Can popular Silicon Valley brand SurveyMonkey avoid a down-round IPO?

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Photo of IPO business concept courtesy of golibtolibov/iStock/Getty Images.

By Rohit Kulkarni, SharesPost

SurveyMonkey is finally pulling the trigger. The nearly 20-year-old unicorn, which pioneered internet polls on everything from consumer brands to politics, recently said it will go public on Nasdaq under the ticker SVMK.

With revenue above $200 million for fiscal 2017, SurveyMonkey has a strong presence in the growing data intelligence industry because of its ubiquitous online surveys. The company has generated noteworthy attention for its partnerships with major media outlets, such as the Washington Post and NBC to help forecast national elections.

SurveyMonkey is also known for its two female directors: tennis superstar Serena Williams and Facebook COO Sheryl Sandberg, who joined the board after CEO and husband David Goldberg unexpectedly died in 2015.

Waited Too Long?

During its last financing round in 2014, investors valued SurveyMonkey at roughly $2 billion. Given its advanced age for a unicorn, we wonder if the company waited too long to go public.

Here’s why: From a valuation standpoint, we believe the company’s 2020 revenue could exceed $300 million, translating into a steady mid-teens growth rate. If investors apply a high single-digit revenue multiple, above 7.0x ‘20E revenue, for example, the company’s valuation would exceed $2 billion. It would effectively avoid a down round IPO.

While SurveyMonkey has reported positive free cash flow in the first half of 2018, the company’s adjusted EBITDA margins have declined on a year-over-year basis. Moving forward, SurveyMonkey will need to stabilize those margins.

However, if the company’s EBITDA margin exceeds 25 percent in 2020, SurveyMonkey could offer investors a compelling story: mid-teens revenue growth and an accelerating bottom line. Investors could then comfortably apply a premium 25.0x or a higher EV/EBITDA multiple to such a valuation, and SurveyMonkey could avoid a down-round IPO.

The Upside Scenario:

A market leader with strong brand awareness. The company was one of the first to popularize online surveys. According to the company’s regulatory filings, 45 percent of businesses prefer the SurveyMonkey platform. In relative terms, SurveyMonkey is used twice as often as the next most recognized product and seven times as often as the third-most recognized polling platform. In addition, 75 percent of its customers last year were repeat business from 2016, a number that demonstrates strong brand loyalty.

SurveyMonkey Financials. Source: SharesPost.

Stable financials with positive free cash flow generation. SurveyMonkey finds itself on stronger financial footing of late. In the most recent fiscal year, the company generated $218.8 million in revenue, a 5 percent increase from 2016. In the six-month period ending June 30, 2018, period-over-period revenue jumped 18.7 percent. Furthermore, the average revenue per user grew to $362 in fiscal 2017 from $349 the previous year. SurveyMonkey in the most recent fiscal year generated positive free cash flow.

A diverse customer base. SurveyMonkey boasts 600,000 customers, none of which contribute more than 1 percent of revenue. With companies accounting for just half of those customers, we can see a large growth opportunity in converting more users to enterprise products. According to the prospectus, about 14 percent of the Fortune 500 held organization-wide contracts with SurveyMonkey. That group accounted for just 12 percent of SurveyMonkey’s overall revenue. Yet, 98 percent of the Fortune 500 companies pay to use some kind of service from SurveyMonkey. Convincing more of these companies to sign enterprise contracts represents a lucrative opportunity.

Promising secular trends. For SurveyMonkey, helping companies understand the “why” behind their customer data and take proper action is a great value proposition. Such a market is worth $60 billion a year, according to the prospectus. Given revenue multiples of comparable SaaS companies in the range of 7.5x to 9.5x, a valuation north of $1.7 billion seems appropriate.

The Downside Risk:

IPO likely used to pay off debt. Unlike typical VC-backed tech IPOs, SurveyMonkey will use a significant portion of the proceeds to pay off debt and other tax liabilities, rather than funding innovation. Moreover, SurveyMonkey has yet to turn a profit, although the losses are decreasing. Paying off debt will reduce future interest expense.

Competitive landscape is getting crowded. SurveyMonkey faces stiff competition. Google provides an online survey platform. Qualtrics and Medallia, as well as more traditional market research firms, operate in this space.

Freemium model continues to face execution and conversion challenges. Only 10 percent of SurveyMonkey’s registered users pay for the service, and only 26 percent of this group actually used the platform last year. So we anticipate the company will need to spend considerably to convert users to subscribers. In the last fiscal year, the company devoted 35 percent of revenue to sales and marketing.

International Challenges. With 35 percent of current users outside the United States, SurveyMonkey is not immune to escalating global trade tensions and intellectual property disputes. Foreign customers respresent a large portion of SurveyMonkey’s future growth.

Rohit Kulkarni is a managing director and head of research at SharesPost Inc.

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