Gates Are Open

The IPO window is currently wide open. Over the last 40 days, 30 IPOs hit the US public market, with the average performance up +22%. Year-to-date, 54 IPOs made a debut, and we are on pace to almost double the 39 listings from the first six months of 2016. What is even more encouraging is the spike in emerging growth (VC-backed, tech) IPOs. In the last 2.5 months, blockbuster listings included Snap, Mulesoft, Alteryx, Okta and Cloudera. (Disclosure: GSV owns shares in Snap).

Looking ahead, we expect to see many more highly attractive, emerging growth IPOs hitting the public market. Airbnb, Didi, Dropbox, Spotify, Lyft, Palantir, Klarna, Warby Parker are all potential candidates over the next 6-12 months. (Disclosure: GSV owns shares in Dropbox, Lyft, Spotify, Palantir).

One company that will likely not make it out of the gates soon is Uber. Its management’s highly aggressive behavior from the past has come around like a boomerang: the Waymo case is now a criminal case; Uber’s image is deteriorating and users are switching to better brands; and talent is churning. Uber’s $69B valuation was largely based on its global dominance and its self-driving future. But neither premise has currently strong visibility, and it will be difficult to justify that valuation in the near term.

Airbnb has had a different approach; while similarly disruptive to its industry like Uber has been in Transportation, Brian Chesky and co. have played “nice” with authorities. That has helped them maintain a good image and grow the business. Last year, the company made its first profit on $1.7 billion of revenue, according to Bloomberg. Airbnb is projecting to do $2.8 billion of revenue and $450 million of EBITDA this year, according to the same source.

At its current $31 billion valuation, Airbnb “trades” at 11x 2017 P/S. We expect the company will continue to post strong top line growth at ~35% annually for the next three years. This will be driven by the core lodging business and also by its new “Experiences” vertical. We also expect operating leverage, and believe the company can achieve a 30%+ EBIT margin over the next three years. Applying these estimates to its current value show Airbnb is an attractive IPO candidate:

Dropbox’s management had previously talked about achieving key milestones before considering an IPO. After successfully hitting two milestones over the past year — they became free cash flow positive in mid 2016, and hit $1 billion in annual revenue run-rate in January — Dropbox also became EBIT profitable, as reported by CEO Drew Houston last month.

Dropbox’s valuation from its last equity financing was $10 billion. That was back in 2014, in the heyday of the private market “bubble” when “valuations were ahead of themselves.” But with the recent performance and key achievements, we expect Dropbox to be valued above those levels, should it decide to go public. Looking at the list of high growth SaaS comps, the median P/S multiple is at 10x. What is also interesting is there is only one company that is EBIT profitable.

Salesforce, with a 1% EBIT margin and “only” +27% revenue growth, gets a 7.6x P/S multiple. Reason for the high multiple (vis-a-vis its growth rate) is the premium applied to being profitable and having long term visibility. Looking at the comps’ medians, we could like see a profitable Dropbox trading at such levels, assuming its revenue growth rate support the thesis.

Another way to look at a the public market valuation is to plot the growth rate against the P/S multiple. The scatter plot shows those data points against each other, and the best-fit-line.

Another near term IPO candidate could be Spotify. The on-demand music leader recently re-negotiated two of its major label contracts — with Universal Music and Merlin — and is still negotiating those with Sony Music and Warner.

Spotify’s fundamental drivers seem to be strong, as evidenced by the accelerating growth in paid users. In March, Spotify announced it passed 50 million paid users, which was up from the 30 million it announced a year ago. Accordingly, we can expect revenue growth to be at similar levels. (Spotify had last reported $2.2 billion in revenue for 2015). With the leverage from the negotiated deals, we also expect to see improvements in gross and operating margins in the near-term, which should improve Spotify’s attractiveness to the public market.

Looking at New Media comps, there is a slightly different picture than that of the high-growth SaaS companies. Revenue growth rates are generally lower, profitability is typically higher, and P/S multiples are slightly lower. In our opinion, Spotify could be valued at a multiple near to that of Netflix. Both companies are leading platforms in their respective fields, both are showing strong user (and revenue) growth, and both have high engagement rates (time spent per user). Also, both have strong management teams and are consistently out-innovating their competitors.

One major difference is the margin and profitability profile. Netflix reported a 37% gross margin and a 10% operating margin in Q1’17. Spotify last reported a $194 million in net loss on $2.2 billion of revenue for 2015… So it will be imperative for Spotify to improve its margins in order to receive a P/S multiple of 6x or above. We believe that the recent label re-negotiations will bring a positive swing in that respect.

We also see rising momentum in the private market, with several of the late stage private companies experiencing more demand than there is supply. This is a new trend that we did not see in most of 2016. Accordingly, we expect to see continued strong momentum in the IPO market. 

How to Invent the Future I: class 9

CliffsNotes + commentary on Startup School

Class with Alan Kay.

I encourage everyone to watch the full lecture (58 mins, link at end of this post), but if you are just curious or want a 5 minute refresher, here we go:

Alan

If you want to make money, don’t bother with a startup, create an industry because then you get trillions instead of billions — not going incrementally from the present but carving out an entirely new area.

You want to invent, not innovate. To do that you need to escape the tyranny of the present. If you work off of the present, you work will be incremental.

“School is the best place ever invented to keep you from thinking about something important for more than a few minutes.”
— Marvin Minsky

Picasso said “Learn the rules like a pro, so you can break them like an artist.”

You have to learn everything and find a way to forget it so you can have your own ideas.

Xerox PARC 1973, we created the Xerox Alto, an early computer. We made 2,000 of these. It led to the development of the Mac. We had 25 researchers in 5 years develop the first modern personal computer, graphical user interface, desktop publishing, WYSIWYG (what you see is what you get), object oriented programing, laser printer, fonts & postscript, Ethernet, peer-to-peer and client server, and the Internet.

Cost: $10–12m / year.
Return: $40 trillion total.

“Real” Xerox PARC ended in 1983 when they fired Bob Taylor. If large companies were rational, then startups shouldn’t exist.

Since then, it’s been extraction but almost complete lack of curiosity and interest in the processes that produced them.

The world is different now. Read “The Dream Machine”. There had been a long continuity that led to PARC. The Manhattan Project, MIT Radar Project, MIT Whirlwind Project brought scientists and engineers to work together.

Ivan Sutherland created graphical sketches on computers in one year because he didn’t think it was hard; he was just working on the problem.

J.C.R. Licklider “Lick” was the leader of the ARPA and he developed 16

1. Picking an idea worth dedicating your life if necessary.

2. Forget about goals; focus on visions.

3. Fund people, not projects.

4. Only fund the very best people.

5. It’s a research community, not a research project.

6. Fund problem finding, not just problem solving. Figure out what the actual problem is.

7. Milestones not deadlines.

8. Baseball not golf. If you strike out, you don’t cry. Batting .300 is great.

9. You can’t think inside the Beltway (Washington D.C.)! There’s too much noise.

10. It’s about shaping computer stuff to human ends per the vision.

11. If you can make your own tools, HW and SW, then you must! Otherwise you are working on some other vendor’s product.

12. Software drives the hardware, rather than vice versa.

13. Make enough of the inventions so that more than the inventors can use them. PARC, whatever you did, you have to make over 100 of them.

14. Argue for clarity, not to win.

15. Develop people for the long term. Grad schools admitted students who were interesting, but didn’t make judgment on them until a few years down the road.

16. The reaching is the reward.

“You miss 100% of the shots you don’t take.”
“A good hockey player goes to where the puck is; a great one goes to where the puck will be!”
— Wayne Gretzky

Escaping the Present

1. “Cosmic goodness intuition” — start with an intuition about what products might exist and would be useful.
2. “Identify favorable exponentials” — see if there are fundamental shifts in technology that would enable your intuition.
3. Take the cosmic intuition out 30 years. Extrapolate what 30 years of the shift might be. For example, 30 years of Moore’s Law would create 32,000 times more computing power (if doubling every 2 years).
4. Can we say “it would be ridiculous if we didn’t have this” after 30 years.
5. Now, bring that 30 year future idea back to 10–15 years out. Can something be done now to reach that 10–15 year version?
6. At this point you can just pay money. If you pay a lot of money now, you can get the commodity computer of 10, 15 years in the future.
7. You make a bunch of them and intertwine them, i.e. run the software.
8. Experiment with software applications to design products.

Watch the full video HERE.