Toast IPO: Valuation Reaches $18 Billion

Toast IPO: A Significant Valuation Increase

The Boston startup scene is experiencing considerable growth, and restaurant software company Toast is poised to further accelerate this trend with its anticipated Initial Public Offering (IPO).

Boston, while internationally recognized for its advancements in hard technology and biotechnology, is set to witness a notable achievement. Toast’s recovery from pandemic-era workforce reductions and its progression towards a public offering are impressive.

The company is aiming for a valuation nearing $20 billion, rather than $10 billion, which represents a substantial success.

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Toast’s IPO Details and Valuation

A recent S-1/A filing revealed Toast’s preliminary IPO price range to be between $30 and $33 per share. This could result in a maximum capital raise of $825 million through the IPO.

Previously, in early 2020, Toast was valued at $4.9 billion following a $400 million funding round. The company is now projected to significantly exceed this earlier valuation due to increased revenues and a particularly strong performance in the second quarter.

Analyzing the IPO Price Range

Let's examine the new IPO price range, calculate both simple and fully diluted figures, and assess potential pricing scenarios.

It’s important to remember that Toast generates revenue from both recurring software subscriptions (SaaS) and financial technology services (primarily payments). This revenue combination is noteworthy.

How Toast is ultimately priced in the IPO could provide valuable insights into the valuation of other vertical SaaS companies that integrate payments with their software offerings.

Further details are available within the filing itself.

• The company’s financial performance is a key driver of the increased valuation.
• SaaS and fintech revenue streams contribute to Toast’s overall financial health.
• The IPO could set a precedent for valuing similar businesses.

Toast’s Initial Public Offering Valuation

Toast is offering 21,739,131 shares of Class A stock during its IPO, each carrying one voting right. Conversely, Class B shares are allocated ten votes apiece. Therefore, prospective investors seeking influence over Toast’s direction through share ownership should be aware that their voting power will be limited.

The IPO primarily serves as a mechanism for public market investors to either support the existing management team or abstain from investing. This structure effectively concentrates control within the current leadership.

Independent of perspectives on these governance models, following the IPO, Toast will have a total of 499,332,681 shares in circulation. This figure could rise to 502,593,550 if underwriters exercise their option to purchase additional shares – the so-called “greenshoe” option.

Valuation Range

Based on the anticipated IPO price of $30 to $33 per share, Toast’s market capitalization is projected to be between $14.98 billion and $16.48 billion. Including potential shares from the underwriters’ option, this valuation range extends to $15.08 billion to $16.59 billion.

These calculations do not encompass all outstanding shares, specifically fully vested stock options that are eligible for exercise. Considering these options, Renaissance Capital estimates a fully diluted valuation of $17.9 billion, nearing $18 billion.

Whichever valuation is considered, each represents a significant increase compared to Toast’s last private valuation. This means the company, despite having implemented staff reductions in 2020, is poised for a successful IPO.

This outcome highlights the dynamic and often unpredictable nature of the business world.

Valuation Considerations

Whenever a company experiences a valuation increase, it becomes essential to determine whether investors are primarily compensating for past performance or anticipating future expansion. In the instance of Toast, the answer likely encompasses both aspects.

The company demonstrated a notable recovery from the declines experienced in Q2 2020 due to the pandemic, indicating that investors are factoring in this rebound. Furthermore, the strong results achieved in Q2 2021 may also justify a premium placed on Toast’s shares.

To illustrate this, Toast’s revenue increased from $198.6 million in Q1 2020 to $279.0 million in Q1 2021, representing growth of over 40%. However, the period from Q2 2020 to Q2 2021 saw an even more substantial increase of 192.5%.

It is true that the comparison involves a 2021 figure against the lowest point in Toast’s 2020 performance. Nevertheless, this is not the complete picture. While the Q2 2021 results are remarkably improved compared to the same quarter in the previous year, more significantly, Toast’s revenue grew by just over 52% from Q1 2021 to Q2 2021 alone. Therefore, investors are investing in both the company’s recovery and its accelerating revenue growth following its initial public offering.

Valuation Metrics

Let's examine some valuation calculations. Based on Toast’s revenues and the upper end of its valuation range – $17.9 billion, fully diluted – the company’s worth is 10.5 times its Q2 2021 annualized revenue run rate.

This valuation may appear relatively modest when considering current trading levels for software companies. However, it’s important to note that only 8.9% of Toast’s Q2 2021 revenue originated from software. The majority stemmed from its payments business, which operates on lower margins. A smaller portion came from hardware and services, which currently operate at break-even or a loss. (These latter categories are strategically designed as loss leaders to support the company’s more profitable core businesses, a sensible approach).

Considering Toast’s revenue composition, heavily weighted towards payments, its implied IPO revenue multiple could be considered somewhat high for investors. Specifically, in Q2 2021, Toast reported $37.6 million in software revenue and $353.6 million in finance income, the latter encompassing “transaction-based payment processing services for restaurants.”

During its most recent quarter, Toast’s software revenues achieved gross margins of approximately 66%, while its finance income generated a gross margin of only 20.7%.

Toast primarily functions as a payments business, complemented by a comparatively smaller, yet profitable, software component. Successfully securing a double-digit revenue multiple based on a majority of revenue with 20% gross margins is a noteworthy achievement. We are not advocating for this valuation, but simply observing that, based on the company’s latest reporting, it doesn’t appear excessively conservative.

Implications for Startups

This situation provides a valuable data point for software-and-payments companies seeking to secure new funding at favorable valuations. A successful IPO for Toast could establish a benchmark for companies pursuing a similar business model. However, startups should not anticipate achieving the same multiple unless they demonstrate accelerating revenue growth.

In simpler terms, startups offering both software and payments technology, but deriving the majority of their revenue from payments, should expect an IPO run-rate multiple of less than 10x. Therefore, it is crucial to accurately assess your financial projections.