SaaS IPOs Are Slowing Down: What It Means for Founders, Employees, and Investors

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I was recently sent a LinkedIn post by Jason Lemkin (he posts good content by the way), about SaaS IPOs and the length of time it is now taking for companies to go public. It was an interesting post and something we’ve written about before, albeit not SaaS companies specifically. 

We wanted to jump back into it from the perspective of the different stakeholders affected by the extended timeline and see what it means for each of them.

For a long time, SaaS and cloud companies have been the trailblazers of the tech sector. Many SaaS companies have set new standards in growth and innovation and the latest top dogs in the field - Canva, Stripe, Databricks, ServiceTitan, Gusto, and Wiz are on track for highly anticipated IPOs in 2025 or 2026. However, SaaS has some problems. Firstly, it's under threat by advancements in AI. Many current SaaS companies could see whole offerings wiped out by AI, where agents could simply do the task within an organisation with no need for multiple licences of said SaaS solution for their employees. That is a newsletter-worthy topic in and of itself!

Additionally, for those who can survive, one trend is impossible to ignore: the road to an IPO is getting longer.

The SaaS IPO journey, which used to average 10.4 years, is now stretching to over 13.6 years judging by the current IPO frontrunners. Recent IPOs from companies like Klaviyo, Rubrik, and OneStream took an average of 11.3 years. I know thats only 3 companies so not a huge amount of data to go off but if we judge off of this, we can see how it's starting to trend upward. 

Let’s look at what the extended timeline means for founders, employees and investors, and explore likely outcomes and potential workarounds we might see to address these new challenges.

For Founders: Longer Runway, New Challenges

For SaaS founders, the reality of a longer IPO timeline demands a reevaluation of growth and funding strategies. Maintaining the momentum needed to reach and sustain IPO readiness over a 13+ year period will require substantial resources and stamina. I mean, 10 years is long as it is. A decade of unrelenting pressure and operational resilience is daunting enough.  Increasing that journey by a third is not to be taken lightly and will compel founders to look for new funding methods or partnerships to continue fueling growth, and ultimately, survive! Here’s what founders might need to consider:

• Extended capital needs: The need for capital to sustain and expand operations rises. And raising further funding that late in the game means greater dilution for Founders and investors pre-IPO. They could consider alternative funding mechanisms such as debt financing to preserve equity but it also has its downsides.

• Focus on profitability and resilience: In a slower IPO market and a journey that's likely to take much longer, businesses will likely prioritise profitability and long-term resilience. If they can do that, they can maintain sustainable growth without over-reliance on new capital and can avoid the dilution I mentioned above.

• Strategic partnerships and acquisitions: Founders can leverage strategic partnerships or M&A activities to stay competitive and explore avenues for growth that don’t necessarily depend on new rounds of venture funding.

For Employees: Delayed Liquidity and New Pathways

Employees in SaaS companies look forward to an IPO as an opportunity to access liquidity and get that much anticipated pay-off. However, with IPO timelines extending, the wait for liquidity has also lengthened, which could affect morale and retention. Employees might need to recalibrate their expectations and explore alternative ways to access liquidity.

• Longer vesting periods and retention packages: Companies may need to offer extended vesting schedules or additional stock options to retain top talent. Employee Stock Ownership Plans (ESOPs) and other retention bonuses might help offset the longer wait for an IPO.

• Secondary markets and liquidity programs: As IPOs take longer, employees may seek liquidity through secondary markets or structured liquidity programs. Many SaaS companies are now considering internal liquidity programs to provide early employees with an opportunity to cash out some of their holdings without waiting for an IPO. We recently saw Stripe and Revolut offer employee share sales so employees can access liquidity and the companies can sure up their cap table pre-IPO. This will likely become more common.

• Reevaluating compensation packages: The trend might encourage SaaS companies to balance equity offers with something like cash bonuses to retain talent who might be less inclined to wait out an extended IPO timeline. 

For Investors: Longer Wait for Liquidity, But Potentially Bigger Returns

The extended IPO timeline also has implications for venture capitalists and other investors. In traditional VC structures, funds are designed to provide liquidity within 10-12 years. However, the latest SaaS companies are now averaging nearly 14 years to IPO. Plus for VCs, it can take another 3 years to fully distribute and get liquid after a 6 month lock up. So 17+ years for VCs to be fully liquid on SaaS IPOs - from VC funds that are designed to last 10-12 years. Looks like the investment lifecycle may need rethinking. So how might that look:

• Longer-term fund structures: VCs may need to extend fund durations or adopt new structures that allow for longer holding periods. Alternatively, venture funds could look to liquidate partial holdings in the secondary market before the official IPO - something we’re seeing a lot more of lately.

• Focus on sustainable growth and lower ARR IPOs: Investors could start pushing SaaS companies to focus on more sustainable growth metrics or support IPOs at lower ARR thresholds if market conditions support such exits. Lower ARR IPOs could become more common as companies and investors look for ways to create liquidity sooner.

• Exit strategies beyond IPOs: Acquisitions by larger firms could provide alternative exit routes that offer liquidity sooner. Investors will likely be more open to these options to generate returns within reasonable timeframes however, it might not be the favourable route for the founders.

While the road to IPO for SaaS companies has gotten longer, the fundamentals of high-performing companies remain the same. Maybe this extended timeline simply reflects the evolving maturity of the SaaS market and the need for all stakeholders to adapt. For founders, it definitely means managing growth over a longer period and prioritising more sustainable growth. For employees, expectations may need to be tempered and alternative liquidity options might need to be explored or discussed when negotiating their compensation. And for investors, fund timelines and exit strategies might be up for discussion.

Change is coming. And as the SaaS landscape evolves, those who adapt will continue to thrive!

What we’ve been working on at Shuttle

• Finalising deal flow for our private launch 🚀

• Simplifying our onboarding flow 💨

• Kicking of QA 🧪

The Unsophisticated Investor is brought to you by Scott & Rob, the founders of Shuttle. We’re both sick of private markets being a playground exclusive to the ultra-wealthy so we started a company to challenge the status-quo. Shuttle’s singular focus is to unlock private markets for Millennial and Gen Z retail investors and help them build wealth through the highest performing private market opportunities.

Scott & Rob
Shuttle Co-Founders