How the World's Most Promising IPO Companies Use Debt

Perceptions of debt for pre-profit growth companies range from “valuable financing tool” to “TNT in the living room.” To say the least, opinions vary widely.

This is illuminated when studying debt usage by 17 pre-profit tech companies that went IPO in 2019, with debt users vs non-users demonstrating very different leverage multiples, growth rates, burn rates and valuation multiples.

Of course not every company is on an IPO track. But insights can still be gleaned as to when debt may be most useful.

Debt to Revenue

2019 Pre-Profit IPO Companies

*Debt Users defined as those companies with debt availability >25% of LTM revenue

Before we get into more data, why are pre-profit companies using debt in the first place? The debt vs equity decision process is nuanced: how and when does debt trump the patience and flexibility of equity in certain scenarios?

​That said, debt is not used to “boost returns” or optimize WACC!

A closer look at 2019 pre-profit tech IPO companies reveals interesting takeaways. In particular, active debt users are leveraged at 40-200%+ of annualized revenue, yet 8 of the 17 companies in the sample had little to no debt whatsoever (deemed “non-users”).

As noted in the table below there is a large gap in metrics between debt users and non-users, generally based on:

- growth rate

- burn rate

- valuation multiple

Conclusion

While pre-profit tech companies can benefit from debt capital when structured and sized appropriately, most are not using debt so significantly as to materially improve equity investor returns. For the IPO sample, debt is being used as a tool to supplement later stage equity funding, or to boost balance sheet liquidity.

Those IPO companies experiencing a bit lower growth, lower burn, and lower valuation multiples are using and benefiting from debt financing more actively.

These takeaways often apply to mid / later stage private tech companies (that may never go public) as well.

Data set notes:

Companies analyzed: 2019 pre-profit tech IPO companies (excl Biotech)

Total count: 17

Definition of a Debt User: Committed debt facilities >25% of revenue

Definition of Non User: Committed debt facilities <25% of revenue

# of Users: 8

# Non Users: 9

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