Wow, they really don't even seem like they are very confident they could even ever achieve profitability. At what point does an IPO just turn into a pump and dump scheme designed to let the angels...
Wow, they really don't even seem like they are very confident they could even ever achieve profitability. At what point does an IPO just turn into a pump and dump scheme designed to let the angels cash out, who no longer believe in the company they invested in?
S-1s are like the opposite of your traditional corporate press releases. Since they involve liability, companies are as dire and down as possible about their companies to cover all basis. Anything...
S-1s are like the opposite of your traditional corporate press releases. Since they involve liability, companies are as dire and down as possible about their companies to cover all basis. Anything that could go wrong, from a Yellowstone erupting to WW3 is included as risk.
For the most part, software companies are given significant leeway in profitability. Justified or not, the reasoning is that much of a software company's costs is very flexible. Unlike, say, a retailer with 10% net margins, SaaS companies usually have 60-80% margins. Much of the cost is in sales and marketing, R&D, developer salaries, developer RSU packages, and so forth.
So you could, theoretically, just cut the shit out of all that while still having your main product function... and make a profit.
You can see this play out recently with the pandemic. AirBnB, for instance, also filed to go public. They made a profit last quarter, with the leanest costs they've had since inception by laying off half their employees and cutting international S&M. Despite a pandemic that decimated their business.
There is a real reason why investors are so happy with unprofitable companies.
That's all pretty standard language in IPO filing documents for unprofitable tech companies (which is a lot of them). For example, you'd see most of the same phrases in Airbnb's S-1 filing from...
That's all pretty standard language in IPO filing documents for unprofitable tech companies (which is a lot of them). For example, you'd see most of the same phrases in Airbnb's S-1 filing from earlier this week.
Do you have any insight as to why a company that isn't profitable would even bother filing an IPO, though? The only reasons I can ever come up with that make sense to me are never good ones. IPOs...
Do you have any insight as to why a company that isn't profitable would even bother filing an IPO, though? The only reasons I can ever come up with that make sense to me are never good ones. IPOs don't make available any new resources to businesses. It's just the existing owners divesting some of their personal equity in the business. And I can't imagine anyone would want to divest from a company they actually expect to be able to turn a profit in a timely manner...
For one, their employees might be getting antsy. Tech startups are generous with RSUs, and the earliest Roblox engineers no doubt have millions of dollars in stock that they want liquidity on....
For one, their employees might be getting antsy. Tech startups are generous with RSUs, and the earliest Roblox engineers no doubt have millions of dollars in stock that they want liquidity on. Wait too long and they'll jump ship, looking for more liquid compensation. This also applies to VCs, although unlike individuals they're not particularly antsy.
Secondly, a traditional IPO actually does raise capital, a lot of it. An IPO carves a usually large chunk of equity, sets a price on it, and sells it to institutional investors as the company begins public trading. The company gets a lot of money from that.
edit:
Some more benefits
Banks usually give public companies a lower interest rate; you can get much better equity collateralized debt
There is a benefit to spreading ownership, and risk, from the founders and a couple of VCs over to the broader world of retail investors, hedge funds, pension funds, index funds, and so forth
I think you have a misunderstanding of IPOs. An IPO is usually primarily about the company selling new stock, which effectively raises money. One of the main reasons that companies are choosing...
I think you have a misunderstanding of IPOs. An IPO is usually primarily about the company selling new stock, which effectively raises money. One of the main reasons that companies are choosing not to use the new "direct listing" model is that it doesn't raise money in this way, and is more similar to what you're describing. From this page:
The major difference between a direct listing and an IPO is that one sells existing stocks while the other issues new stock shares. In a direct listing, employees and investors sell their existing stocks to the public. In an IPO, a company sells part of the company by issuing new stocks. The goal of companies that become public through a direct listing is not focused on raising additional capital, which is why new shares are not necessary.
I think my mistake was conflating the owners with the business itself. I see now how an IPO can provide business with a big infusion of cashflow. But it's really being paid for by the divested...
I think my mistake was conflating the owners with the business itself. I see now how an IPO can provide business with a big infusion of cashflow. But it's really being paid for by the divested equity of the original owners (and not by the new investors) that comes from the devaluation of their stock through issuance of new shares, which really does make it all seem less smarmy.
To get a foundation, let’s recall how Roblox was valued during its last private round. According to Crunchbase data, Roblox’s $150 million Series G was raised at a $3.9 billion pre-money valuation. So, Roblox was worth $4.05 billion after the February 2020 funding event.
From its S-1, here are the Q4 2019 numbers:
Revenue of $138.3 million, +44.2% compared to the year-ago quarter
A net loss of $39.6 million, +197.1% compared to the year-ago quarter
Annualizing that revenue figure, Roblox was on a $553.3 million run rate at around the time it raised that >Series G. In revenue-multiple terms, Roblox was valued at 7.3x its top line on an annualized basis.
If you are a SaaS fan you are probably pretty shocked right now. Why the hell was Roblox, a software company, worth so little?
From a last-private-round multiple of 7.3x for Roblox, that Unity multiple appears to be atop a different mountain range altogether. But not all of the gap between Unity’s multiple and Roblox’s comes from differing revenue mechanics. Some of it is public market enthusiasm. So, we should anticipate that Roblox has a good shot at a higher multiple than it managed during its last private round.
After all, the public markets appear to be even more risk-on than the private world in 2020. So, how about 10x? That’s a nice number. And if we take the company’s most recent quarter’s revenue and annualize it, we get $968.8 million in top line. At our 10x multiple, Roblox would be worth just a hair under $10 billion.
By that modest mathmagic we can see that Roblox should not struggle to defend its last private valuation and will probably outscale it by a decent margin. Its “worth” will be formally set once it begins to trade. But we’ll know a lot more when it sets a first price range. More soon.
Wow, they really don't even seem like they are very confident they could even ever achieve profitability. At what point does an IPO just turn into a pump and dump scheme designed to let the angels cash out, who no longer believe in the company they invested in?
S-1s are like the opposite of your traditional corporate press releases. Since they involve liability, companies are as dire and down as possible about their companies to cover all basis. Anything that could go wrong, from a Yellowstone erupting to WW3 is included as risk.
For the most part, software companies are given significant leeway in profitability. Justified or not, the reasoning is that much of a software company's costs is very flexible. Unlike, say, a retailer with 10% net margins, SaaS companies usually have 60-80% margins. Much of the cost is in sales and marketing, R&D, developer salaries, developer RSU packages, and so forth.
So you could, theoretically, just cut the shit out of all that while still having your main product function... and make a profit.
You can see this play out recently with the pandemic. AirBnB, for instance, also filed to go public. They made a profit last quarter, with the leanest costs they've had since inception by laying off half their employees and cutting international S&M. Despite a pandemic that decimated their business.
There is a real reason why investors are so happy with unprofitable companies.
That's all pretty standard language in IPO filing documents for unprofitable tech companies (which is a lot of them). For example, you'd see most of the same phrases in Airbnb's S-1 filing from earlier this week.
Do you have any insight as to why a company that isn't profitable would even bother filing an IPO, though? The only reasons I can ever come up with that make sense to me are never good ones. IPOs don't make available any new resources to businesses. It's just the existing owners divesting some of their personal equity in the business. And I can't imagine anyone would want to divest from a company they actually expect to be able to turn a profit in a timely manner...
For one, their employees might be getting antsy. Tech startups are generous with RSUs, and the earliest Roblox engineers no doubt have millions of dollars in stock that they want liquidity on. Wait too long and they'll jump ship, looking for more liquid compensation. This also applies to VCs, although unlike individuals they're not particularly antsy.
Secondly, a traditional IPO actually does raise capital, a lot of it. An IPO carves a usually large chunk of equity, sets a price on it, and sells it to institutional investors as the company begins public trading. The company gets a lot of money from that.
edit:
Some more benefits
Banks usually give public companies a lower interest rate; you can get much better equity collateralized debt
There is a benefit to spreading ownership, and risk, from the founders and a couple of VCs over to the broader world of retail investors, hedge funds, pension funds, index funds, and so forth
I think you have a misunderstanding of IPOs. An IPO is usually primarily about the company selling new stock, which effectively raises money. One of the main reasons that companies are choosing not to use the new "direct listing" model is that it doesn't raise money in this way, and is more similar to what you're describing. From this page:
I think my mistake was conflating the owners with the business itself. I see now how an IPO can provide business with a big infusion of cashflow. But it's really being paid for by the divested equity of the original owners (and not by the new investors) that comes from the devaluation of their stock through issuance of new shares, which really does make it all seem less smarmy.
Here's some snippets from a paywalled Techcrunch analysis
https://techcrunch.com/2020/11/20/what-is-roblox-worth/