Pod Insights Equity Podcast Freshworks, Toast go public and we have Takes About this episode Hello and welcome back to Equity, TechCrunch’s venture capital-focused podcast, where we unpack the numbers behind the headlines.
Today we got the gang together -- Natasha and Danny and Alex -- to chat about the most recent IPOs in tech-land, namely debuts from Freshworks and Toast.
TechCrunch has covered their pair of firms somewhat closely during their IPO run, as they each have some notable characteristics:
Freshworks' IPO provided a fresh window into how public market investors are willing to value growth-oriented software companies out the gate. The news is good. Which means that we could see more unicorns looking to list in coming months.
Toast's IPO provided a lens by which we could gauge public-market sentiment for hybrid software-and-payments companies. The answer? That the stock market is pretty dang enthused about the companies in question.
So it's a good news day for unicorns, for tech startups, and for Boston, a city that Danny has many thoughts about. Please send him your complaints, and not the show. We take no responsibility.
It's Disrupt week, so we'll have more in a few days but until then we'll see you at the event!
Credits: Equity is produced by Theresa Loconsolo with editing by Kell. Bryce Durbin is our Illustrator. We'd also like to thank the audience development team and Henry Pickavet, who manages TechCrunch audio products.
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Transcript 0:09 Speaker 00 Hello and welcome back to Equity TechCrunch's venture capital focused podcast where we unpack the numbers behind the headlines. We are live here Wednesday morning with some IPO news. It is a disrupt day, so we are kind of coming together as a group to chat about some important news before we dive into conference mode. This is Alex, of course. I also have Natasha here. Natasha, say hello.
0:29 Speaker 01 Hello, hello. Excited to be here.
0:31 Speaker 00 Good, good. And we also have Mr. Danny Crichton. Danny, how are you?
0:35 Speaker 02 I'm doing great. We're halfway through Disrupt and Natasha, I believe, had three panels yesterday, although fortunately for her, she actually had breaks between her panels. I have two panels today, back to back. You will see me live like Wolf Blitzer on the Situation Room. You just never get them off the screen ever at Disrupt.
0:53 Speaker 00 In contrast, I have one panel because the way TechCrunch works is the cooler you are internally, the more panels you get. And Natasha is very cool, and so she got many panels. I'm essentially the custodian, so I got the one panel that no one else wanted. But it's the panel, it's the panel that I deserve. I'm talking about IPOs later, which is the theme of today's conversation. We have two IPOs that have just happened. They priced last night. We are catching up on the news. It is Freshworks and it is Toast. Freshworks is an American-Indian company that works in the customer support and success software space. Toast is a Boston-based fintech and software platform aimed at restaurants. And Natasha, let's start with Freshworks. I'm not putting you on the spot. An actual question. Had you heard of the company before a couple of weeks ago?
1:37 Speaker 01 No, I don't think it's a company I really paid much attention to until you wrote about it, which can often be the case due to the IPO world and me being a seed stage reporter.
1:46 Speaker 00 No, no. And the reason why I asked is I just spoke to the CFO of Freshworks, and he mentioned that one of the reasons why they're going public is because they're not as well-known as they might be, and it's kind of an effective branding exercise for our company.
2:00 Speaker 02 You know, it's not for liquidity reasons. It's not for capital fundraising reasons. It's like, you know, from a brand perspective, your marketing department is now driving conversations about NASDAQ.
2:10 Speaker 01 It's a flex.
2:11 Speaker 00 Well, the way this works out in practice is, um, so I talked to the CEO of Big Commerce pretty much every quarter now. And one thing he has consistently mentioned to me is that after they went public, they were more able to land larger accounts because people had more visibility into their finances. And therefore there was more kind of like general belief that they were not going to disappear overnight like a startup might.
2:29 Speaker 01 Yeah.
2:29 Speaker 00 Um, and so it provides some kind of durability, Danny. But you're right. I mean, like, obviously IPOs are financial first and marketing second. But for companies that generate cash already, they're less of an immediate fundraising need, if you will. Yeah, there's a lot of high valuations, but we don't know if there's a lot of high margin recurring revenue out there. And going public is a great way to find out. To bring everyone the news. So essentially Freshworks targeted a $28 to $32 per share IPO range, raised that to 32 to 34, and then priced at 36. So Natasha, we're seeing the company raise its range and then price above that, which to me is about as bullish a signal as you could possibly imagine. So good news for companies everywhere.
3:05 Speaker 01 At the new IPO range, I know you mentioned like Freshworks could be worth between 9.1 billion and 9.7 billion. Are we going to see other numbers out there? Or is that like kind of the both extremes?
3:17 Speaker 00 Well, keep in mind that we calculate IPO evaluations in two ways, which I think is what you're driving at here. One is the simple IPO evaluation, which is just kind of like how many shares will be outstanding times the share price, literally a third grader with Will from Alpha can do that math. It gets a little trickier when you want to calculate fully diluted market caps, because then you have to go through the S1 a little bit more carefully and figure out how many RSUs are fully vested at what price, how many stock options are fully vested at what price. And then if you add in the fully vested RSUs and stock options, and there's often some grants and some other kind of shenanigans in there, you get a fully diluted share count, at which point you can apply that number to the share price and get a larger number. So I think we're actually going to see Freshworks quoted around the 11 billion mark closer when all of their shares are taken into account.
4:02 Speaker 00 So this is a mega debut. This is a deck of corn IPO. So it's kind of a big deal. I know Danny's too cool for school, but like, I'm still impressed, Danny, by a $10 billion exit. Call me, uh, you know, cliche, if you will.
4:13 Speaker 02 I mean, this is the new bar, right? I've said we should just ignore all unicorns and move exclusively to the deck of corn. Like, everything else is inflating in the economy. Why shouldn't we inflate, you know, our bars? I think it's actually a great exit. I mean, you know, in the year ending 2020, so the fiscal is the calendar, company had 250 million top line revenue, which I think is pretty strong. Now, if you compare that to the valuation they're looking on Wall Street, you know, 40x isn't crazy.
4:36 Speaker 00 No.
4:36 Speaker 02 It's not nuts. It's not nuts.
4:38 Speaker 00 It's not cheap, though. And so if you look at their most recent quarter, Q2 of '21, put together an annualized run rate, the multiple falls to 32.5x, which, again, that's an old PE ratio, and we're talking about price-sales ratios, so things are still frothy, but it's not exactly the most ludicrous valuation out there that we've seen, which, of course, is owned by Bill.com. Let's be totally honest, Toast is the more interesting of the two companies going public today. Natasha, you have known the Boston scene for a long time. Toast is one of the, I think, one of the best-known Boston-based tech unicorns out there.
5:12 Speaker 01 I think every startup in Boston right now is probably watching this company reprice with a lot of excitement, especially compared to where we were. I know we keep talking about it, but it's layoffs a year and a half ago when we were talking to Boston startups then, there was a completely different, maybe like bittersweet sort of, we believe in it, but this is a really hard moment for the ecosystem. Now we're seeing them go public, so I feel like it's a lot of weight that's on Toast's shoulders.
5:35 Speaker 02 I think when you look at Boston, having spent time there, what's amazing is there's actually an amazing number of companies that are successful coming out of Boston, and I'm not including biotech in this. Like, you know, we always talk about Klavio these days. We did it on the MailChimp episode we did as a shot, what, last week?
5:50 Speaker 01 Yeah.
5:50 Speaker 02 But like, Klavio itself is a $10 billion Boston company, right? There's a number of major IPOs coming out of the Boston ecosystem. It's just that no one wants to acknowledge this. Bostonians are very, like, cloistered people. They're like on the Cape. And it's funny, because like, they have huge wins, and one of the complaints that people always have locally is no one's ever willing to really just say, like, these are amazing companies and the best in the world.
6:13 Speaker 01 Danny, I'm not standing with you on this one, because I do not want Boston Twitter to come after us. I feel like Boston-
6:19 Speaker 02 I think I blocked Boston Twitter, by the way, at this point. Apologies to folks in Boston.
6:23 Speaker 01 Boston people are so strong about their startups, at least in the early-stage world. Every time I go there, it's like mostly a pitch of like, we're not even in the same universe as New York and San Francisco. We are Boston, and that's all we need to be compared to. And so that's my perception of Boston. I'm so interested to know that they're not excited in your mind.
6:41 Speaker 02 My perception of Boston is they closed the Curious George store in Harvard Square. And since then, I've never paid any attention to the city ever again. Because no matter how many $10 billion stores there are, Curious George is dead.
6:53 Speaker 01 What does Providence think?
6:54 Speaker 02 That's what Boston did to that.
6:55 Speaker 01 What does Providence think about Boston startup scene right now?
6:58 Speaker 00 Well, we don't like Boston in general because we live in a better city. But I want to go back and elucidate two core facts about what Danny just said. One, he spent time in Boston. Danny, that's when you were at Harvard.
7:07 Speaker 01 That's also in Cambridge. Like, let's just be honest about where he was.
7:11 Speaker 02 I lived in both Boston and Cambridge. They are very different places. I was also a VC at Charles River Ventures, which is named for the Charles River, which is located in the middle of Boston. In case for those who aren't knowledgeable about these things.
7:24 Speaker 00 Charles River Ventures isn't named for the River Thames? I'm shocked.
7:30 Speaker 02 It was named for the local geographical landmark available from the window viewable from MIT. But nonetheless, I think one of the things that's actually magical about Toast, unlike, say, the Clavio story. So if I had to give two narratives here. You know, Clavio is a classic enterprise SaaS story, constantly kind of growing. Also SMB focused, you know, in many ways. There's actually a little bit of overlap here. Very SMB focused, but has been able to grow consistently year over year. Toast was a much more complicated business because they focus on restaurants. They were sort of exclusively focused on SaaS early on. And that was a terrible business model. And I remember key in times when I was a VC and in that ecosystem at that time, like Toast was one that like walked around and struggled quite a bit. Mostly because people were like, look, look at these numbers. You're not making a lot of money per restaurant.
8:13 Speaker 02 It's very expensive to do sales hand to hand, going from restaurant to restaurant. Like, the math just didn't work. But Alex, they came up with a revolution. And that's really what's driving the sales going on here today.
8:24 Speaker 00 Yeah, we talk a lot about vertical SaaS here at TechCrunch because it matters a lot and it's an enormous part of the startup world. But one thing that you'll find that a lot of SaaS companies, if you sell to a business area that isn't super rich, is that you can't charge that much for your software. Like, if you're going to sell to restaurants, which have famously slim margins and relatively tight budgets, you can't charge them 10K a month for your software. So what do you do? Well, you offer fintech services, in this case, payments. And what Toast has found is simply enormous growth. In the payment side of its business, as its software business has grown, and for those of you out there who are a little bit pedantic, yes, it does have a hardware and a services part of its business, but those are both essentially gross margin break even, and they're essentially just marketing lost leads to funnel restaurants into the mix.
9:07 Speaker 01 And just one small number to give a sense of how much money is going through Toast Systems. There's approximately 48,000 restaurant locations on the Toast platform, processing over 38 billion of gross payment volume. So it's not like a cute, maybe nice to have service that they're kind of offering. It's definitely one that a lot of their customers are taking advantage of.
9:27 Speaker 02 I think when you look at the revenues, looking at the year ending 2020, again, another calendar year equals fiscal year. I love these companies, by the way. They make a lot more logical sense when you have to report on them. Last year, subscription revenues, 101 million. Financial Technology Solutions, which is their fintech product, 644 million dollars. Hardware, 64 million. Professional Services, 13 and a half million. So like, when you look at the scale of this business, I mean, think about it. If this was a 100 million SaaS business with a little bit of professional services, you'd think boring, what a disaster. Then you plop in almost 650 million of financial services revenue on top of that, and suddenly you've got your $20 billion double unicorn or double decker corn.
10:06 Speaker 00 It's even more extreme than that, Danny, because if you look at the more recent quarters, the pace of growth in fintech revenues at Toast has kind of accelerated. So if you look back to, I don't know, the June 30 quarter of last year, the company had 105.7 million in fintech revenues. That grew to 353.6 million in the last quarter. That's insane. And this is why Toast has been so much fun to write about in the path up to going public, because it is a SaaS business that is dwarfed by its payments business, and they have very different gross margins, Danny.
10:39 Speaker 02 Well, I was just about to say, the gross margins is a huge part of the story here. So on subscription, you know, about 60% gross margin. So we got about 100 million at the top line, cost of revenue, 40 million. But when you go to financial services, it's a very different story. 645 million top line versus 510 million cost of services, right? So it's a very tight margin that you don't normally see in SaaS revenue, which is why, now I'm going to get into my soapbox. The fact that the company on its first number on its first page, combined the two revenue figures into an ARR number, angers me dramatically.
11:12 Speaker 01 Say more.
11:14 Speaker 00 Yeah, Danny, tell us why.
11:16 Speaker 02 I'm angered dramatically.
11:17 Speaker 00 All right, I'll translate. So ARR usually stands for annual recurring revenue. It's a very specific metric. It deals with software incomes that are charged on a usually an annual basis and tells investors how much revenue they can expect to persist into the next year. And then, of course, there's upsells and so forth. You get net dollar retention. Huzzah. What doesn't count as ARR is literally everything else. Now, in this case, Danny, do we know if it's annual run rate or annual recurring revenue? Because they both have the ARR metric, or acronym, I should say, and people love to confuse them when they want themselves to look better.
11:51 Speaker 02 I don't think we know. And I will say, because it's the first number, the first page, like, a little annoying not to be so transparent on the very first thing you publish. But nonetheless, very strong company, lots of operating expenses. This is a tough one when we compare it to Freshworks. You know, Alex, I think you were talking to the CEO. Freshworks got a bit of a lucky break on a quarter, if I recall correctly.
12:11 Speaker 00 Yeah, so the CFO of Freshworks pointed out, well, I pointed out to him this morning that they had a profitable quarter on a net income basis. So real grown up, big boy pants, profitability, a couple quarters back. And it sends them, they've kind of fallen into some really small net losses. But he was like, look, we're growing really quick and we're cash flow positive and net losses don't particularly matter. And I can't dispute that.
12:30 Speaker 02 I think when you compare it to Toast, the net losses are significant. So last year, 250 million, the year before, 210 million. It's a very, very different setup because of the level of growth, the sales and marketing costs of going to restaurants. And I think they're trying to position for growth, obviously. I mean, at 48,000 restaurants, you're barely touching the surface. All the restaurants just in the United States, let alone around the world. So I think from their perspective, it's a huge greenfield. I think the big question, though, which is something that I'm curious about, is how do you think about Toast in comparison to other point of sale systems like Square and others who are in the restaurant space? And obviously, Square is a very valuable company, has a lot of cash to burn to get those restaurants on its own systems.
13:09 Speaker 01 Why not Square? Like, I hate to be that person, but it's kind of similar to being like, why doesn't Google build this? Or why doesn't Instagram build this? Like, in fintech, why doesn't Square build this? Do you feel like you've gotten a good answer on that when covering Toast, Alex?
13:21 Speaker 00 Well, I think about where you see Square POS terminals, point of sale, not piece of shit. I always giggle when everyone's like, here's the Toast POS.
13:29 Speaker 02 I always have to say that, yes.
13:31 Speaker 01 That's so funny, guys. I didn't know that.
13:33 Speaker 02 It used to be funnier when Square was really, really bad. It's less funny now that it's a more legitimate system. Although that said, this weekend, Square did have the tipping screen did not load for several hours across all Square POSs. So for a lot of workers at restaurants, they may have a different sense of what the acronym means today.
13:50 Speaker 00 Yes, so once again, the Square POS became a POS. And if you don't like that joke, you were on the wrong podcast. The reason why I think Square is different than Toast, Tasha, back to your question, is that it's tuned for restaurants. Like, it's not just a payments terminal. They sell hardware that has like ordering mechanisms and so forth. So it's really a software solution built for restaurants. It just happens to monetize mostly through fintech payments. And so that's why it's fun. On that point, the company initially targeted a $30 to $33 per share IPO range. That went up to 34 to 36, and then it priced at 40, which is a really, really strong evaluation point for the company, roughly $20 billion, depending on how you want to calculate that
14:30 Speaker 00 on a share count basis, giving it a roughly 13, 14x current run rate multiple, which, I'm not going to lie, for a majority 20% gross margin payments business feels really good. I mean, isn't that good, right, guys?
14:45 Speaker 02 I think it's pretty good. I also think when you look at the competition, you know, obviously Square has proven that you can do a mix of business models and it works really well and Wall Street can understand it, but there is more competition on the realm. When you look at Sundae, which Romain, our colleague in Paris, just wrote about today, Sundae is focused on also fast checkout for restaurants, raised $100 million this morning. And as I have been liking to call it because it's Paris-based and it's in the restaurant space, I've been calling it the French toast. And that is my favorite joke of the day. I'm just breaking that up. It's the French toast. It is literally the French toast.
15:19 Speaker 00 No, we got it. I'm so tired.
15:20 Speaker 02 I'm going to recycle this joke 10 times today. I'm going to use it on every panel at Disrupt. I'm going to literally burn it out. For every piece of syrup it's worth.
15:30 Speaker 00 Oh my gosh. Love you. Anyways, Natasha, one thing I'm curious about from the early stage perspective is how often you're seeing SaaS companies work with payments. I cover SaaS, so I saw a lot of this. I'm curious if this kind of like hybrid software financial services model is showing up on yours.
15:47 Speaker 01 I think the argument that you made, I think a few episodes ago about how it makes sense to add on fintech if you're already there and already part of their process, made me start seeing it more. Like, I was like, yeah, that makes a lot of sense. And it's like, well, yeah, obviously CEOs who are looking to increase revenue agree with that. So to answer it, definitely, Alex, it's like, not necessarily like innovative, new way to grow your business. It feels like the new standard.
16:13 Speaker 00 Yeah, I think that's the case. And what I'll say before we talk about some stuff that's coming up and kind of what's happening later today, is that, you know, this is an important pricing event. And I think Toast is not just blazing a trail for Boston to either keep talking about itself, as Natasha said, or to start talking about itself, as Danny said. But really, for a host of companies around the world who are a blend of software and fintech revenues, here's a great marker for you that you can use to bash your local VC over the head and demand a higher valuation in your next round.
16:40 Speaker 01 Before we jump to what's coming up, I feel like we have to rewind to Monday when the stock markets really were tumbling down. And I'm really curious, like, is that something that is impacting these repricings? Obviously not, but have any of them talked to you about that?
16:53 Speaker 00 Well, I mean, it's probably baked in there somewhat, because we had the Monday sell-off, and then these companies priced last night. So certainly, people had slightly less money than they had before. Natasha, I can't tell you that it would have been a dollar per share or more for each company if Monday hadn't been a collapse. But I mean, you certainly notice it. And I was just talking to Tyler, the CFO of Freshworks, and we were talking about IPO timings and preparatory cycles. And because that's what my panel at Disrupt is today. It's all about how to get ready for an IPO if you're a startup. So I was pressing him on stuff, doing some last minute research before I get on stage. And he was like, you know, it's a long process, multiple years, a lot of prep on the system side, on the execution side. And then he's like, you get ready. And then Monday happens, which was weird. And I'm like, yeah, it's got to not be good to start your IPO week
17:35 Speaker 00 with watching the entire global stock market go bleh all over itself.
17:39 Speaker 02 You know, a lot of folks reached out to me on Monday to ask about Evergrande, you know, the Chinese property conglomerate, which is theoretically hundreds of billions in debt, is systematically potentially damaging the world economy. That was the trigger for Monday. And I think the answer is, is for a lot of these tech companies, I mean, Unlike Lehman Brothers, which was actually the thing that came up in like six different chats with folks. I had folks from Greece, London, New York here and in San Francisco were like, is this the Lehman Brothers of 2021? And I was like, well, I don't think so because you either know you have exposure to the Chinese real estate economy or you don't. Lots of people do, but you generally know that you have that. And I think for a lot of tech investors, like, who cares? I mean, it is separate.
18:21 Speaker 02 It doesn't feel like the massive catastrophe that's happening in the Chinese financial markets have anything directly to do with American tech IPOs. But who knows? And that's like, I think the big open question for the next couple of weeks as we find out more about that crisis.
18:33 Speaker 00 A last note on that, I think Danny's right. The link between bad debt and off sheet liabilities at the number two Chinese property developer and the price of Toast IPO. There's a couple of jumps to get there, but what I will say is sentiment is a motherfucker. And if the market itself gets more afraid in general, that can spill over more broadly, even where there's not direct connections.
18:59 Speaker 02 And look, there's upside, like now the fresh works is public, as you mentioned with big commerce, they can get larger and larger accounts. Because they're an accounting software, they could actually be bought by Evergrande to figure out where all those off balance accounts are and track down the couple hundred billion dollars are missing.
19:12 Speaker 00 Yeah. If you, if you want to learn more about Evergrande, just beat your head against the wall and then you'll know what it's like to be their CFO. Okay. Looking, looking ahead, guys, a couple of quick things. We do have the GitLab IPO coming up. They filed recently and I was, here's a look behind the curtains, shocked at how many people read that story. I thought it was going to be me and my mom. Turns out everyone cares about GitLab, so that's great. We also have the Amplitude Direct Listing coming up and Natasha, at some point Discord will pull the trigger. And I'm going to put you on the spot for real this time on purpose. When will that happen?
19:46 Speaker 01 Next week, actually, right when you're logging off and I'm the only one that's online and I'm somehow going to have to write that post and it's going to be fantastic.
19:55 Speaker 00 You know that I'll jump back online of Discord files. We're really excited about that. Danny, what IPO are you looking forward to the most? And why is it a Lux Capital portfolio company?
20:04 Speaker 02 I think the one that's most interesting is absolutely GitLab. I mean, you know, when you look at the remote work situation there, truly from the ground up, a remote work company has been very focused on growing in a unique open source way. It's actually like a real leader is a model for how to build a company. And I would call the 2020s, you know, it is the first of this cohort. And I think if they have a really strong debut, 88% gross margins. I think that this could really sell a lot of folks on the power of remote work, open source organizations, open source software. And we just haven't had one of those great kind of companies go through the pile in a long time.
20:41 Speaker 00 Yeah, I think that's dead on. So if you're curious about what it looks like to go public as a remote first company, the GitLab S1A is for you. We adore you all. This has been Equity slash Hangout. We'll talk to you all soon. Have a good day. Peace. Hugs. Love. Bye.
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