Why ServiceTitan Was Ready to Go Public

ServiceTitan's decision to go public stemmed from its rapid growth, strong market position, and the increasing demand for home services technology. The company, which revolutionized the field service management industry, saw its value rise significantly as it expanded its customer base. With a proven business model, substantial revenue potential, and a solid reputation, ServiceTitan was well-positioned to tap into public markets, securing funding to fuel further growth and innovation.

When ServiceTitan filed its S-1 for a public offering on November 18, many venture capitalists (VCs) likely celebrated. A successful IPO from the company, which develops operational software for trade businesses, could be the catalyst the dormant IPO market needs to regain momentum.

However, ServiceTitan's IPO timing may not be entirely driven by favorable market conditions. The company had agreed to a deal term in 2022 that required it to go public by May 2024, or face share dilution. With the deadline now past, ServiceTitan will owe more shares to certain investors each quarter it remains private before the IPO.

Here's how this works.

When ServiceTitan raised $365 million in its Series H funding round in November 2022, the deal included a compounding IPO ratchet, as noted by late-stage VC Meritech Capital and highlighted in the company’s S-1 filing.

An IPO ratchet is a clause that protects investors, ensuring their equity remains unchanged if the company goes public at a lower valuation than the price they paid. However, if the company’s valuation increases, this clause is no longer applicable.

ServiceTitan's IPO ratchet is "compounding," which adds complexity. If the company didn’t go public by May 22, 2024—18 months after the Series H round—the terms of the ratchet would change. Since the deadline has passed, the minimum valuation required for ServiceTitan to avoid share dilution will rise each quarter by 11% annually.

Initially, ServiceTitan's hurdle rate was set to $84.57 per share to avoid giving additional shares to certain investors. However, since the deadline has already passed, the hurdle is now closer to $90 per share, according to Meritech's estimate. The longer ServiceTitan waits, the higher the hurdle will climb.

If ServiceTitan’s valuation had continued to rise after its 2022 funding round, the issue would be less significant. Unfortunately, that's not the case. Meritech estimates the company is now valued at around $70 per share, while Caplight, a secondaries trading site, values the share at $81.59, giving the company a $7.3 billion valuation. Even Caplight’s higher estimate still falls short of the hurdle rate.

Ultimately, the key factor will be how ServiceTitan prices its IPO. The company has declined to comment.

Founded in 2012 in Silicon Valley, ServiceTitan has raised over $1.5 billion in venture capital from firms such as Iconiq, Bessemer, and Coatue. As of July 31, 2024, the company reported $685 million in revenue and a net loss of $183 million, according to its S-1 filing.

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Source: Techcrunch‍