Reopening the IPO window — Part 1: SaaS

Raphaëlle d'Ornano
7 min readFeb 15, 2024
Credit: Andy Hermawan

The IPO market has been frozen for almost two years. Through the first nine months of 2023, there were 60 public listings of VC-backed companies in the U.S. with a total value of $28.2 billion in exit value, a sharp fall from the 229 IPOs in 2021 with a total value of $511.9 billion, according to Pitchbook.

The IPO drought has created a liquidity crisis, putting tremendous pressure on the entire VC-backed startup model. Startups can’t access the public-market money they need to grow, and investors can’t generate returns that they often use to invest in even more innovation. Essentially, the wheel that finances innovation is blocked, threatening to undermine the ability to fund critical breakthrough technologies, of which the shift to GenAI.

However, there are signs of an IPO thaw thanks to encouraging economic signs, hints that interest rates may start to come down, though most likely starting in H2, and a rebound in investor optimism. Should the IPO window gradually reopen, some sectors are poised to benefit first: SaaS and Fintech. Investors need to understand why these segments are in the best position to complete an IPO — and how to evaluate the very best candidates.

The most successful investors will have a strategy for sorting through the clutter and identifying the companies with high-quality and resilient business models poised to deliver long-term growth. A growth that is efficient. In this article, we’ll look at the investor rules of engagement for SaaS IPOs. Next month, we’ll zoom in on Fintech.

Let’s explain first why SaaS companies will likely lead the charge into a rejuvenated IPO market.

During the funding boom years of 2020–21, SaaS became one of the most popular business models for VCs. According to Pitchbook’s Q3 2023 Venture Report, SaaS startups in the U.S. had a cumulative valuation of $532.4 billion — the most of any vertical. Given the median valuation of $436.9 million, these suggest a large crop of candidates from which to choose for IPOs. Pitchbook’s barometer identified 2,282 SaaS startups with solid potential for exits, including 194 who are likely to IPO. The last big SaaS IPO post pandemic was Hashicorp in December 2021.

Still, there are risks in pursuing an IPO. Given the backlog of late-stage companies seeking public market exits, there will be a temptation by founders, VCs, and banks to push the mediocre out along with the genuinely great. But if they push weak companies onto the public markets, then a string of underperforming public offerings could shake the markets’ confidence and cause the window to slam shut. Last year, the IPOs by ARM, Klaviyo, and Instacart offered glimmers of hope that a rebound was at hand. But their mixed performance cooled enthusiasm. As JP Morgan noted in a recent report, any company preparing an IPO will face a “high level of scrutiny and continuous performance expectations. Private companies considering an IPO need to be prepared.”

On the other side of the equation, if IPOs return, the volume of offerings could make it harder for investors to select the best opportunities, causing their returns to take a hit — or for them to miss out on the real winners. What makes this challenging is that not all growth is alike. It’s easy to be dazzled by top-line numbers that suggest someone has built a juggernaut. But even companies posting top-line solid revenue growth could have hidden weaknesses that are hard to spot until they burst out into the open further down the road when growth stalls.

The solution to this dilemma is a rigorous analysis that tests the critical components of these high-growth, innovative companies. To understand what it takes to be a serious SaaS IPO candidate in 2024, we applied our Advanced Growth Intelligence (AGI) framework, which uses four pillars to identify the key characteristics that confirm whether a company’s growth is high quality and durable:

Quality of Revenue:

This measures the recurring and technological factors of a SaaS company’s revenue. It is about understanding how much revenue comes from actual licensing, how much is recurring subscription revenue, how much is transactional, and how much is one-off with lower margins. The valuation of a company whose revenue is truly recurring and truly “technological” will be higher than a company bearing the same numbers but with a lower revenue quality. Often, S1s are mute on these qualitative aspects.

Another critical consideration is the quality and concentration of the customer base. For instance, we analyzed the Klaviyo IPO filing last year. The marketing SaaS platform reported that almost 80% of its ARR comes from the Shopify ecosystem. A savvy investor will want to probe further to understand how the company plans to reduce that dependency over time. In contrast, the company’s top 10 customers only represented 1.4% of ARR. So, on balance, the overall revenue quality is good.

Quality of Growth:

This starts with the actual revenue level and the overall rate of growth. Before the Klaviyo IPO, SaaS companies had an average of $200 million to $300 million in revenue when they entered the stock markets. And growth levels north of 50%. Klavyio set high standards with north of $500M revenue and >56% y.o.y growth at IPO.

Not all growth has to be organic. M&A can also be an essential driver of growth. AI-driven data analytics platform Databricks has raised more than $4 billion. It has a reported valuation of $43 billion, making it one of the world’s most highly valued private companies. It has long been viewed as a strong IPO candidate. Last year, the company leveraged its leadership with two significant acquisitions, paying $1.3 billion for MosaicML and its GenAI tools for developers and $100 million for enterprise data startup Arcion. Both companies provide critical functionality that will bring their respective customer bases while allowing Databricks to expand its offerings to its current customers. In this case, M&A has allowed it to pivot the model from a SaaS company to an AI-first company. Contentsquare also constitutes a strong example of a SaaS company pursuing an external growth strategy on top of its organic one.

Companies aiming for an IPO must also show growth endurance rather than just growth. A premium is attached to continued, quarter after quarter, growth rather than having bumps in the company’s growth trajectory.

With the imperative of efficiency brought by funding restrictions over the last 18 months, there is also a substantial premium attached to expansion-related growth. In all cases, the two engines driving ARR growth are Net New ARR (new customers) versus Net Expansion ARR (extending the sales relationship with current customers). In today’s market, the latter offers a particularly compelling premium. Investors need to know to which degree each is fueling growth. On the other hand, the ability to not lose customers is critical. Gross Revenue Retention (GRR) can be revealing because it measures customer retention — necessary for revenue stability — and the level of churn. A good level of GRR — which will depend on the company’s customer segments — is a prerequisite to any IPO, even if NRR stands above 120%.

Finally, different Customer Acquisition Cost (CAC) ratios (LTV/CAC, CAC payback, etc.) can tell us about sales efficiency. How much revenue does a company gain for each dollar it spends to acquire a customer through sales and marketing? Many of the best SaaS companies use product-led growth strategies to create an optimal CAC flywheel.

Quality of Margins:

This digs into the expense side of the equation by dissecting spending on areas like S&M, R&D, and G&A. It also looks at factors like cloud infrastructure costs and — depending on the platform type — items such as model, inference, and MLOps costs.

Assessing the quality of a SaaS company’s margins consists of challenging the normativity of opex spending in relation to ARR growth and the company’s ability to innovate. It is frequent that pre-IPO S&M spending rises above 50% of the Net Sales ratio, but such a level makes sense only to the extent that the company continues high growth (>40%) at scale.

In the case of Klaviyo, the company had steadily reduced S&M and G&A expenses over the years. At the same time, it maintained strategic spending on R&D, which is not optional as SaaS companies embed GenAI as a new feature/product in their offering. The company balanced these shifts and increased Gross Margins over the three years before its IPO, making it a best-in-class candidate.

Balance Sheet Strength

This fourth pillar identifies the main balance sheet components to assess the strength of the company’s balance sheet. The underlying idea here is that to grow resiliently, a SaaS company needs sufficient cash on hand and must be lightly or not levered.

Assessing a company’s intrinsic value and resilience through this kind of granular analysis will be crucial for investors who want to navigate a potential wave of IPOs. These insights offer clear advantages and create the confidence to make the right decisions rather than just following the crowd into a company because it’s built tremendous buzz. All sides of the IPO ecosystem benefit when the very best companies attract the savviest investors.



Raphaëlle d'Ornano

Managing Partner + Founder D’Ornano + Co. A pioneer in Hybrid Growth Diligence. Paris - NY. Young Leader French American Foundation 2022. Marathon runner.