It’s early in the Wednesday trading session, meaning that we’re waiting on the first trades of Rent the Runway stock on the public markets.
But what we do know is that the company priced at $21 per share, giving it a valuation of $1.33 billion using a simple share count and around $1.47 billion on a fully diluted basis. For a company last valued at around $1 billion in 2019, those figures may not sound too impressive. But I think that they are.
TechCrunch’s earlier coverage of the Rent the Runway IPO filing and pricing run was, respectively, skeptical and pessimistic. And yet public investors not only had enough interest for the IPO to proceed but also for the clothing rental company to price at the top of its range.
Let’s talk about why that’s bullish for unicorns more broadly.
Tech-enabled versus tech
A software company is a tech company. And an e-commerce platform is a technology company. But a firm that merely employs e-commerce channels to sell its goods is not. It’s, instead, tech-enabled.
The difference is no small nuance. Tech companies can find themselves valued at 40x or 50x revenues in today’s markets. Concerns that are merely tech-enabled, however, tend to trade at lower multiples.
Why? Gross margins, essentially. Tech companies have strong gross margins because they are using a new method — a technology — to short-circuit the world as it exists, generating a solution to a problem more quickly, cheaply or intelligently. Software is a good example of this, as is a physical good that can shake up the existing economic norm. A battery that has 10x the capacity of another, say, would be a good example of a tech product you could build a company around.
This brings us back to Rent the Runway, more of a tech-enabled business than a technology firm. As such, we’d expect it to trade at a discount to purely tech companies, and it is. Worth just over 7x its July 31, 2021 run rate (quarter times four), it’s hardly valued like a high-growth SaaS company.
Still, I struggle to understand why the company’s revenue multiple is landing where it is, given that Stitch Fix — a related firm, though not a direct comp — is seeing its own valuation in revenue terms dip into a far lower range:
Aside from one peak earlier this year, Stitch Fix’s revenue multiple (price/sales ratio) is dramatically lower than what we see from Rent the Runway’s IPO pricing. This implies gobs of investor optimism in Rent the Runway and good on them for attracting it.
We will know more later today when Rent begins to trade.
But for today, we can’t help but read its IPO pricing as not only good news for unicorns but also for tech-enabled unicorns. The Rent IPO pricing result redoubles our case that this is the time when unicorns should be going public, and with alacrity. Not that Rent isn’t worth one valuation or another — the market will decide that for us. But we can still read sentiment from ticker tape, and in this case, it’s hard to miss the positive vibes.
More when Rent trades.
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