We looked at the revenue trends of 119 tech companies prior to their IPO and discovered something interesting: while fast growth in the year of IPO is critical (obviously), so is consistent growth from the prior year. In other words, tech companies that exit show very consistent year over year growth, not just fantastic growth in the year of exit. The data is below:
-SaaS companies grew 55% in the year leading up to IPO and 50% the year before that. Social media companies had similar trends (151% and 154% respectively), as did marketplaces (55% and 50%), and e-commerce companies (72% and 72%). What strikes us is not only the strong growth but the very consistent growth year over year. Even though these companies got bigger, management was able to maintain the growth nearly perfectly from the prior year.
-If your growth is going to slow, make sure it’s still very impressive. For instance, content distributors posted 112% growth in the year leading up to IPO but 178% growth in the year prior. Even though growth slowed, 112% is still very impressive, especially when median revenue in the year of IPO was $119mm. New hardware showed similar slowing trends, but again the growth was impressive: investors will not fault you for growing 87%, down from 191% in the prior year (hardware’s numbers).
-Payments and gaming were outliers, actually increasing growth materially in the year prior to IPO, but we only have 2 companies for each of those industries, hence the sample set is too small in our view to draw conclusions from.
The data shows consistent growth leading up to the year of IPO/exit is every bit as important as fast growth.