Samsara IPO breakdown — the continuous cycle of an entrepreneur’s journey
In Buddhism, the Samsara doctrine contends that beings undergo endless cycles of rebirth, existence, and death, with the type of birth in this life being the result of karma from previous lives, and across six realms (hell, hungry spirits, animals, asuras, human beings, and heavenly beings).
“If you want to know your past life, look into your present condition; if you want to know your future life, look at your present actions”
In organizations that rely on physical assets, managing them is a constant struggle. Businesses in industries such as supply chain, transportation and government don’t have a precise maintenance scheduling process; they generally don’t have a real-time visibility of their fleet, ETA for their deliveries, and safety reports. On top of that, these companies usually have disparate custom-built applications (or paper-and-pen processes) to manage each part of their operation with outdated and hard-to-integrate data functionalities. Yet, equipment-heavy operations represent approx. 40% of the global GDP.
Since the mid-2000s, Universities and companies began to connect these assets to the internet (hence Internet of Things, or IoT) to enable monitoring and controlling. The speed of which IoT was adopted worldwide is electrifying: From 1.1 billion IoT devices in 2011 to more than 8 billion in 2018, and 2020 represented the first time with more IoT devices than non-IoT equipment, allowing companies from every size, industry and geography to benefit from this nascent trend.
In 2015 two entrepreneurs founded Samsara to become the de-facto cloud platform for all things IoT related: from the way cities manage their fleet of cleaning trucks in real-time, to how factories gain control and insights from their boilers, sensors, and assets in a modern cloud architecture. Just six years later, the company filed its S-1 prospectus with the U.S. Securities and Exchange Commission (SEC) to have their shares publicly traded, giving unique insights to their operations and financials.
SAMSARA BUSINESS OVERVIEW
The Samsara Connected Operations Cloud comprises of hardware and software environments in which the company controls what data is collected, and how it is ingested, analyzed, and reported.
The elegant solution is a result of the ability of harnessing IoT data from either Samsara’s proprietary applications or from third-party IoT connected assets. According to the prospectus:
“We are helping drive the digital transformation of physical operations by enabling organizations with fleets, equipment, job sites, and mobile employees to connect real-time data from their physical operations on one platform. Our solution lets organizations capture data from our IoT devices and a growing ecosystem of connected assets and third-party systems so that they can access, analyze, and act on key insights to improve end-to-end operations. Our solution consists of our Connected Operations Cloud, together with a suite of easy-to-install, ruggedized IoT devices that capture data from offline assets and connect them to the cloud.”
Hardware installation and initial configuration is as easy as some of the best consumer products. Further integration with the Samsara Cloud is seamless, as seen in these demos:
The company originally focused in providing fleet management services with a suite of video, vehicle telematics and workflows for drivers, but followed suit by expanding to equipment monitoring and IP cameras for site safety and visibility. This allowed supply chain teams to oversee complex operations, dispatch vehicles and diagnose issues remotely through a single dashboard, improving incident response times and improving overall productivity.
As a result, the company has gained traction at a fast clip and across several industries, with transportation (their initial focus area), and wholesale and retail representing nearly 40% of revenues in 2020. Currently International markets represents 10% of total ARR and it is a key source of growth in the coming years, and the digital transformation imperative is still lagging internationally when compared to the U.S.
The company disclosed the number of customers, and the increase in customers in the cohort of Annual Recurring Revenue above $100k is impressive, with an average of new customers of 42 in Fiscal Year (FY)2019, 50 in FY2020 and 81 in FY2021. A real proof of the speed of digital transformation efforts across enterprises that need better visibility and lower cost of operations.
Entrepreneurship, like life, should be a never-ending learning experience. Research shows that while failure is a common path, repeat entrepreneurs have a higher rate of success than first-time founders.
“The average age of a successful entrepreneur in high-growth industries such as computers, health care, and aerospace is 40. Twice as many successful entrepreneurs are over 50 as under 25”
Source: HBR, 2013
With that being said, imagine you are in your early-to-mid 30s having sold your first company for $1.2 billion (in a all-cash deal) and wondering what your next cycle will be: for Sanjit Biswas and John Bicket it was all about building their next company. And there may not have a more appropriate name than Samsara to mark this new chapter.
Their first company, Meraki, started as a MIT project between three co-founders in 2006. In a nutshell, Meraki developed in the 2000s software and hardware to manage enterprise wi-fi networks in a way that was not easily done before. There are excellent articles, podcasts and interviews that describe the transaction in detail, and I want to highlight the importance of leadership in this moment, from lowering your team’s anxiety about next steps of the acquisition, to their personal plans after the deal was closed.
First is the email that Sanjit sent to the entire Meraki team after social media broke the news of the acquisition (emphasis added):
“In terms of what happens next: this week our job is the same as it was last week — to build amazing products and deliver them our customers. We will also continue to operate as a separate company until the acquisition closes, which we expect before the end of Cisco’s fiscal quarter. The plan is for employees to transfer from Meraki to Cisco.
My apologies again for having to send out email about something so important to all of us. We will plan to cover our plans in more detail at tomorrow’s event, which is being rescheduling for 10:00am at the new facility and on WebEx (three hours earlier than originally planned). AJ/Kathy will email out more details about logistics this afternoon.”
Here, Sanjit’s leadership skills are noteworthy: I can’t see many entrepreneurs who have just announced the acquisition of their company for over $1 billion to be apologetic in their ‘victory lap’ email. Also of note, it should be clear for the employees what would have happened next when it comees to their own job security and also of the founders’ (Book alert: Never Lost Again: The Google Mapping Revolution That Sparked New Industries and Augmented Our Reality tells a great story — and all the anxiety and uncertainty employees experience — when they are acquired by a larger organization).
Second, the partner at Sequoia who lead their Series A deal wrote an article about the Meraki story and what stood up to me was this:
“It was amazing to watch the founders grow into leaders”.
To put this phrase in context, he has led investments in companies including ServiceNow (market cap of $134 billion as of Nov/21), RingCentral ($21b), Nubank (targeting $50b IPO in late 2021) and others.
And Samsara had big aspirations from birth: to do for IoT hardware and software what Meraki accomplished in the Wi-Fi network industry: simplify and centralize industrial operations.
To reach this grandiose vision, the company is spearheaded by 12 leaders, but with only two women. It is relevant to mention that the CRO, CTO of Hardware, CPO and the VP of People joined Samsara from Meraki and the CFO and VP EMEA were part of ServiceNow, indicating that the virtually all-male bench is full of experience in the industry and in similar roles.
The 8-person Board is young (average age just under 52 years), with 3 women (all of which appointed in the last twelve months) is another testament of the attention to detail of the co-founders about how they build the Samsara’s foundations. Marc Andreesen (who led first round of financing and rarely sits in Boards, with the exception of Facebook, Coinbase) is in the Board since 2015, Hemant Taneja is in the Board since General Catalyst led the series C in 2017 (also Board member at Teladoc).
Then, the heavy-weight quartet of independent directors was nominated starting in August of 2020 with Jonathan Chadwick (who sits in the Board of ServiceNow, Zoom and Confluent and is the former CFO of McAfee, Skype, VMware), followed by Susan L. Wagner (co-founder of BlackRock and Board member at Apple and Swiss Re), Ann Livermore (Board at Qualcomm and UPS) and Sue Bostrom (Board at Anaplan, GitLab, Nutanix, ServiceNow and former CMO of Cisco).
There are no words to describe the breadth and depth of this Board, but I wonder when they plan to — at least — attain gender parity. The positive news is that the 37.5% women representation at the Board is above average when compared to 30.3% for S&P 500 companies (as of October 2021 according to Bloomberg).
Glassdoor ratings are nothing to brag about: 3.8 overall rating, 93% CEO approval (above average) and 69% recommend to a friend (something to keep an eye for but I believe is a direct result of the most recent fundraising-and-layoff episode).
Speaking of which, on March 20, 2020 the company announced a $400m fundraise round (and massive down-round) followed by the layoff of nearly 20% of the organization. Again, Sanjit chose transparency over ambiguity and wrote candidly about the process (remember what our lives’ expectations were three days after San Francisco announced the first lockdown in the U.S. when reading this piece).
Now let’s see how their business fundamentals and leadership style translate to financials.
SaaS businesses have proven that spending upfront to scale their platforms and their sales & marketing motion can generate positive long-term cash flow as long as customers stick to their contract (and renew for longer periods). This is usually analyzed as Unit Economics, and LTV to CAC ratios being one of the gold standards (Long-Term Value and Cost of Acquisition of Customers, respectively).
On a relative basis, Samsara’s Income Statement is demonstrating the benefits of long-term thinking. Whereas in May of 2019 Operating Expenses represented 287% of total revenues, in the most recent quarter this metric was 100% of revenues. With increased scale in their operations, Samsara can continue to attract more customers and serve them equally well thanks to a platform developed years ago.
On absolute terms, while the nearly 6-fold increase in Revenue is massive, gross profit is even more so at 7.5x, a clear win for scale and profitable unit of economics. At the same time, Operating Expenses increased by 2x to serve an total customer count that increased 2.5x, and 11x higher for for the cohort of Customers > $100,000 in ARR. This is efficiency at scale.
Revenue growth is corelated with the increase in the Number of Customers with > $100,000 in ARR, with an average of 76% over the last four quarters. Since 44% of ARR came from this cohort, we can expect these two indicators to lead and lag future company performance.
A second derivative to understand future ARR and Revenue Growth is through Net Retention Rate, and Samsara calculates NRR as follows:
“dollar-based net retention rate as of a period end by starting with the ARR from the specified cohort of customers as of 12 months prior to such period-end, or the Prior Period ARR. We then calculate the ARR from these same customers as of the current period-end, or the Current Period ARR. Current Period ARR includes any expansion, and is net of contraction or attrition over the last 12 months, but excludes ARR from new customers in the current period, as well as any ARR associated with paid trials. We then divide the total Current Period ARR by the total Prior Period ARR to arrive at the point-in-time dollar-based net retention rate. We then calculate the weighted average of the trailing 12-month point-in-time dollar-based net retention rates, to arrive at the dollar-based net retention rate”
The great Jamin Ball also broke down the Samsara IPO and published a comparable graph of NRR for high-growth tech companies, with the company siting below the cohort median of 119%. One explanation can be attributable for the contract length, that has an average of 3 to 5 years, above the typical one-year contract for most SaaS businesses. Also noted above, with larger New Net Quarterly ARR, the company may be landing larger initial contracts, with smaller room for upsell and cross-sell opportunities in the short-term.
When looking at the income statement, there are two outstanding factors to analyze on a year-over-year time series:
- The fast improvement in gross margins (dark blue below) increased from high 50s to lower 70s in only two years. One explanation may be that the company attained significant economies of scale in building hardware to serve larger contracts, and the second may be a factor of economies of scope to manage, operate and host their cloud services.
2) Sales and Marketing expenses have decrease significantly in the same period without affecting their sales motion and efficiency. This is clear when looking at the graph below outlining sales efficiency and payback period, with the clear outlier the first quarter of the Covid-19 pandemic.
A reminder that Sales efficiency is the division between Annualized rate of Net New Gross Margin and Sales & Marketing Expense, with payback period being the inverse of Sales Efficacy. So, the smaller Sales Efficiency is, the longer payback period will be.
The company also disclosed quarterly ARR, so it is quite interesting to see the rapid acceleration in Net New Quarterly ARR for the first two quarters of 2021 only to find a steep deceleration in the last quarter as a private company. In absolute terms, however, the company is consistently landing larger New Quarterly ARR, and as discussed previously, probably a proxy for large lands and lower expansion opportunities in the short-term.
In terms of valuation, the company should expect to trade with the high-growth SaaS cohort (between 30x to 50x Next Twelve Month Sales). Thus, anything between the $20b to $30 billion range, depending on the growth and sales multiple assumptions. Interestingly, the updated IPO prospectus have Samsara at $11.6b at the top of the range ($21 to $23/share), or 23.6x this year’s ARR.
When modeling Samsara’s EV with other high-growth SaaS comparables, its valuation ranges from a similar $21b to $40 billion range.
With that, let’s turn to the financial return of Samsara’s Investors.
Venture Capital is a game of optimizing for allocation because failure is the most common outcome. Thus, these funds allocate a large percentage dedicated to follow-on to improve the funds economics to their Limited Partners.
Fred Wilson articulates (albeit in a different context) the importance of allocation for a fund and you should definitely read it.
Samsara has one of the simplest cap tables one can analyze in pre-IPO companies: There are only two VCs with more than 5% ownership (Andreessen Horowitz and General Catalyst), and the founders have an above-average ownership and voting power. One explanation for them having more than 50% ownership (updated from nearly 60% in the first IPO prospectus submission) is that the founders have co-invested in their rounds, withholding other firms to participate. Another is FOMO: VCs tend to allocate larger investments in their highest-conviction companies.
Interestingly, the average stock return of the 18 tech companies with the largest founder ownership at IPO until November/2021 is above 800% (or more than 850% when excluding GroupOn).
One explanation for the outsized returns for the cohort may be the long-term ownership nature of the cap table: Founders have an incentive to build long-term value for the firm without necessarily emphasizing daily volatility of the markets. Another assumption may be the result of the laws of supply-and-demand: with lower availability of shares outstanding compared to the average stock (and assuming equal demand), then shares tend to increase in price to reach equilibrium. And while I haven’t read an authoritative research about price performance versus insider ownership in tech companies, there are plenty of studies for broader stock indexes, both analyzed in the context of U.S. and international markets).
While there is still no disclosure on price per share, we can infer investors’ gain per round of financing. At $21.5/share (mid-point of IPO prospectus), early-stage investors are poised to return between 28x to 58x their initial investment, with a solid 2–6x for later-stage investors.
In Buddhism, the continuous cycle of rebirth and death ends when a person reaches Nirvana (achieving the highest enlightenment, or the cessation of suffering). For enterprises, the endless (and painful) cycles of mismanaging their operations may end when they adopt the Connected Operations Cloud with Samsara. For Sanjit and John, Samsara represents a new beginning, a new path in their entrepreneurial journey. As a publicly traded company, Samsara will be subject to a lot of new requirements and obligations, almost as a newly birth entity, and there is reason to believe the future is bright. Congratulations to the founders, employees and happy customers and investors alike. Namaste.
This is not investment advice, it is not, etc, etc, etc.