Company Overview
SendGrid, the leading email API and communications platform, filed for a $100M IPO with Morgan Stanley leading the offering. SendGrid will trade under the ticker “SEND” on the New York Stock Exchange. More and more enterprise SaaS/cloud companies are going public this year and SendGrid will be the 9th after AppDynamics, MuleSoft, Alteryx, Okta, Cloudera, Yext, Appian, and MongoDB.
SendGrid was founded in 2009 to solve the problem that developers had with managing email delivery. The company built a robust API where developers can, in minutes, integrate their email and deliverability platform into any application. Email is a critical medium for businesses to interact with their customers for things such as purchase receipts, shipping notifications, account information, social media updates, reservations, etc.
SendGrid has processed over 1 trillion emails and now processes 35 billion each month. The company is also growing revenue nicely — they did $51.8M of revenue for the first 6 months of the year, up 43% YoY. They did $79.9M in 2016. They are now at $108M of implied ARR (annual recurring revenue), which is up 42% YoY. SendGrid grows efficiently and during the first 6 months of 2017 only had $(2.6)M in GAAP operating losses, a (5)% operating margin. In the most recent quarter, they had a positive free cash flow margin of 3%. The company has 384 FTEs and is based in Denver, CO.
SendGrid has three product offerings; (i) Email API (ii) Marketing Campaigns and (iii) Expert Services. The email API is SendGrid’s core product which they launched in 2009 — it enables developers to programmatically send emails via their API or an SMTP relay. SendGrid manages delivery, account stats/metrics, and recipient engagement. Pricing starts at $9.95/month for 40,000 emails and this product represents 79–80% of total revenue. Their Marketing Campaigns product launched in late 2015 and enables marketers to upload and manage customer contact lists, email templates, create email campaigns, and run A/B tests. This product is also sold as a subscription and is priced based on the number of email contacts stored and emails sent to those contacts. Marketing Campaigns is integrated into the API product and there are over 7,400 customers using it. Their Expert Services, which are services packages for customers, launched in 2016 and is a de minimus percentage of revenue. The services are either charged based on a one-time consultation fee or on a monthly basis. Below is a screenshot of their pricing structure from the site.
Source: Company website
The company uses a self-serve go-to-market and while they have enterprise customers, most customers are SMB / mid-market companies, and 98% of their customers purchase through the website. A developer usually signs up on the site for the API product and over time increases the number of emails they send and buys additional products, increasing their spend with SendGrid. Customers pay on a monthly basis and their average ACV (annual contract value) was $1,957 this quarter, which has been relatively constant. Given the go-to-market and nature of the product, SendGrid has attractive net dollar expansion characteristics — 117% last quarter and it has been over 110% since 2014, very impressive for a largely SMB customer base. In total, SendGrid has ~55,200 customers in a wide range of industries and 36% of revenue comes from international. No customer represents more than 2% of revenue either (their larger customers send 1+ billion emails a month). The company believes they are only 3% penetrated within their current customer base.
Market Opportunity
Email is the most popular form of digital engagement between businesses and their end customers, representing a large market opportunity. SendGrid believes the transactional and email marketing market was worth $11B in 2016, which is estimated by looking at the total number of global businesses with more than 5 FTEs, of which ~50% have an online presence, and multiplying that by SendGrid’s revenue/customer.
Competition
SendGrid’s market is large but also competitive, even with their API-first approach. Mailgun, SparkPost, Oracle, and Amazon offer transactional services and many companies offer email marketing software solutions, ranging from large companies like Adobe, Campaign Monitor, Salesforce, and MailChimp, to smaller email marketing companies like ActiveCampaign.
Investors and Ownership
SendGrid has raised $82M to date (less than most venture-backed IPOs) from investors including Bessemer, Bain Capital Ventures, Foundry Group, Highway 12 Ventures, SoftTech VC, Techstars, 500 Startups and others. 5%+ pre-offering VC shareholders include Foundry Group (29.6%), Bessemer (22.5%), Highway 12 Ventures (13.9%) and Bain Capital Ventures (7%).
CEO, Sameer Dholakia, is at a 3.1% pre-offering ownership stake. SendGrid hasn’t released their valuation publicly, but their last round (series D led by Bain Capital Ventures) in Nov-2016 was a $33M round at a $14.14 share price.
Financials and Metrics
SendGrid is growing quickly and the business was close to operating breakeven this past quarter and had a positive free cash flow margin of 3%. They have also accelerated growth moderately, which is impressive. Given the developer focus and inherent self-serve go-to-market, they don’t spend much to acquire customers. SendGrid has raised $82M and has $38M on their balance sheet, implying it took them only ~$44M in cash to get to over $100M in ARR.
While ACVs are small at around $2K, their implied payback periods are short compared to other IPOs this year — they averaged 14 months the past 9 quarters and only 12 months this past quarter. SendGrid also has strong net dollar expansion which has been above 110% since 2014. While it’s not disclosed in the S-1, I suspect their median ACV has been growing over time given the new marketing product and growth within existing customers, but is masked by a very long tail of small customers. The company does have seasonality, and ~30% of their revenue comes in the fourth quarter given the uptick in their customers sending marketing emails (hence a good time to go public as they expect a large Q4'17). Outputs of other financials and metrics are below:
Annual Historical P&L (000's)
Source: Company S-1
Quarterly Subscription Revenue ($M)
Source: Company S-1
Implied Ending ARR Over Past 10 Quarters ($M)
SendGrid is growing their ARR quickly although smaller than some other IPOs this year (other software IPO ARR ramps here). Over the past year, they added $31.9M of net new ARR.
Source: S-1. Note: Implied ending ARR calculated by multiplying quarterly subscription revenue by four.
Average Subscription ACV (annual contract value)
We don’t have SendGrid’s customers for every quarter, but below are the periods for which I could derive their ACVs. They have been ~$2K on average.
Source: Company S-1
Adjusted Net Income / (Loss) and Free Cash Flow Margins
Source: Company S-1
Cohorts and Linearity
Given SendGrid’s product, once a developer starts using it they usually increase spend over time. SendGrid discloses that their 2012 cohort contributed $4.8M of revenue in 2012 and in 2016, that same cohort contributed $15.4M in revenue, growing by 221% over 5 years. The output is below;
Source: Company S-1
SendGrid’s self-serve nature produces nice linearity throughout quarters, as you can see in the output below. Atlassian had a similar output in their S-1.
Source: Company S-1
Quarterly P&L / Metrics (000's)
Source: Company S-1
Implied Payback Periods in Months
Source: Company S-1
Annual Cash Flows (000's)
Source: Company S-1
Valuation
Investors will use a forward revenue multiple as the primary valuation methodology, with a likely combination of NTM (next-twelve-months) and 2018 estimated revenue. I used NTM revenue as a proxy for the valuation table below.
Note: Enterprise value ranges and growth rates are illustrative.
SendGrid is an impressive business and another API-first company to go public after Twilio last year. While the ACVs are smaller compared to other public software companies, the GTM is efficient and developer-focused, creating an efficient growth engine. I think public market investors will like the developer-focused product and GTM, strong cohorts and net dollar expansion, large market opportunity and recent positive free cash flow margins. While they weren’t valued at unicorn status ($1B or more) on paper in the private markets, I think they get there after the first day’s close as a public company.
Lastly, SendGrid is maybe the only company I’ve seen that discloses their Glassdoor rating in their S-1, which was a 4.8 / 5.0 as of August 2017. Congrats to the team on not only building a great company, but also a great culture.
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