Twilio: From API to IPO

twiliologo

I enjoy honoring the founders of companies who “go long” on this blog by conducting breakdowns of their IPOs. Unfortunately in 2016 so far, there haven’t been many opportunities to do so given the record-low number of IPOs. This paucity makes Twilio’s successful IPO even more remarkable. I’d like to congratulate the entire Twilio team and long-term investor base on this milestone.

Funny enough, at the end of 2015, I predicted 2016 would be a big year for IPOs. I’ve clearly been dead wrong, but could the $TWLO IPO be a watershed event, triggering many more debuts this year? I don’t believe so, and I’m not just concluding that because of Brexit (I plan to discuss Brexit in an upcoming post). To explain, let’s evaluate why Twilio worked for Wall Street in today’s climate, what we can divine from its success, and what it means for management teams hoping to complete IPOs.

Why did the $TWLO IPO work?

  1. Dynamic business model: While many public SaaS companies have employed heavy sales & marketing spend to drive growth, Twilio’s solution is API-based and the company has organically built a devoted and expansive developer community over several years. This has enabled Twilio to grow rapidly while keeping sales & marketing costs low, driving an efficient go-to-market model. As a result, public market investors with whom I’ve spoken have taken comfort with the company’s ability to generate significant cash flow in short order and profits over time.
  2. Executive leadership: Jeff Lawson, the CEO, possesses a rare combination of attributes: he’s a technical visionary, has the right commercial instincts, and is able to sell to a variety of audiences, from individual developers around the world to picky, experienced public market investors. The CEO doesn’t do this alone, of course, which is a testament to the team Lawson has built.
  3. Large, growing market: For large enterprises, spend on communications is larger than on IT, and Twilio has only penetrated a single-digit percentage of all developers who could ultimately write to their API, so investors believe there’s plenty of room to grow.
  4. Sensible pricing and guidance: Relative to public market SaaS comparables, $TWLO was priced modestly on a revenue multiple basis, attracting lots of interest. Public investors also undoubtedly liked seeing high quality, long-term VC investors such as Bessemer, USV, Redpoint, and DFJ involved; additionally, Fidelity and T.Rowe, both existing investors, re-upped in the IPO. Finally, the initial analyst projections suggest rapid deceleration in growth, giving investors hope that Twilio can meet or exceed these numbers. These are all signals to public investors that the company will be well managed as a public company.

The Twilio IPO teaches us some important lessons. One, Twilio is an excellent business. Despite all the hype and hate around unicorns, there are few that are growing over 50% at scale, generating operating cash flow, and showing clear progress toward profitability. Twilio is a real unicorn among unicorns. Two, Twilio’s IPO performance does not necessarily suggest that growth-at-all-costs is back in vogue as a strategy for public investors. Three, it’s clear the public market is starved for growth, but I don’t believe growth without profitability line of sight is a good recipe for success in the current environment.

What does the $TWLO IPO mean for future IPO hopefuls?

  1. Cohorts: Perhaps unfair, IPOs tend to be grouped into a “class” or “cohort” based on their timing, even if their businesses are not alike in any way. Investors do this as a way to read where the market is.
  2. Association: Given Twilio’s success (so far), many companies would like to be part of Twilio’s class because investors may start to believe that IPOs are working again and will look to pile in.
  3. Fundamentals: Most (not all) other unicorns have kept burn high to keep growing fast. Most of these companies look very different than Twilio and may not get the same reaction in the current market. Recognizing this, many have curtailed burn in order to reach profitability, but if growth slows as a result, this doesn’t necessarily translate into generating excitement among public investors.
  4. Threading the Needle: There are at least a few unicorn types who’ve curtailed burn but have discovered they can continue to grow rapidly anyway. These companies, as they march toward profitability with high (40%+) growth rates, should study $TWLO closely – this is good one to emulate.

Overall, the Twilio IPO should be celebrated for many obvious reasons. That said, given the market environment, I don’t believe the Twilio IPO will be a harbinger for future IPOs this year. I do think we’ll start to see some more deals test the IPO waters, but only those who are threading the needle, with fast growth and a profit profile, are likely to achieve meaningful success in their IPOs.

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