Direct Listings, Raising The Bar And Centurion Founders (Let’s Aim For 100M ARR, Not Valuation)
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1. Direct listings are revolutionizing IPOs
The Founder’s lens
Moving beyond the traditional avenues of banker-driven IPOs, today’s leading unicorns are taking an alternative that has now become an upward trend. Reputed venture capitalists such as Benchmark’s Bill Gurley and Sequoia’s Sir Michael Moritz are amongst the pioneers of this new thinking. This raises an important question – how do fast-growing, more than adequately capitalized, late-stage startups attract blue-chip investors, thus avoiding an IPO?
The need to search for many impactful alternatives stems from disgruntled founders (and their VC backers) who feel traditional IPOs are controlled by investment bankers and lawyers. This underpriced process leaves less money for the founders and early investors, while large fees are pocketed by the advisors.
From a founder’s perspective, an ideal scenario ought to have a small group of large shareholders that have the patience, trust, and commitment for the founders’ long-term vision (as opposed to institutional investors who are in for big gains with little patience).
Waning banker power
With this push toward direct listings in recent times, premiums for top drawer bankers have gradually been fading, with Uber and Peloton being good examples.
Direct listings have also witnessed a contrarian scenario with a few of them underperforming in the market. For instance, Slack and Spotify have been trading at lower than opening prices.
A constant push to keep exploring optimal avenues that protect and enhance founder interests will continue to exist while bringing in the big names needed to back late-stage growth companies with patient and sustained capital.
2. ‘New-tech’ transforming ‘Old-econ’
Typically, most enterprise-tech startups are born in one of two ways, in the realm of “new tech”
Technology that is redefining and disrupting traditional industries where the incumbents are largely non-tech. These incumbents will compete or become either customers, acquirers or will get disrupted. Here, technology has to be very robust.
Applying New-Tech, e.g. Machine Learning/Artificial Intelligence to specific use cases and verticals. Here, while the tech has to also be robust, it’s more important that its application is sharp.
An example – Turing.com an AI/ML-first startup which helps reinvent business processes in their entirety, aims to turn the IT services model and redefine the software lifecycle.
One of the biggest beneficiaries of new technology will be old-economy industries. Food & beverages, logistics (covers warehousing, transportation, etc.), fashion, health, bio/life sciences are all relevant examples. Deep-tech includes conversational AI, RPO (robotic process automation), where AI is being used to alter and reshape industries.
Here, a great example is our very own Grey Orange [Robotics]– which is transforming the world of warehousing automation with its full-stack platform of robotics products and solutions, and a globally distributed model including sales & marketing in the Americas, Europe, Japan and Asia, R&D across Boston, Hanover and Gurgaon, and operations in the above geographies plus Singapore.
Fresh from a Series B/C raise of around 20M+, it is advisable to consider bulking up via strategic M&A or partnerships. These can take you beyond just acqui-hires, but also help you “buy into” accretive revenues and leverage useful, differentiated technology. For example, doing this right could help an 8-9M ARR grow 2x.
3. Raising the bar – Enter growth rates, gross margins
Capital should be viewed as a tool to accelerate growth when you are already market-relevant. Holding momentum is imperative.
For enterprise startups, a majority need to yet cross the chasm from 1M to 5M. Once you’ve grown past 5M and are approaching 10M, showing proven tech with a humming sales engine – enter marquee growth & late-stage VCs, eager to take a closer look.
Some metric benchmarks (ranges):
A healthy and consistent growth rate is key
Metrics for a marquee Series C would be 15-20m+ ARR and growing at 40-50% YoY
A 3-5M capital raise usually achieves 2M ARR
$10M ARR achieved by at least a 20M raise
On average, at least a $200M raise is needed to get to $100M ARR
SaaS and its advantages for scalability & sustainable growth
SaaS, led by Slack and Zoom, remains at the heart of Silicon Valley and Wall Street “recurring with high growth” businesses – thus trading at higher revenue multiples. This, in turn, affords proportionately higher multiples of growth & profitability. RingCentral is a good example; today it has evolved into a SaaS company, but its genesis lay in selling phones.
Today, pure SaaS / SW subscriptions comparatively show higher reliability and scalability as business models. ‘Pay as you go’ is showing the way of the present and the future.
4. Key Takeaways for founders looking to scale –
Aiming for annual, recurring, scalable revenue from Day One can go a long way. The bar today has been escalated. In the enterprise sector, breaching $100M in revenue is the new test of scale.
The Law of large numbers – Keep a sharp lookout with large numbers – as you scale, growing at the same rate becomes a real challenge.
Broadly, the best-valued companies are highly related to higher gross margins. “Have money and free cash flow” generally implies, in turn, higher pricing leverage with less volatility.
Heard from a late-stage VC — “learn the rules of public markets early, and start operating with that behaviour, adopting those best practices in mind.”
Increasingly, enterprise-tech, which spans Software/SaaS to deep-tech, has come to occupy a distinctive slice on the global tech map.
If we can consistently deliver a pipeline of fast-growing, ‘path to profitability’, 100M ARR-scale B2B stars, India will have truly raised the bar and created a launchpad for a steady stream of ‘Centurion Founders’.