The most significant step for many SaaS companies is going public, and many financial leaders are wondering if they should, how they can, and why it's essential. Getting to an initial public offering (or IPO) will hold a company more accountable than ever, and the process requires a tremendous amount of financial discipline, disclosure, planning, and strategic direction.
Many SaaS companies might wonder if they should or shouldn't IPO, but the correct question to ask is WHEN are they ready? Before having a successful IPO, you need to show your potential investors specific metrics, whether you're at the early stage or venture stage. In this article, we will look at the critical metrics financial leaders need to show potential investors when getting IPO-ready.
What Is Important for Financial Leaders to Show Potential Investors
Every SaaS company needs to get specific metrics ready to impress potential investors if they want to have a successful IPO. Let's take a closer look.
The first thing that potential investors look for is growth metrics. In the case of SaaS companies, their value is based on revenue growth over any other type of financial metrics. A high growth rate for an investor will indicate that new customers are buying, existing customers are retained, and there is a low churn among existing customers. Other metrics include users, bookings, gross merchandise value, and billings. SaaS companies also need more precise metrics when running a subscription business.
Asides from proving that you can grow, your business must also show investors that it can grow at scale. Investors are interested in companies growing at a sustainable rate despite what's trending or random events. Sustainable growth assures the investors that the company has a plan for solid revenue growth in the long term.
When measuring the profitability of a SaaS IPO, investors focus on specific metrics. For one, they check if a SaaS business with subscription-based revenue models has free cash flow, although those without these models will do best with robust net income. Asset-heavy companies with debt on their balance sheet will need EBITDA.
Although this might seem like an obvious metric for your SaaS business, it's still worth mentioning. There's no doubt that investors always check the type of products a company has before considering investing in them.
Investors also look at your competitors, so you should conduct in-depth competitor research and analysis while getting IPO ready. When a market has a lot of competition, it's hard to select who leads that industry. Thus, your business needs something that makes it stand out.
One of the reasons companies want to do an IPO is that they need access to capital, but there's a dilemma since they need money to fund the business. Potential investors always check the balance sheet to see if your company has enough cash or would soon be making enough cash to take care of business through cash flow forecasting. It also helps to learn how to forecast cash to reduce uncertainty. Thus, you need a cash forecast and business plan to prove your cash flow.
Potential investors look out for SaaS companies in total addressable markets. In this type of market, your company has a higher chance of becoming a large franchise, and you won't have to penetrate the market deeply. Businesses in a large market also have higher growth rates in the long term.
Investors will check if you have good unit economics before having confidence in your long-term success. For a SaaS company, the unit economics will involve analyzing the cost and revenue of selling software to each user, thus separating the main costs from the overall costs to check the long-term profit margins.
Any potential investor would assess the financial leader of a SaaS company before deciding to invest. Not just the company's economic leader and/or its public image, the leadership team must prove that they can be truly trusted to bring results.
Managing SaaS Metrics
It's crucial to properly manage the metrics of your SaaS business and use that to drive growth. By checking your metrics regularly, you know where to improve and how to adjust your strategy. It's advisable to learn how to manage SaaS metrics throughout your company's lifecycle to understand your business and increase revenue growth properly.
Managing your SaaS metrics is essential in getting ready for IPO. You always need to have metrics and data at hand to present to potential investors with proper management. Luckily, there are different metrics that you can use to evaluate and manage your SaaS company to promote growth.
How Do You Track IPO Performance?
You can track your IPO performance through different metrics and specialty websites. Most investors track IPO performance on NASDAQ, NYSE, BSE, NSE, and other websites that monitor IPOs. Internally, you can set up a team that would constantly check your IPO performance and investor satisfaction.
What is the Success Rate of IPOs?
The success rate of IPOs was 22% as of 2020, which is quite discouraging as many SaaS businesses want to use this to raise capital. In 2009, the number of companies that became profitable after their IPO was at 81% in the US, but it has been falling.
Where Can You Get IPO Data?
You can get IPO data from reputable library sources that provide this information and news. Every company has an IPO prospectus which has information on their initial public offering and other important metrics.
To prepare your SaaS business for IPO success, you need to put together the metrics you need with analysis and predictable forecasting. So long as you present the correct information to investors, you can convince them to have some faith in your company and the growth you're planning to have.