Unicorns, Braze, and UserTesting: A Comparative Look

Braze and UserTesting Launch Publicly, Revealing Divergent IPO Outcomes

Trading has commenced for both Braze and UserTesting, marking the beginning of their journey as publicly listed companies.

Despite appearing similar as emerging tech ventures backed by venture capital, a closer examination reveals significant differences in their initial public offering (IPO) results.

Disparate Pricing Signals a Complex Market

Braze successfully priced its IPO above its projected range, whereas UserTesting priced below its initial expectations. This discrepancy raises important questions about the current market conditions.

Let's analyze the financial details, assess the valuations of both companies at their IPO prices, and extract insights into the software exit landscape.

Software IPOs are particularly valuable indicators of the broader market appetite for software startups. The valuations assigned by public markets directly influence the pricing of subsequent startup funding rounds.

Furthermore, upcoming mega-IPOs from Nubank and Paytm necessitate a thorough understanding of current market dynamics, prompting us to gather as much data as possible.

Analyzing the Valuation Gap

Therefore, understanding the factors contributing to Braze’s more favorable IPO outcome compared to UserTesting is crucial.

Here's a breakdown of key considerations:

• Growth Rates: Examining the revenue growth trajectories of each company.
• Market Position: Assessing their respective competitive landscapes and market share.
• Profitability: Evaluating their paths to profitability and current financial health.
• Investor Sentiment: Gauging the overall market mood towards similar companies.

These elements collectively contribute to the valuation assigned by investors during the IPO process.

The contrasting results of Braze and UserTesting provide valuable data points as we prepare for the arrival of larger IPOs, allowing for a more informed perspective on the evolving tech market.

Contrasting Initial Public Offerings: A Tale of Two Valuations

Braze initially aimed for an IPO price between $55 and $60 per share, but ultimately sold its stock at $65 a share. Renaissance Capital’s assessment placed the company’s value at approximately $5.9 billion, based on the midpoint of the initial range ($57.5 per share). The final share price of $65, however, resulted in an estimated valuation of $6.7 billion.

Conversely, UserTesting projected a price range of $15 to $17 per share for its IPO, but shares were ultimately offered at $14. Renaissance Capital calculated a potential valuation of $2.7 billion at the midpoint of the proposed range ($16 per share). The actual IPO price of $14 translated to an estimated valuation of $2.4 billion.

While exceeding a billion-dollar valuation is generally positive, the disparity between these two IPOs warrants investigation. Let's consider their respective growth rates, noting that more recent data is available for UserTesting due to differences in fiscal calendar reporting.

• Braze year-over-year growth (Q1-Q2 2020 vs. 2021): 52.5%.
• UserTesting year-over-year growth (Q1-Q3 2020 vs. 2021): 45.4%.

These growth figures are surprisingly similar, and therefore don’t fully explain the valuation difference.

Examining growth multiples provides another perspective. By annualizing the most recent quarterly revenue, we can compare the two companies:

• Braze run rate multiple at IPO valuation: 30.0x.
• UserTesting run rate multiple at IPO valuation: 16.7x.

Despite the comparable growth rates, this significant difference is puzzling. The slightly more recent data available for UserTesting (September 30th quarter) compared to Braze (July 31st quarter) may contribute, but the gap remains substantial.

Let’s analyze their gross margins to see if that reveals any insights.

• Braze gross margin (most recent quarter): 66%.
• UserTesting gross margin (most recent quarter): 75%.

Interestingly, this is contrary to expectations, considering Braze’s stronger IPO performance and nearly double the revenue multiple of UserTesting. This outcome is somewhat unexpected.

Perhaps a look at key SaaS metrics will illuminate the situation? Here’s what the data shows:

• Braze (as highlighted by TechCrunch): “Our dollar-based net retention rate for the trailing 12 months ending July 31, 2021, January 31, 2021, and January 31, 2020 was 125%, 123%, and 126%, respectively, across all customers.”
• UserTesting: “As of September 30, 2021, our net dollar-based retention rate was 119%.”

Braze demonstrates a superior net retention rate, aligning with its higher growth. Now, let’s consider profitability:

• Braze: -23% net margin in the most recent quarter.
• UserTesting: -25% net margin in the most recent quarter.

Overall, the two companies exhibit more similarities in performance metrics than initially apparent.

However, Braze showcases better growth and net retention, alongside marginally improved profitability. These factors, particularly the expansive total addressable market (TAM) for software, appear sufficient to justify its higher revenue multiple and, consequently, the difference in IPO pricing.

Ultimately, both companies are performing well and warrant continued observation as they navigate the public market.