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Twilio’s IPO Pricing Shows Off The Valuation Gap

tl;dr Twilio’s proposed IPO pricing values it close to its last private round. Why is that the case? 

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A Twilio spokesperson demonstrates an everyday usecase for telecommunications APIs.

Twilio proposed a $12 to $14 price range for its IPO today, valuing the firm at $1.07 billion assuming mid-range pricing. As Fortune reports, that’s up a mere mote from its last private valuation of $1.03 billion.

The company raised that last round of private cash in July of 2015. Compared to more recent figures, the company’s revenues were smaller by a material percentage, and in that year, Twilio would go on to post a larger loss—than in either of its two preceding annums; quick revenue growth $88.8 million in 2014 to $166.9 million in 2015—came at the price of increasing burn.

However, and notably, in the company’s most recently reported quarter—the first of this year—it posted steep year-over-year revenue gains from $33.4 million to $59.3 million, and a net loss that fell from $8.7 million to $6.5 million during the corresponding periods. Those figures suggest that Twilio can now grow its top line while at the same time reducing its GAAP net losses.

Hello, IPO.

All that is an elementary reading of the company’s new S-1A, so let’s have some adult fun1.

The Public’s Discount

By this point, you should be asking yourself why Twilio is worth only a nudge more than its prior valuation—despite having nearly another full year of growth on the record and shrinking losses.

As we’ve discussed a time or two here at Mattermark, the gist is that public investors have repriced the value of private technology company revenue over the past few years. We’ve approached the question largely from the recurring revenue perspective and not a simply annualized pace2, but the lesson largely holds up. Twilio will be our guide on that point.

Quickly, the company’s last raise was announced mid-quarter. As such, we can’t put an exact figure on what its annualized run rate was at the time of the raise, but we can get modestly proximate. To make a proper estimate, we’ll calculate what the company’s quarterly revenue pace was at the time of the investment and extrapolate from there.

The quarter preceding the period in which the company announced its $130 million round clocked in with $37.9 million in revenue. The quarter during which the new capital raise was in fact made public saw $44.3 million in top line.

Taking the average of the difference of the two end-of-quarter figures, and taking one full month into account as the new cash was announced in July’s closing days, we can estimate a nearly flat $40 million in quarterly revenue for Twilio at the point of its last private capital event. This is useful as it helps understand how the market valued it at the time, compared to how public investors are expected to value the firm, presuming it debuts at the midpoint of its range.

Still here? Good. Let’s make this easy:

  • Last private round: $160 annualized run rate ($40 million quarterly pace). Valuation: $1.03 billion. Value of each dollar of annualized revenue: $6.4.
  • Most recent quarter, and proposed mid-point IPO price: $237.2 annualized run rate ($59.3 million quarterly pace, as reported) Proposed valuation: $1.07 billion. Value of each dollar of annualized revenue: $4.5.

That’s a decline of 29.7 percent of corresponding valuation in terms of each dollar of run rate demonstrated.

There are terms we don’t know about and various other arcana that make our analysis reductive by default, so please do not take our percent decline as perfectly accurate. Instead, it’s a useful tool to show directional shift in valuations3.

Twilio, Ratios, And The Number 4.ish

Here we go from the private, to the public, to the downright alchemical. 

Twilio’s $1.07 billion valuation at mid-point pricing is nearly the same multiple of both its aggregate capital raise and its current annualized run rate. Likely a coincidence, I still enjoy seeing numbers come into alignment. Perhaps this is the financial version of horoscopes. Humor me:

  • Twilio’s capital raised ($234 million, according to Mattermark) to mid-point valuation ($1.07 billion) ratio: 4.6
  • Twilio’s most-recently-reported annualized run rate to ($237.2 million) to mid point valuation ($1.07 billion) ratio: 4.5

So, in short, the amount of money Twilio raised is nearly precisely its last-reported-quarter’s annualized run rate, and both clock in around around 1:4.5 in terms of value creation. Every dollar that went into Twilio generated an average of $4.6 in value. And every dollar that the company generated on an annualized basis in its most-recent quarter was worth around $4.6 in value.

Spooky!

Top Gif Via Tumblr
  1. Calm down.
  2. This is the other form of ARR. Perhaps we should call it AnRR, or something similar, as the SaaS kids have taken ownership of ARR in the recurring context.
  3. This article isn’t about Twilio per se, it just happens to have given us the most recent set of numbers to hang out with.

Disclosure: The CEO of Mattermark is a former Twilio employee. Editorial methods, topics, decisions and analysis are the domain of the editorial team, of which she is not part. Even given that fact, her former employment status felt worthy of public notice given the topic of this piece. Hi! — Alex.

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© Mattermark 2017. Sources: Mattermark Research, Crunchbase, AngelList.
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