Category Archives: Private Equity

A Look at the Tintri S-1

Every now and then I take a dive into an S-1 to see what clears the current, ever-changing bar for going public.  After a somewhat rocky IPO process, Tintri went public June 30 after cutting the IPO offering price and has traded flat thus far since then.

Let’s read an excerpt from this Business Insider story before taking a look at the numbers.

Before going public, Tintri had raised $260 million from venture investors and was valued at $800 million.

With the performance of this IPO, the company is now valued at about about $231 million, based on $7.50 a share and its roughly 31 million outstanding shares, (if the IPO’s bankers don’t buy their optional, additional roughly 1.3 million shares.)

In other words, this IPO killed a good $570 million of the company’s value.

In other words, Tintri looks like a “down-round IPO” (or an “IPO of last resort“) — something that frankly almost never happened before the recent mid/late stage private valuation bubble of the past 4 years.

Let’s look at some numbers.

tintri p+l

Of note:

  • $125M in FY2017 revenue.  (They have scale, but this is not a SaaS company so the revenue is mostly non-recurring, making it easier to get to grow quickly and making the revenue is worth less because only the support/maintenance component of it renews each year.)
  • 45% YoY total revenue growth.  (On the low side, especially given that they have a traditional license/maintenance model and recognize revenue on shipment.)
  • 65% gross margins  (Low, but they do seem to sell flash memory hardware as part of their storage solutions.)
  • 87% of revenue spent on S&M (High, again particularly for a non-SaaS company.)
  • 43% of revenue spent on R&D  (High, but usually seen as a good thing if you view the R&D money as well spent.)
  • -81% operating margins (Low, particularly for a non-SaaS company.)
  • -$70.4M in cashflow from operating activities in 2017 ($17M average quarterly cash burn from operations)
  • Incremental S&M / incremental product revenue = 73%, so they’re buying $1 worth of incremental (YoY) revenue for an incremental 73 cents in S&M.  Expensive but better than some.

Overall, my impression is of an on-premises (and to a lesser extent, hardware) company in SaaS clothing — i.e., Tintri’s metrics look like a SaaS company, but they aren’t so they should look better.  SaaS company metrics typically look worse than traditional software companies for two reasons:  (1) revenue growth is depressed by the need to amortize revenue over the course of the subscription and (2) subscriptions companies are willing to spend more on S&M to acquire a customer because of the recurring nature of a subscription.

Concretely, if you compare two 100-unit customers, the SaaS customer is worth twice the license/maintenance customer over 5 years.

saas compare

Moreover, even if Tintri were a SaaS company, it is quite out of compliance with the Rule of 40, that says growth rate + operating margin >= 40%.  In Tintri’s case, we get -35%, 45% growth plus -81% operating margin, so they’re 75 points off the rule.

Other Notes

  • 1250+ customers
  • 21 of the Fortune 100
  • 527 employees as of 1/31/17
  • CEO 2017 cash compensation $525K
  • CFO 2017 cash compensation $330K
  • Issued special retention stock grants in May 2017 that vest in the two years following an IPO
  • Did option repricing in May 2017 to $2.28/share down from weighted average exercise price of $4.05.
  • $260M in capital raised prior to IPO
  • Loans to CFO and CEO to exercise stock options at 1.6% to 1.9% interest in 2013
  • NEA 22.7% ownership prior to opening
  • Lightspeed 14.5% ownership
  • Insight Venture Partners 20.2% ownership
  • Silver Lake 20.4% ownership
  • CEO 3.8% ownership
  • CFO 0.7% ownership
  • $48.9M in long-term debt
  • $13.8M in 2017 stock-based compensation expense

Overall, and see my disclaimers, but this is one that I’ll be passing on.

 

Is Venture Capital Broken?

See this post on VentureBeat, entitled The VC Model is Broken which asserts that the venture capital model no longer works and that the Bubble 1.0 get-out-jail-free card given to the industry around 2001 has now come due.

The post refers to a presentation by Adeo Ressi, founder of Yelp-for-VCs site The Funded which asserts that:

  • VC is too much of a “hits business” (i.e., returns are lackluster excluding the 1-2 top hits per fund, and that some funds, presumably the B- and C-tier ones, don’t even have those hits)
  • VC is too clubby with too many exits of newer companies going to earlier portfolio companies at lofty valuations. (“Can you please buy my other company, at a premium?”) One cannot help but think of YouTube’s $1.6B exit to Google in this context.
  • VC is too herd oriented, resulting in too many me-too companies being funded and too few truly innovative companies being funded.
  • 2H08 is the first time period in which VC exits are less than VC investments

He recommends the following changes:

  • Less funds and better funds
  • More deals and equal treatment
  • Simplified terms and standard structures
  • Improved fund governance
  • Restructure fund incentives

Personally, while I agree with many of his asserted troubles, I generally disagree with his recommendations. To me, market forces should work over time to correct all ills.

  • Presumably, if mainstream VCs are too herd oriented then newer/different VCs should be able to stake out the different positioning. And LPs who seek such differences should be able to find them.
  • Similarly, if there is a problem with mainstream VC terms/structures, then presumably B-tier and/or new VCs can attempt to differentiate themselves by offering these different terms.
  • Increasingly, private equity firms are entering and innovating in VC already. I suspect they are exploiting the opportunities created by the standard criticisms of VC.
  • With the fall in the stock markets, most institutions are presumably now over-allocated to VC and/or private equity. That is, if you want a 10% VC allocation and the stock market falls 30%, then presumably you end up in a 15%+ position. So I suspect institutions and investors will be seeking to reduce VC exposure, not increase it.

Basically, I’m a believer in Darwin/Malthus. Yes, VC was “too easy” in the 1990s and presumably too much money flowed in and too many firms and funds were created. But the natural response to this, over time, should be a weeding out of the weaker funds and players. Since VC timeframes are elongated, with the typical fund lasting 10 ten years, it will take a long time for these cycles to play out — but play out they will.

Here are the slides from Adeo Ressi:

/2008/11/18/is-venture-capital-broken/

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