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ResearchThe Weekly (12/22)

The Weekly (12/22)

Dec 22, 2023

IPO markets have been a bit of an oddity lately.

It feels like we have been hearing rumors of massive tech companies “waiting in the wings” to test the public markets for well over two years now. And yet, they’ve largely stayed there.

So far, 96 IPOs have raised $18.8 billion in 2023, according to Renaissance Capital. It’s better than 2022 which saw an unimpressive $7.7 billion in IPOs but still well off the historical ~$50 billion average.

Taking a peek under the hood, it’s interesting that the vast majority of the recent and rumored IPOs have been consumer oriented:

  • Instacart 

  • Reddit

  • Cava

  • Birkenstock

  • Skims

  • SHEIN 

  • Golden Goose

The key non-consumer companies:

  •  ARM

  • Klaviyo (technically consumer adjacent)

It’s a divergence away from what venture capitalist and private equity firms are typically funding: the vast majority of investment goes towards SaaS companies with a “focus on recurring B2B revenues”.

Something doesn’t add up. Consumer companies are undoubtedly difficult to scale but their upside can be tremendous.

It makes us wonder: why are the public markets open to consumer companies but not enterprise SaaS?

We see two plausible reasons: (1) the macro and (2) profitability 

1.) Macro

Business customers have shareholders; consumer customers don’t. When rates go up, businesses prefer short-term profit over long-term investment, so (among other things) they cut SaaS spend.

On the other hand, consumers generally don’t care too much about rising rates. Some consumers may feel the impacts but, on the margin, consumers still spend and they certainly don’t have a board of directors telling them to put their wallets away.

2.) Profitability

Consumer companies are often accused of having bad unit economics, because of having to acquire each customer individually, at a smaller average purchase size compared to their enterprise peers. This is, in many cases, wrong. 

Sure, consumer companies have to acquire customers individually, but they do not have to employ the sales teams that SaaS companies require. For consumer companies, sales and marketing costs are a manageable expense (to Facebook and Instagram), not headcount.

Many successful enterprise SaaS companies have multiple year payback periods while the best consumer companies are usually profitable (gross) on the first order. SaaS companies are structured to be profitable far into the future, whereas consumer companies can often be profitable *now*. 

This vision of the future that is increasingly uncertain may be contributing to the lack of SaaS IPOs. 

So if private investors are largely funding SaaS companies, which will change first: the IPO markets, or private market investors’ mindsets?

Have a great weekend,

— Your Titan Team


Disclosure:

As of writing, META is a holding in Titan Flagship.

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