norms.

For instance, a battery with ten times the capacity of existing options would represent a technological advancement suitable for building a company around.

Rent the Runway as a Case Study

Considering this, Rent the Runway is more accurately categorized as a tech-enabled business rather than a pure technology firm. Consequently, its valuation should reflect a discount compared to companies solely focused on technology. Currently, its valuation is slightly above 7 times its July 31, 2021 revenue run rate, a figure significantly lower than that of a rapidly growing Software-as-a-Service (SaaS) company.

Despite this, the company’s current revenue multiple appears surprisingly high when compared to Stitch Fix, a related but not directly comparable business, which is experiencing a decline in its own revenue-based valuation.

With the exception of a single peak earlier in the year, Stitch Fix’s price-to-sales ratio has been considerably lower than the valuation indicated by Rent the Runway’s initial public offering (IPO). This suggests a substantial degree of investor optimism regarding Rent the Runway, and the company has successfully capitalized on this sentiment.

Market Sentiment and IPO Timing

Further insights will emerge as Rent the Runway begins trading. However, the IPO pricing can be interpreted as positive news not only for unicorns in general but also specifically for tech-enabled unicorns.

This outcome reinforces the argument that the current market conditions are favorable for unicorns seeking to go public, and that they should do so promptly. While the ultimate valuation of Rent the Runway will be determined by the market, the initial pricing reflects a decidedly optimistic investor outlook.

Additional analysis will be provided as trading commences.