April 26, 2018 | Blog

DocuSign IPO: All Signs Point To A Successful Exit

IPO Window Opens For More Unicorns

DocuSign is scheduled to go public this week, having recently filed an S-1 at an offering price ranging from $24 to $26 per share. On Wednesday, DocuSign raised its pricing range to $26 to $28 per share, implying a market cap of $4.3 billion at the high-end and a 40% premium to its most recent private valuation. The San Francisco software company could raise up to $540 million in this offering. Selling shareholders plan to offer shares worth up to $146.7 million. DOCU is now the eighth cloud or enterprise SaaS company going public this year. It appears, the time is right for cloud or enterprise SaaS companies.

Expect Healthy IPO Pipeline of Enterprise SaaS Companies: It’s been a fairly busy 1H:2018 for cloud or Enterprise Software investors in the Private Tech Growth asset class. In addition to DocuSign, Carbon Black, Smartsheet, Pivotal, Dropbox, Zscaler, Zuora, and Ceridian have filed an S-1. Dropbox and Zscaler, are up 38 percent and 70 percent from their IPO price, respectively. We think this is a sign of things to come in 2018. At the same time, we believe mega consumer Internet unicorns such as Airbnb and Uber will likely wait until 2019. While large and successful consumer-oriented unicorns (such as Spotify) continue to get the bulk of media attention, the unglamorous Enterprise Cloud companies are the engines of the Private Tech Growth asset class. These past several months have provided encouraging signs that other such workhorses in the cloud could deliver returns over the longer-term.

Private Tech Valuations Could Continue To Rise In Public Markets: Recent IPO activity among VC-backed tech companies has been encouraging. Cybersecurity firm Zscaler upped its IPO at $16 per share after an initial range of $13 to $15 per share. Zscaler’s IPO was effectively valued at 99 percent above its most recent private funding round. Dropbox and Spotify have also enjoyed warm receptions on Wall Street. DocuSign’s proposed $4.284 billion valuation in the public markets (assuming the high-end of its IPO pricing range) would compare favorably to its $3 billion private valuation. Because tech IPOs and rising valuations are a key indicator of investor sentiment, they are seen as a potential promising sign for the more than 200 unicorns waiting to go public. We could possibly see another wave of IPOs, as well as possible significant value creation for institutional and individual investors and employee shareholders. Including DocuSign, we’ve tracked 27 VC-backed tech IPOs over the past 24 months in the chart below. According to our data, 18 companies enjoyed IPOs that exceeded recent private valuations, while nine companies suffered down-round IPOs.

IPO Pricing Compared to Last Private Valuation
Source: Google Finance; SharesPost Research; Spotify IPO valuation assumed at $28.5 billion; Pivotal IPO valuation assumed at $4.0 billion; Chart excludes Stitch Fix IPO which implied a 595 percent estimated premium; Docusign IPO valuation assumed at $4.3 billion

Background: DocuSign was founded in San Francisco in 2003 by Thomas Gosner. DocuSign pioneered e-signature technology, allowing parties to sign, record and execute digital agreements in the cloud. It avoids the need for handwritten signatures on paper. The company operates offices in the United Kingdom, France, Ireland, Israel, Australia, Singapore, Japan and Brazil. About a quarter of DocuSign’s 2,255 employees are based overseas. DocuSign’s top three shareholders include: Sigma Partners (12.7 percent), Ignition Partners (11.5 percent), and Fraizer Technology Partners (7.1 percent). Google and Comcast are also major investors. DocuSign boasts about 375,000 customers worldwide, including Bank of America, Verizon, Nasdaq, Coldwell Banker, Walmart, and Fed-Ex. The company also enjoys strategic sales partnerships with Google, Microsoft, Oracle, Salesforce, and SAP.

From a valuation standpoint, DocuSign generated $518.5 million last year, a 36 percent increase over 2016 and a 52 percent jump over 2015. Assuming another 25 percent year-on-year growth in revenues in 2018, DocuSign’s IPO valuation implies roughly 6x forward revenue multiple – a reasonable valuation, in our opinion.

The Updside Scenario

More subscriptions, more visibility. Over 93 percent of DocuSign’s annual revenue in fiscal 2018 came from recurring subscription fees, which offers investors a much more transparency in evaluating the company’s core business.

Gross margins getting fatter. Last year, DocuSign generated healthy, gross profit margins of 77 percent, compared to 73 percent in fiscal 2017 and 70.5 percent in fiscal 2016.

Getting closer to overall profitability. DocuSign has progressively lowered its overall operating losses by more than a third over the past three fiscal years. And, it reported positive free cash flow in 2017. In fiscal 2018, DocuSign reported an overall loss of $52.3 million. That’s considerably lower than its losses of $115.1 million in fiscal 2017 and $122.6 million in fiscal 2018.

Significant untapped potential in Blockchain technology. DocuSign, which has spent $300 million on research and development over the past 15 years, is testing new Blockchain/smart contract technology. It is collaborating with financial services giant, Visa Inc., to simplify the buying or leasing a car. The technology would enable a consumer to complete the transaction, including document signatures and payments, without ever leaving the vehicle. DocuSign believes it can eventually apply the technology to financial services, healthcare, and legal proceedings.

The Downside Risk

Still early in international expansion: Less than 20 percent of revenues originates overseas, which means investors should expect the company to spend more cash moving into foreign markets.

Selling shareholders signaling effects: DocuSign has several institutional investors, including Sigma Partners, Ignition Partners, and Google Ventures, looking to sell shares, which might drive down the ultimate IPO price. More than 20 percent of the offering, or 5.5 million shares, are such secondary sales.

Competitors include established players. DocuSign’s main competitor is Adobe, which acquired EchoSign in 2011 and now offers the technology as Adobe Sign. Other competitors include niche software firms such as HelloSign that operate in specific industries and geographies.

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Analyst compensation is based upon various factors, including the overall performance of SharesPost, Inc. and its subsidiaries, and the performance and productivity of such analyst, including feedback from clients of SharesPost Financial Corporation and other stakeholders in our ecosystem, the quality of such analyst’s research and the analyst’s contribution to the growth and development of our overall research effort. Analyst compensation is derived from all revenue sources of SharesPost, Inc., including brokerage sales.

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This report does not contain a complete analysis of every material fact regarding any issuer, industry, or security. The opinions expressed in this report reflect our judgment at this date and are subject to change. The information contained in this report has been obtained from sources we consider to be reliable; however, we cannot guarantee the accuracy of all such information.

Any securities offered are offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative and involves a high degree of risk. It should only be considered as a long-term investment. You must be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and you should complete your own independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or other investment advice.

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Alejandro Ortiz

Alejandro Ortiz

Alejandro is a Research Analyst, Private Investment Research for SharesPost Research LLC. Prior to joining SharesPost, he was a Valuation Analyst at Duff & Phelps with a focus on TMT industries.
PLEASE READ THESE IMPORTANT LEGAL NOTICES & DISCLOSURES

CONFLICTS

This report is being published by SharesPost Research LLC, and distributed by SharesPost Financial Corporation, a member of FINRA/SIPC. SharesPost Research LLC, SharesPost Financial Corporation and SP Investments Management, LLC, an investment adviser registered with the Securities and Exchange Commission, are wholly owned subsidiaries of SharesPost, Inc.

Recipients who are not market professionals or clients of SharesPost Financial Corporation should seek the advice of their own personal financial advisors before making any investment decisions based on this report. None of the information contained in this report represents an offer to buy or sell, or a solicitation of an offer to buy or sell, any security, and no buy or sell recommendation should be implied, nor shall there be any sale of these securities in any state or governmental jurisdiction in which said offer, solicitation, or sale would be unlawful under the securities laws of any such jurisdiction.

This report does not constitute an offer to provide investment advice or service. Registered representatives of SharesPost Financial Corporation do not (1) advise any member on the merits or advisability of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.

ANALYST CERTIFICATION

The analyst(s) certifies that the views expressed in this report accurately reflect the personal views of such analyst(s) about any and all of the subject securities or issuers, and that no part of such analyst compensation was, is, or will be, directly or indirectly related to the specific views contained in this report.

Analyst compensation is based upon various factors, including the overall performance of SharesPost, Inc. and its subsidiaries, and the performance and productivity of such analyst, including feedback from clients of SharesPost Financial Corporation and other stakeholders in our ecosystem, the quality of such analyst’s research and the analyst’s contribution to the growth and development of our overall research effort. Analyst compensation is derived from all revenue sources of SharesPost, Inc., including brokerage sales.

DISCLAIMER

This report does not contain a complete analysis of every material fact regarding any issuer, industry, or security. The opinions expressed in this report reflect our judgment at this date and are subject to change. The information contained in this report has been obtained from sources we consider to be reliable; however, we cannot guarantee the accuracy of all such information.

Any securities offered are offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative and involves a high degree of risk. It should only be considered as a long-term investment. You must be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and you should complete your own independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or other investment advice.

Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

SharesPost, the SharesPost logo, My SharesPost, the SharesPost Index, and SharesPost Investment Management are all registered trademarks of SharesPost, Inc. All other trademarks are the property of their respective owners.

Copyright SharesPost, Inc. 2019. All rights reserved.