What is the Typical Profile of an IPO-Ready Tech Company?

AUGUST 3RD, 2016

How long does it take for tech companies to get public, and what does a tech company look like at the time of its IPO?

To answer the first part of that question, let's take a look at the "Years to IPO" of some of today's most recognizable public tech co's. I've excluded any tech co's that had their initial public offering prior to the year 2000, thus you won't see eBay (1998), Amazon (1997), Yahoo (1996), or Activision (1993). The median "Years to IPO" for this group is 8 years.

The team at CB Insights also recently analyzed VC-backed tech companies that have exited since 2007. Their results show that, in the most recent year they analyzed exit data from, 2013, it took (on average) 85 months (7.1 years) from the time of the company's founding to the date of its IPO. This is fairly consistent with the median time to IPO from my sample set above. 

Based on those data sets, it's safe to conclude that, on average, it takes 7-8 years from the date of its founding for a tech company to be ready to go public.

There are a number of different criteria we could look at to answer the second part of my opening question- what does a tech company look like at the time of its IPO? I'll stick to high level benchmarks, applicable across industry sectors, but it's important to note that if you wanted a better idea relative to, say, an enterprise SaaS company, you could pull direct comps and dig into the relevant metrics (revenue growth, LTV:CAC, churn, sales efficiency metrics, etc.) of those comps.

Back to the question at hand, first, let's look at the median funding raised (again using CB Insights data) for companies considered IPO candidates in 2016. The median total funding raised by 'internet' companies considered IPO-ready in 2016 was $105m. Applying the same analysis to companies from my sample set of public tech co's, we arrive at an average of $397m, however, if we remove outliers (data points more than 1.5 times the interquartile range above the third quartile or below the first quartile- you're welcome stat nerds!), the adjusted average is $158m. 

Based on that data, it's safe to conclude that, on average, it takes $100m - $150m in funding prior to a tech company going public. 

Mahesh Vellanki of RedpointVC has compiled a great analysis on the average revenue growth rates of tech co's leading up to their IPO, and the results were basically what you would expect- Tulia, Zillow, Facebook, LinkedIn, and Twitter all had 100-200% annual growth 1-2 years prior to their respective IPOs.  Most of the marketplace companies in his analysis were growing at 30-80% per year, and there were a few outliers that absolutely crushed it prior to their IPO (Groupon, Zuliliy, Fitbit, GoPro, RetailMeNot, etc.).

Outliers aside, it seems relatively safe to conclude that, at a minimum, tech companies should be growing revenues by 80-100% YoY in the two years leading up to a potential IPO. Combine this with the old axiom that markets are most receptive to companies with $100+ million in revenue, and we get a good sense of where a tech company should be in terms of revenue and growth at the time of its IPO. Applying a recent comp, Twilio held their IPO at a $200m revenue run rate, with 80% YoY historical growth, which fits our 'typical' benchmarks in terms of growth and revenue.

Tying all of that together gives us a good understanding of what a 'typical' technology company looks like at the time of its IPO. It is 7-8 years old, has raised $100m-$150m in funding, has revenues of $100+ million, and has been growing at a YoY growth rate of 80-100%. Public markets also like to see low cash-burn rates, and many of the companies included in this analysis were at or near cash-flow breakeven at the time of their IPO.

Hopefully that's a helpful profile for any venture backed technology companies considering an IPO. Based on this profile, we have several portfolio companies that will qualify as 'typical' IPO candidates in the next 12-24 months, and it will be exciting to see how public markets treat technology IPOs between now and then. Based on the early performance of recent IPOs (Twilio, Talend, etc.), I'm optimistic that the IPO market will be alive and thriving, which is exciting for my portfolio companies, and for investors in my fund.