3 Key Takeaways from the Recent Frenzy of Tech IPOs
During one of the liveliest days in the history of US Securities and Exchange (SEC) filings, six tech startups filed for an initial public offering (IPO). Among the startups were Asana, Snowflake, Unity, Palantir, JFrog, and Sumo Logic. They each submitted their S-1s on Monday, August 24, 2020. While none of the filings came as a shock, their rapid-fire manner created a wave of IPO wisdom for us to share.
Before we take a deep dive into lessons we can learn from this IPO rush, let’s review these startups’ story. The following is a debriefing of the events that lead up to that particular day:
Dustin Moskovitz, the Facebook co-founder, launched this work management platform in 2008. With over 1.2 million paying users, Asana reported $143 million in revenue and experienced an 86% YoY revenue growth in 2019. Although this startup competes with Workzone, Trello, and Jira, it’s still blazing trails.
Snowflake is a cloud-based data warehousing startup founded in 2012 by three experts in the field: Benoit Dageville, Thierry Cruanes, and Marcin Zukowski. It tripled its revenue to $242 million during the first half of 2020, making it the most valuable software startup ever to go IPO and the fifth most valuable tech startup ever — topping Google, Lyft, and Snap.
Unity was founded in 2004 by David Helgason, Joachim Ante, and Nicholas Francis in Copenhagen as Over the Edge Entertainment. After changing its name to Unity in 2007, the 3D video game development platform made $350 million in revenue in the first half of 2020. The platform is widely popular, being used by over half of all mobile, PC, and console games — including Mario Kart: Tour and Pokemon GO.
Peter Thiel founded this software startup in 2003. Palantir specializes in big data analytics, selling data products to governments. Of the six startups featured in this clip, Palantir was the first to file its S-1. With only 125 customers and despite a $580 million loss in 2019, it still recorded $742 million in revenue. Amazingly, over $200 million of that revenue came from its top three customers.
JFrog is a software startup, providing binary repository management solutions to software developers and DevOps teams. Fred Simon, Shlomi Ben Haim, and Yoav Landman founded this company in 2008. In 2019, JFrog booked $104.7 million, which was a 65% YoY revenue growth. It experienced $69.3 million in revenue during the first half of 2020, increasing its YoY by 50%.
Founded in 2010 by Kumar Saurabh and Christian Beedgen, Sumo Logic is a cloud-based machine data analytics company. Ending 2019, with a revenue of $92 million, this tech startup reported $47.2 million in the first quarter of 2020, which was a $14.7 million YoY increase.
The oldest company in this roundup is only three years shy of a whopping 20 years. While they each might seem like overnight successes or newbies, they’re not. The lesson here is simple: be patient.
Through funding round after round and multiple CEO changes, these startups diligently climbed the ladder to IPO. Consider that Snowflake recruited a new CEO in May 2019, Frank Slootman. By October, Slootman was already telling the London press that the company might pursue an IPO in 2020 — but it was still just chatter at that point.
Later in September, the talk was put to action when Snowflake made an IPO at $120 per share. By the end of the first day of trading, it’s market value was $70.4 billion, which was more than double its initial value. It closed at $253.93, having sold 28 million shares and raising $3.4 billion. These astounding figures made it the most significant software IPO (and largest IPO, in general) to double on the very first day of trading.
As mentioned, the lesson we can learn from Snowflake is to be patient. Time isn’t the only changing variable here, after all. Sometimes holding out for the right people in the right positions at the right time is well worth it.
It’s no surprise that the COVID-19 health crisis has impacted the financial market significantly. Stocks, bonds, and commodity markets all took a harsh hit. Some countries even initiated a short-selling ban, including Italy, Spain, and France. Many financial experts believe the market impact is a more significant crisis than the pandemic, mostly because it’s caused pent-up economic and geopolitical dysfunctions to surface — and rapidly.
Despite the vast amounts of businesses shuttering and mounds of companies going into debt, it wasn’t all doom and gloom. Tech companies looked to cash in when the market recovered from its pandemic-induced drop. Fortunately, several tech startups benefited from the glimmer of hope, including the six featured here. This outcome goes to show that even the bleakest times have silver linings — especially if you’ve played your cards right along the way.
For example, the tech behemoths — Google, Amazon, Apple, etc. — have been raking it in and are feeling fine during the pandemic. For many, tech companies have been the bright spot in all of this coronavirus mess. Daniel Ives, managing director at Wedbush Securities said, “The largest tech companies could emerge on the other side of this much stronger.”
But it’s not only tech giants that have reaped the rewards during this trial and tribulation. Tech company mergers and acquisitions (M&A) are on the rise. Plus, as we witnessed in the rush of S-1 filings, the pandemic likely motivated many founders to make their move.
It’s not always effortless for pre-IPO companies to make it to the public finish line. That said, some businesses don’t even look great on paper when IPO time rolls around. Consider Palantir’s unique position when it filed its S-1.
Keep in mind that this software startup serves mostly governments, and many consider it a controversial business. Although attempts to land it more significant corporate customers are voracious, the company wasn’t exactly self-sustaining when it filed its S-1 in July. In fact, a leaked screenshot of Palantir’s S-1 revealed that it experienced a generous 2019, booking $742 million. However, it also records a net loss of about $580 million for 2019 — which mirrors its 2018 loss. Despite Palantir’s net loss percentage improving from 2018 to 2019, it was still in a sticky spot going public.
The lesson here is that there’s always more going on behind the scenes. For one, going public doesn’t solely depend on financial records. Even though Palantir lost the same amount of money in 2018 and 2019, it still increased its YoY revenue.
Despite its distinctive approach, however, Palantir still isn’t trading. The company chose to hit the stock market via direct listing rather than the traditional IPO. Amendment after amendment, the controversial company is toying with various lockup periods, aiming to (eventually) make it invulnerable by any outside governance. Again, there’s always more to the story than we might initially think.
Setting your company up for success requires making strategic decisions. When they launch their startup, most founders dream of going public someday. But it’s a tough path. Preparing for an IPO is challenging and full of complicated obstacles. No founder can afford to lose any ground — or get held up handling legal issues, for that matter.
Unfortunately, no news feed is without a buzz of some new claim arising against directors and officers. D&O lawsuits are more widespread now than ever before. These cases are some of the most likely hold ups for any company with a board of directors — private or public.
D&O lawsuits happen for several reasons. Founders, executives, and investors are shareholders actively steering a private company. As a result, they get accused a lot, and for various reasons, such as:
On average, companies pay lawyers a minimum of $35,000 to $100,000 to defend each incident. Plus, indemnity payments average around $500,000, but can quickly reach seven figures. Only D&O insurance can thoroughly protect your company from these types of costly lawsuits. But what does it cover?
This coverage features three parts, each focusing on a different business aspect.
Side A: Suppose directors are personally sued and are forced to pay defense costs and settlements, this portion of D&O insurance kicks in to protect the individual. However, Side A will only pay the individual directors if the entity can’t, such as if the company is insolvent. Many pre-IPO companies opt for additional Side A coverage limits, which is an excellent option.
Side B: When the company (or entity) indemnifies individuals named in the lawsuit, Side B coverage reimburses those costs. But it only extends to indemnifying insured individuals named in the lawsuit.
Side C: This coverage provides a balance sheet protection for the company if it is named in a lawsuit alongside an individual director. Side C coverage will reimburse the costs and settlements incurred.
Understanding the details of what coverage your company needs can be a confusing process. Founder Shield specializes in knowing the risks your industry faces to make sure you have adequate protection. Feel free to reach out to us, and we’ll walk you through the process of finding the right policy for you.
Want to know more about D&O insurance? Talk to us! You can contact us at firstname.lastname@example.org or create an account here to get started on a quote.
They’re a hot topic on Wall Street — but why are companies forgoing the traditional IPO route and opting for SPACs?
Now more than ever, companies must safeguard their directors and officers — but how? Here’s an inside look at what drives D&O insurance prices.