Ask HN: What are some indicators that a company will have an IPO or exit?
Are there quantifiable numbers that can say whether a start-up or a company is doing well and will have successful IPO or exit in the near future?
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For an IPO, expect to see the company redoing the entire finance system - public companies have very strict reporting requirements that startups don't implement. Also, if they start withholding more information, there's a lot of things that you can't announce as a public company(or becoming one). Of course, that could be the opposite and the numbers are so bad they wont talk about them. One last thing is auditors could indicate either - due diligence in an acquisition, or prepping for an IPO.
In terms of raw numbers, there's not as clear a thing - I've been in companies that were acquired for doing really well, and others that might not have been able to pay payroll in a month.
In terms of raw numbers, there's not as clear a thing - I've been in companies that were acquired for doing really well, and others that might not have been able to pay payroll in a month.
I have been thinking about the GitLab IPO for a while now. GitLab is not in Canada and it might be years before they IPO, but one thing I dislike is the CSA's position that is more strict than SEC: https://www.theglobeandmail.com/report-on-business/social-me...
We plan to IPO in 2020 https://about.gitlab.com/strategy/#sequence
I've been with two companies that have IPO'd recently - Twilio and Okta - but nothing here reflects those organizations.
If a company is heading towards an IPO, they MUST already have a CFO in place, probably 3-5 years in advance. While there are financial systems required, there are practices, reports, etc etc that require day after day, month after month, and quarter after quarter monitoring. It's not something that can just be "cleaned up" at the last minute.
Profitability is not a hard requirement but certainly helps.
The "magic number" used to be $100MM ARR but that doesn't appear to be the case anymore. I'd wager this is in part because of the increased private/VC valuations the last few years.
Strong growth is good. Strong growth among the more profitable product lines is even better. Margins should be high, potentially increasing as the cost of delivering the product goes down. If the team can put $X into Sales and Marketing and get 3-5X revenue out, that's a good sign.
If you can determine LTV, CAC, and churn, those are GREAT indicators but unless you're senior management, odds are you won't see those.
Regardless, it is NOT something you can bet on because even if it does happen, it can be YEARS down the line and if you're an insider, there are complex rules on when you can do or say what.
If a company is heading towards an IPO, they MUST already have a CFO in place, probably 3-5 years in advance. While there are financial systems required, there are practices, reports, etc etc that require day after day, month after month, and quarter after quarter monitoring. It's not something that can just be "cleaned up" at the last minute.
Profitability is not a hard requirement but certainly helps.
The "magic number" used to be $100MM ARR but that doesn't appear to be the case anymore. I'd wager this is in part because of the increased private/VC valuations the last few years.
Strong growth is good. Strong growth among the more profitable product lines is even better. Margins should be high, potentially increasing as the cost of delivering the product goes down. If the team can put $X into Sales and Marketing and get 3-5X revenue out, that's a good sign.
If you can determine LTV, CAC, and churn, those are GREAT indicators but unless you're senior management, odds are you won't see those.
Regardless, it is NOT something you can bet on because even if it does happen, it can be YEARS down the line and if you're an insider, there are complex rules on when you can do or say what.
Which is why doing an RTO is an attractive alternative. Although they seem more popular in Canada for some reason.
A Reverse Take-Over is where a company pays for a shell corp that is listed on a public exchange and the shell officially "takes over" the company, then changes it's name to that of the "purchased" company, which is a great shortcut to a public offering.
But the need for a CFO is the same, the books have to follow the standard public process.
A Reverse Take-Over is where a company pays for a shell corp that is listed on a public exchange and the shell officially "takes over" the company, then changes it's name to that of the "purchased" company, which is a great shortcut to a public offering.
But the need for a CFO is the same, the books have to follow the standard public process.
Number of years since initial VC investment.
After 7-12 years in VCs will want to get their money out to pay out their LPs. Around this time they will start pressuring management to find a buyer or prepare for an IPO. Though this pressure depends a lot on the company's financial situation and how willing the VCs are to wait for an exit.
It's not the best indicator but it still is one.
After 7-12 years in VCs will want to get their money out to pay out their LPs. Around this time they will start pressuring management to find a buyer or prepare for an IPO. Though this pressure depends a lot on the company's financial situation and how willing the VCs are to wait for an exit.
It's not the best indicator but it still is one.
Don't forget about employees. Much of early employee compensation is in the form of equity. After 4 years, people expect to monetize and reap some of the rewards. If there is no exit in sight, the senior employees start making for the exit.
Yes. When a company is 'operationally cash flow positive' which is to say they make enough money that not only does their bank account balance increase each quarter, but also their future spending to refresh their equipment and offices etc would not cause their cash balance to go below its current point. That company will have the opportunity to 'exit' (sell themselves to another company) or IPO.
To quote the former CFO of Blekko, "Every month we have a number of dollars in the bank, that number is bigger than last month, 'Bueno', its smaller than last month 'No Bueno.'"
Easy and quantifiable.
Also, if the company is losing money, and each month the bank balance goes down, divide the rate of loss by the balance, at the zero intercept the company will 'exit'.
Also easy and quantifiable.
Between those two 'easy' versions, lays the challenge. But for your question which included the caveat "... in the near future" only the easy ones apply.
To quote the former CFO of Blekko, "Every month we have a number of dollars in the bank, that number is bigger than last month, 'Bueno', its smaller than last month 'No Bueno.'"
Easy and quantifiable.
Also, if the company is losing money, and each month the bank balance goes down, divide the rate of loss by the balance, at the zero intercept the company will 'exit'.
Also easy and quantifiable.
Between those two 'easy' versions, lays the challenge. But for your question which included the caveat "... in the near future" only the easy ones apply.
Blekko exited by selling to IBM. That was a pure technology buy; the public search engine was killed.
True and true, but I'm not sure what you were trying to say. Blekko never did discover the secret to competing with the #1 and #2 search engine companies spending over $5B a year to buy search traffic :-). However IBM found great value in a technology that could effectively crawl and index billions of pages, that is, remarkably, still a hard problem even today.
"Annual income twenty pounds, annual expenditure nineteen pounds nineteen shillings and six pence, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."
It is complex, but the rule of thumb is that you get to a point in which you have consistent and predictable revenue. The "magic" number for software companies in the US is around 100MM.
All of the employees suddenly stay.
In addition to the hiring of an experienced CFO, mentioned already, in the run-up to an IPO you may see:
- A cleanup of administrative processes such as HR. Standardisation of leave, expenses, release of a overly-detailed employee handbook, change of employment contracts. Exec HR contingency plans, documented reporting lines. Beyond HR, compliance may also be given more attention than usual.
- Removal of minor shareholders, cleaning up equity structure, if it was not done exceptionally well from the beginning.
- A PR push with a common focussed narrative on the companies aims & growth. Following this, announcements of comparatively minor things that support it. Lots of quotes from key management. However, as you draw closer to d-day there will be a quiet period where no information will be released as part of the process.
- Some key execs removing themselves from day to day ops while its ongoing. Guarded language during announcements as mentioned previously, especially in the final stages.
There are presumably more indicators based on the companies performance, investors and the market in general, but I think it would be guesswork without being in the loop on their corporate strategy.
- A cleanup of administrative processes such as HR. Standardisation of leave, expenses, release of a overly-detailed employee handbook, change of employment contracts. Exec HR contingency plans, documented reporting lines. Beyond HR, compliance may also be given more attention than usual.
- Removal of minor shareholders, cleaning up equity structure, if it was not done exceptionally well from the beginning.
- A PR push with a common focussed narrative on the companies aims & growth. Following this, announcements of comparatively minor things that support it. Lots of quotes from key management. However, as you draw closer to d-day there will be a quiet period where no information will be released as part of the process.
- Some key execs removing themselves from day to day ops while its ongoing. Guarded language during announcements as mentioned previously, especially in the final stages.
There are presumably more indicators based on the companies performance, investors and the market in general, but I think it would be guesswork without being in the loop on their corporate strategy.
Background info: https://news.ycombinator.com/item?id=13688591
Let's assume you're meaning an exit with a high multiple on returns, rather than an acquihire. In this case there are 2 models:
1) Game changing technology. These are very hard to measure, especially from the outside. You have to ask yourself, "Is this technology for real?" and "Could a large company monetize this?" This is what's happening in the autonomous car market. Let's step aside from this.
2) Companies that are growing well and fast on their own. In this case there are 3 metrics that matter: Revenue, Revenue Growth (new business minus churn) and Margins. Revenue is the base for valuation, and Growth and Margins determines the multiple. A weak rule of thumb that answers your question is that once a SaaS business hits 50mm in ARR, Growth Plus Margins should equal 50%. (It's ok to lose 10% of revenue in margins if you're growing 50% per year. If you're only growing 20% per year, you should have 30% profitability.) If it has this it's trending towards a positive exit.
Three caveats:
1) In case 2, if the company has external venture money, they are more likely to exit. (The VC funds need to return money to investors) If they are self-funded, they can stay private much longer.
2) Very few companies pull off the high multiple exit or IPO. It is hard to maintain growth, and hard to eventually turn a profit when you are growing fast.
3) There are a small subset of VC firms and specific VC partners with disproportionately outsized success. In the absence of other information, an investment by them is a good signal. (But smart money won't help a bad business)
1) Game changing technology. These are very hard to measure, especially from the outside. You have to ask yourself, "Is this technology for real?" and "Could a large company monetize this?" This is what's happening in the autonomous car market. Let's step aside from this.
2) Companies that are growing well and fast on their own. In this case there are 3 metrics that matter: Revenue, Revenue Growth (new business minus churn) and Margins. Revenue is the base for valuation, and Growth and Margins determines the multiple. A weak rule of thumb that answers your question is that once a SaaS business hits 50mm in ARR, Growth Plus Margins should equal 50%. (It's ok to lose 10% of revenue in margins if you're growing 50% per year. If you're only growing 20% per year, you should have 30% profitability.) If it has this it's trending towards a positive exit.
Three caveats:
1) In case 2, if the company has external venture money, they are more likely to exit. (The VC funds need to return money to investors) If they are self-funded, they can stay private much longer.
2) Very few companies pull off the high multiple exit or IPO. It is hard to maintain growth, and hard to eventually turn a profit when you are growing fast.
3) There are a small subset of VC firms and specific VC partners with disproportionately outsized success. In the absence of other information, an investment by them is a good signal. (But smart money won't help a bad business)
If they begin treating their financials as if they were a public company, then that's a pretty good indicator. It's pretty much mandatory for an IPO or being acquired by a public company, and its super helpful for other exits as well.
There are signs a startup is doing well (e.g., growth), signs that an exit may be necessary (e.g., capital requirements beyond another VC round), signs an exit may be desired, signs a company is ready for an IPO, signs a company is preparing for an exit, signs that exit will be "successful", etc.
You'd have to chain all those together to answer your question as posed.
Generally, look for $100M+ revs, strong growth, institutional investors, and a reasonably-new CFO with a track record in sales/IPOs.
You'd have to chain all those together to answer your question as posed.
Generally, look for $100M+ revs, strong growth, institutional investors, and a reasonably-new CFO with a track record in sales/IPOs.
Thanks for all the answers. From what I infer, the one thing that's consistent is to look for year on year revenue growth. A company that achieves that will have a healthy exit. A company that doesn't will be forced to a lackluster IPO or sold off for the minimum value or will shut shop.
If you're employed at the company, I'm pretty sure you'd know. However, as an outsider look for regulatory signs such as hiring of new finance/CFO roles. Quiet period without new product announcements or features (out of the ordinary).
Don't they normally tell the staff? I've been at two that IPOed and they told all staff. Good carrot to retain staff: the chance to maybe get a couple of shares.
I'm in Australia though.
I'm in Australia though.
A lead VC (and there the dealmaster) who was involved in more than one exit before.
-3 years of audited financial records
-SOX compliance
Profitability. IPOs for money-losers went out in the first dot-com boom.
The scale of the business has to be reasonably large. Market cap in at least 8 figures.
The scale of the business has to be reasonably large. Market cap in at least 8 figures.
Have you looked at recently IPO'ed companies? Many dont turn a profit. Salesforce only started turning a profit last year I think.
I'll just name a couple of recently or semi recently IPOed companies of varying reputations that do not turn a profit. All are way above 8 figure market caps. Are you sure you didn't mean 9 figures or at least closing in on 9 figures.
- New Relic
- Atlassian
- ServiceNow
- WorkDay
- Splunk
- Box
- Godaddy
I'll just name a couple of recently or semi recently IPOed companies of varying reputations that do not turn a profit. All are way above 8 figure market caps. Are you sure you didn't mean 9 figures or at least closing in on 9 figures.
- New Relic
- Atlassian
- ServiceNow
- WorkDay
- Splunk
- Box
- Godaddy
Atlassian is an odd example here - they've been profitable for a decade: http://www.businessinsider.com/atlassian-files-for-ipo-2015-...
Yes, I should have specified the more unique situation Atlassian is in. They say they were always profitable, but we have had around 6 earnings reports since their IPO. I don't think they have turned a profit once. They also don't seem like they will in the near future.
Do you think it should still be included with an asterisk or not included? I think an asterisk with an explanation would've been best.
Do you think it should still be included with an asterisk or not included? I think an asterisk with an explanation would've been best.
I had a list of companies in Simplenote. It seems like they all still fit. Another almost 20 tech companies without profits yet:
- Okta
- Wix
- Shopify
- Square
- Yext
- RingCentral
- Zillow
- LogMeIn
- Netsuite
- Trivago (though now majority owned by Expedia)
- Youku (Chinese tube site)
- Tableau
- FireEye
- Pablo Alto Networks
- Proofpoint
- Verint
- Imperva
- Okta
- Wix
- Shopify
- Square
- Yext
- RingCentral
- Zillow
- LogMeIn
- Netsuite
- Trivago (though now majority owned by Expedia)
- Youku (Chinese tube site)
- Tableau
- FireEye
- Pablo Alto Networks
- Proofpoint
- Verint
- Imperva
Profitability? You must be kidding. I'm guessing you don't follow many IPOs. Most of these companies lose money every quarter with no end in sight.
Businesses are pretty simple. It's about consistently growing revenue and healthy cash flow.