ServiceTitan's ratchet motivation for going public
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ServiceTitan is expected to be one of the very few "unicorns" to go public in 2024, with its IPO roadshow likely to launch within the next week.
The big picture: One reason is that ServiceTitan should go public, but perhaps the bigger reason is that ServiceTitan needs to go public.
Should: The tradesperson SaaS company was founded in 2007 and generated $614 million in revenue during its most recent fiscal year (31% YoY growth). Still no profits, but that's not been a traditional impediment for tech IPOs.
Needs: ServiceTitan accepted an onerous antidilution term tucked into its Series H fundraising round led by TPG.
Zoom in: The term in question is a ratchet, which effectively would make TPG and other Series H invstors whole were ServiceTitan to go public below the Series H share price.
- This was common in ZIRP-era growth rounds, as startups were eager to maintain their inflated valuations (or at least most of them, since ServiceTitan was actually valued higher in its Series F and Series G rounds).
- This ratchet, however, compounds at 11% per year if ServiceTitan didn't go public within 18 months (i.e., May 2024).
To sum up: The lower the IPO price, the more shares go to Series H investors (and away from other existing shareholders). The longer ServiceTitan waits to go public, the wider that delta grows.
- It is, as venture capitalist Bill Gurley recently noted in a podcast, a massive misalignment of interests. Meritech Capital also published a smart breakdown of the math.
- Right now, the dilution impact is fairly minimal. But given the ratchet's compounding nature, that could change in a hurry were ServiceTitan to stay private longer.
What to watch: How many other compounding ratchet time bombs are out there in unicorn-land, and if that is what finally unclogs the IPO pipeline.
