Blog Article | Rohit Kulkarni
Posted: November 13, 2017

SendGrid IPO: A Mile-High Opportunity?

Denver-based email software company SendGrid recently revealed details about its upcoming IPO in an amended S-1 filing. In the offering, SendGrid plans to list 7.7 million shares on the NYSE at a price as low as $13.50 and as high as $15.50 per share. In total, the company hopes to raise over $100 million in working capital. An IPO at $14.50, the mid-point of the anticipated price range, would peg the company’s implied valuation at over $700 million – more than 20% higher than the company’s most recent private valuation of $582 million in November 2016. This is good news for existing investors, including Founders Fund, Bain Capital, and Bessemer Venture Partners. But, this also raises two basic questions: Is SendGrid an attractive investment for new investors as well? And, what does this IPO tell us about the state of the IPO market in general?

Expect More Enterprise SaaS IPOs

Heading into 2017, our year-end 2016 Investor Sentiment Survey highlighted a clear bias among investors for Enterprise Software companies. The majority of the 600 accredited investors in our survey liked the long-term prospects of Enterprise Software companies as a group. SendGrid will be the ninth after AppDynamics, MuleSoft, Alteryx, Okta, Cloudera, Yext, Appian, and MongoDB. We continue to see an affinity for Enterprise Software companies heading into 2018. While large, successful consumer-oriented unicorns continue to get the bulk of media attention, the less glamorous Enterprise Software companies remain the unsung heroes of the Private Tech Growth asset class. Year to date, these IPOs have provided encouraging signs that other such cloud workhorses will deliver returns over the longer-term.

Why Invest in SendGrid Now? SendGrid was founded in 2009 to solve the problem that developers had with managing email delivery. The company built a robust API in which developers could, in minutes, integrate their email and deliverability platform into any application. Two key points: 1) SendGrid operates within a large and growing market. While companies may be switching to messaging services for internal communications (e.g. Slack, Skype), email remains a critical medium for businesses to interact with their customers for things such as purchase receipts, shipping notifications, account information, social media updates, reservations, etc.; and 2) SendGrid has moderate top-line growth but profitable cash flows. SendGrid enjoys high gross margins – over 70%. Like many successful SaaS companies, the company has also attained profitability on an adjusted net income basis. Additionally, SendGrid has been producing positive operating cash flow since 2015. Overall, these financials are healthy and a step ahead of the majority of pre-IPO software companies. These metrics will also likely appeal to investors in the public market and protect the company from some of the speculative volatility associated with some recent IPOs, such as Snap.

Finally, SendGrid has A-list VC backers and remains a potential acquisition candidate. From a valuation standpoint, assuming a reasonable 30% growth in top-line over the next 12 months, Sendgrid’s IPO valuation implies a 6.5x to 7.5x EV/Revenue multiple, a reasonable valuation for a profitable small-cap SaaS company.

What about SendGrid has us worried? The first concern is SendGrid’s size. As one of the smallest software companies to go public this year, SendGrid is less mature than peers such as Tintri and Cloudera when they went public. This is likely to increase its sensitivity to fluctuations in the market and inhibit its ability to weather headwinds in the short-term. Furthermore, the company will likely feel the burden associated with its transition to operating as a public company more heavily than more developed businesses.

Adding to these concerns is the company’s modest revenue growth rate. At 36% year-over-year for 2016, it lags behind the high expectations investors often have for young growth companies. To improve its fortunes, SendGrid should strive to increase revenue growth rates while maintaining its high gross margins.

Another factor that makes us marginally more concerned about SendGrid is the replicability of its software offerings and business model. Unlike other Enterprise Software companies, SendGrid has an extremely limited IP portfolio. As a result, its flagship offering, SendGrid API, can largely be reproduced by others. This liability, coupled with the fact that email solutions present relatively low switching costs for customers, means that SendGrid is more vulnerable to copycat competitors than other Enterprise Software offerings.



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Information regarding companies in the SharesPost 100 List available on the website has been collected from or generated from publicly available sources. The availability of company information does not indicate that such company has endorsed, supports or otherwise participates with SharesPost. Company “thesis” are the opinions of SharesPost and are not recommendations to buy, sell or hold any security of such company.

Rohit Kulkarni
Article Author

Rohit Kulkarni

Rohit is the Managing Director, Private Investment Research for SharesPost Financial Corp. Prior to joining SharesPost, Rohit was a Vice President, Senior Analyst at RBC Capital Markets.

SendGrid

SendGrid

Sector: Software
Founded: 2009
Last Round Estimated Valuation: $581.79MM
FULL COMPANY PROFILE

PLEASE READ THESE IMPORTANT LEGAL NOTICES AND DISCLOSURES

This blog post is being published by SharesPost Financial Corporation, member FINRA/SIPC. 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. SP Investments Management, LLC is the investment manager of the SharesPost 100 Fund, a Registered Investment Company, and other funds. These entities and funds (hereafter “SharesPost”) does, seeks to do business with and owns the companies covered in this research report. Consequently, investors should be aware that SharesPost has a conflict of interest that could affect the objectivity of this report.

None of the information contained in this blog post 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 does it 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.

Information regarding companies in the SharesPost 100 List available on the website has been collected from or generated from publicly available sources. The availability of company information does not indicate that such company has endorsed, supports or otherwise participates with SharesPost. Company “thesis” are the opinions of SharesPost and are not recommendations to buy, sell or hold any security of such company.

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