Businesses are working hard to conform to traditional heuristics like Rule of 40 (i.e., the idea that the sum of revenue growth and profit margin should equal 40%+, a metric that Bessemer helped popularize).
The world has over-rotated into an FCF margin mindset over a growth mindset, which is backward for growing efficient businesses.
Long-term models show that even in tight markets, growth should be valued at least ~2x to 3x more than FCF margin.
While a margin increase has a linear impact on value, a growth rate increase can have a compounding impact on value.
We show the detailed math below, and it’s confirmed by public market valuation correlations when you backtest the relative importance of growth versus FCF margin.
As 2023 comes to a close, a critical cohort of tech companies has regained the value it lost after the summer rally, potentially setting the stage for a stronger IPO cycle in early 2024 than some may anticipate.
Earlier this year, we saw three companies go public in quick succession: Arm, Instacart and Klaviyo‘s IPOs represented a liquidity peak, but they failed to inspire other tech companies to a rush towards the public market.
The three companies had pretty good IPOs, too, but they mostly failed to make the sort of splash some had hoped for.
Arm’s stock has performed well compared to its IPO price (trading at $71.30 per share today, up from its $51 list price), but Klaviyo and Instacart haven’t fared as well.
Klaivyo’s shares are trading 24 cents above its IPO price, while Instacart’s stock is trading at about $5 less than its listing price this morning.
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