Braze and UserTesting will begin to trade this morning, kicking off their lives as public companies.
But while it would seem we could simply lump the two companies into a bucket and call the day a win for tech upstarts and their venture capital backers, we can’t. Why? Because the two companies had very different final pricing results. And that means we have questions.
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Braze priced above its IPO range, while UserTesting priced underneath its range. Why? (You can read our initial notes on Braze here, if you’d like.)
Let’s parse the numbers, chat through what the two companies are worth at their IPO prices and discuss what we can learn from the information to better understand the present-day exit market for software companies.
We always care about software IPOs because they help us understand the market for software startups — how much public markets are willing to pay for a software company’s shares helps price startup funding rounds, for example. But we also have Nubank and Paytm heading out soon, two mega-IPOs that have us up at night wondering how they will be valued. So we’re collecting all the data that we can in advance.
That in mind, let’s figure out why Braze had a much better pricing result than UserTesting.
Two prices, two sagas
Braze targeted a $55 to $60 per-share IPO price range. It sold stock at $65 per share. In valuation terms, Renaissance Capital estimated that at the midpoint of its range ($57.5 per share), the company would be worth $5.9 billion on a fully diluted basis. That gives the company an estimated valuation at $65 per share of $6.7 billion
UserTesting targeted a $15 to $17 per-share IPO price range. It sold stock at $14 per share. In valuation terms, Renaissance Capital estimated that at midpoint of its range ($16 per share), the company would be worth $2.7 billion. That gives the company an estimated valuation at $14 per share of $2.4 billion.
Never cry for a company that goes out at a valuation of over a billion dollars. But, still, why the divergence? Here are their growth rates, with a bit more time under the belt for UserTesting because we have more recent data from it given a quirk in how Braze handles its fiscal calendar. (The Braze data compares the six months concluding July 31 of 2020 and 2021.)
- Braze YoY growth Q1-Q2 2020 vs. 2021: 52.5%.
- UserTesting YoY growth Q1-Q3 2020 vs. 2021: 45.4%.
Those figures are closer than I anticipated, frankly, and therefore do not answer our question.
Let’s examine their growth multiples, then. Using their most recent quarter times four to set a run rate, here’s how the two companies stack up:
- Braze run rate multiple at fully diluted IPO valuation: 30.0x.
- UserTesting run rate multiple at fully diluted IPO valuation: 16.7x.
Given how close the two companies are in growth terms, I am also boggled at the differential we’re seeing here. Sure, the companies’ divergent pricing runs pushed these numbers further apart. And, yes, we’re using slightly more recent data for UserTesting (September 30 quarter) versus Braze (July 31 quarter), but my gosh. We have to keep looking.
How about gross margins? Here are the two companies’ gross margin results for their most recent quarters:
- Braze gross margin, most recent quarter: 66%.
- UserTesting gross margin, most recent quarter: 75%.
To be frank, that’s the opposite of what we expected given that Braze not only had the better IPO pricing run, but also nearly double UserTesting’s revenue multiple. I am a bit perplexed.
Maybe SaaS metrics are what matters here? Let’s pull up what we have:
- Braze (emphasis by TechCrunch): “[O]ur dollar-based net retention rate [in] the trailing 12 months ended July 31, 2021, January 31, 2021 and January 31, 2020 was 125%, 123% and 126%, respectively, for all our customers.”
- UserTesting: “We measure the rate of expansion within our customer base using our net dollar-based retention rate. As of September 30, 2021, our net dollar-based retention rate was 119%.”
Braze is better here, which makes sense given its stronger growth rates. Now let’s check profitability:
- Braze: -23% net margin in most recent quarter.
- UserTesting: -25% net margin in most recent quarter.
In sum, then, the two companies are more closely matched across a number of performance metrics than we initially guessed.
However, Braze has better growth and net retention, and fractionally better profitability as expressed in percent of revenue terms. It appears that those metrics — software TAM is so large these days that we’re not going to compare vanity metrics for the sake of being kind to S-1 scribblers — are enough to give it the revenue multiple differential that we see, and thus explain the difference in the two companies’ IPO pricing runs.
All told, however, both companies are doing just fine and should prove interesting to watch for the next few quarters as they get into their public-market groove.
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