Tech Companies Going Public Aren’t Getting More Employees, They’re Just Getting Bigger Valuations

Recently, public tech companies have gotten bigger in terms of valuation, but not so much in terms of staff size.

Subscribe to the Crunchbase Daily

That’s the broad conclusion from our latest Crunchbase News analysis of employee totals at venture-backed companies that went public in the past several months. The findings showed a dramatic change from a little over two years ago, when we last looked at the intersection of valuation and staff size, or valuation-per-employee.

Overall, we found that for newly public companies with multibillion-dollar market values, staff size ranged from a low of 171 (Desktop Metal) to a high of 5,465 (Airbnb).1 We also found companies with comparatively small sizes, such as GoodRx, could still command some of the highest valuations on the list.

To get an idea of how valuation correlates with staff size, we put together a dataset of select U.S venture-backed companies that went public in the past year, most in the past six months. We then looked at their market caps and applied simple division to figure out valuation-per-employee, as you can see below:

These are high numbers

We didn’t fit every venture-backed company that’s recently gone public via IPO or SPAC onto our list, focusing instead on the bigger names and on tech rather than biotech. Still, from this limited exercise, the takeaway is clear: Investors are willing to assign much higher valuations relative to staff size than just two years ago.

Whereas in late 2018, software companies with successful IPOs commonly were valued around $1 million to $4 million per employee, high-valuation tech companies today commonly fetch valuations equivalent to $10 million or more per employee. At the high end, prescription drug price comparison tool GoodRx has a valuation equivalent of around $50 million per employee.

The valuation-per-employee inflation is in line with a raft of metrics alerting us that tech stocks are hitting historical highs. Shares are up. Market caps are up. And valuations relative to earnings and revenues (or losses and revenues as is the case for most tech-focused new market entrants), are also way up there.

Is it all about growth?

Generally speaking, newly public tech companies get higher valuations relative to earnings than more established industries because investors see them as poised for growth. Venture-backed tech companies going public typically show at least double-digit revenue growth in the couple years preceding their offerings, with expectations of continued or accelerated momentum.

Because they’re growing, newly public tech players are typically adding staff at a brisk pace, so one would expect valuation per employee to go down. It’s noteworthy, however, that this year’s survey didn’t show much growth in overall employee counts at companies going public. Quite a few highly valued newcomers have a few hundred employees, and only one — Airbnb — had a full-time staff of more than 4,000 people.

Some can fit on a bus; others need an arena

As we noted last time, it’s not unheard of for startups with a staff that could fit into a single bus to be valued in the billions. Take WhatsApp, the poster child for high value-per-worker startups. The messaging company employed just 55 people when Facebook bought it for $19 billion in 2014. That works out to nearly $350 million in valuation per employee.

High valuations per employee are also particularly prevalent in biotech, which we did not survey here, as most companies in the space start out with a small research team and don’t significantly scale staff before reaching the advanced clinical trial stage.

The current tech startup scene also has its share of small teams boosting their startups to unicorn status and beyond. Calendly, the calendar app startup recently valued around $3 billion, lists a staff size of 213. One of the latest to cross the billion-dollar valuation threshold, group discussion platform Clubhouse, got there on a staff of just around 10, according to Rahul Vohra, an angel investor in the company.

Vohra said that although he would agree that valuation per employee has skyrocketed and public market caps are high, he doesn’t think that points to a bubble, given that startups and unicorns have also become better at scaling, noting that “companies are growing faster than ever before to become bigger than ever before.”

Given how tough it is to predict and time the ascent and descent of tech valuations, we won’t speculate here on whether current levels represent a sell signal. However, it is worth considering that companies going public of late are more valuable, but not necessarily any bigger than new entrants a couple years ago. That means investors are expecting existing staff to produce a lot more future value for their employers than they did just a few years ago.

Illustration: Dom Guzman


  1. Staff totals are disclosed in public securities filings and cover full-time positions. Most totals were last updated for Sept. 30, 2020, and may have changed since then.

Related Articles

Fintech valuations are soaring at the late stage, and one Silicon Valley VC is warning of a bubble

Summary List PlacementFintech valuations are booming. 
This flourishing sector for startups is a broad church, comprising payments, financial markets, challenger banking, insurance, and lending. Its emergence is down to factors such as consumer willingness to shop and bank online, and distrust and dissatisfaction with traditional financial providers.
The number of fintech mega-deals rose in the US to a decade high last year, with 44 transactions logging $12.2 billion, according to PitchBook data. The median pre-money valuation for VC-backed, late-stage fintech companies in North America and Europe from 2019 was a record $73.8 million. That figure for last year, as of Q3 2020, was $95 million. Despite the coronavirus pandemic, fintech valuations were breaking records. 
Notable examples include stock trading app Robinhood which raised funding at an $11.2 billion valuation last year; buy now, pay later startup Klarna which raised at $10.65 billion; and Chime, a challenger bank, raised at $14.5 billion.

One skeptic says these record valuations are not justifiable.
Businesses are being funded at potentially unrealistic multiples
Don Butler, managing director at Thomvest Ventures and a backer of big fintechs such as SoFi, LendingClub and Kabbage, says some parts of fintech look bubbly.
“From our perspective, we tend to believe that we are in an era of globalization … that is also leading to more convergence, and we tend to believe that there is indeed a sizeable bubble in many areas of fintech these days,” he told Insider. 
The outsized bets being taken by investors desperate for returns means that some businesses are being funded at massive multiples, which could be inflated.
That, Butler says, could make it harder for those businesses to raise funding in the future at a similarly high valuation. 
Read more: Digital banking is booming due to Covid but remains unprofitable. Here’s why fintech executives and investors believe ‘rebundling’ is key for fast growing challenger banks in 2021.
Not all highly valued fintechs are indication of a bubble, but some sub-sectors may be at risk
The rush by investors into late-stage fintech can be viewed in two ways. 
It may simply be the case that given a previous dearth of fintechs going public, a push from investors into late-stage businesses reflects a new desire to list consumer financial services companies.
Despite crazy 2020 IPO figures, fintech hasn’t been a major sector for listings. Notable recent IPOs include SoFi, Upstart, and Affirm.
Alternatively, investors are simply forced to put their money somewhere, placing outsized bets on late-stage businesses. “I don’t think investors are consistently looking enough at the details but are more interested in seeing these hyper dreams take off,” Ruth Wandhofer, partner at Gauss Ventures, told Insider.
Affirm, a loan provider founded by PayPal cofounder Max Levchin, soared 110% on its first day of trading. 
“Investing in a company like Affirm even at an inflated valuation feels like it has some meaningful return potential given the alternatives,” Butler said. “So for the surge into late-stage companies I think you’re seeing investors trying to get in ahead of the IPO pop that we are seeing real-time.”
Bubbles in fintech sub-sectors will pop
Despite 2020’s record breaking year for tech IPOs overall, public markets will still look for quality. Fintech listings which fail to excite investors could signal the bubble deflating, however, Butler added. The booming public market valuations of recent IPOs, after a record of more than $253 billion in exit value in the US last year, could slow down, causing a disconnect between public and private fintech. 
“I think we’ll see some lesser companies go public in certain categories of fintech that could in turn deflate those subsectors,” Butler added. “So given the scale in financial services, I think a bubble popping will be specific to certain sub-sectors rather than holistic across fintech.”
In particular, Butler cites areas of early fintech, such as marketplace lending, or companies that are focused on one specific product (such as SoFi in student lending), where market leaders in the space have already scaled up, making it harder for new entrants in those categories to catch up.SEE ALSO: We asked 12 prominent European tech investors to pick out fintech startups they think will blow up in 2021. Here are the 20 they chose.
Join the conversation about this story » NOW WATCH: A top economist explains how weighted voting could change democracy

Responses

Your email address will not be published. Required fields are marked *

Receive the latest news

Subscribe To Our Weekly Newsletter

Get notified about chronicles from TreatMyBrand directly in your inbox