Twilio’s S-1

Posted by kdow on May 27, 2016 1:37:36 PM

Today Twilio, the SaaS-based SMS marketing company filed their S-1 to list as a public company on the NY Stock Exchange. You can read the details on

The follow-up comment sections of various sites (Hacker News, Quora, etc.) all remind me of when the company I work for filed. There’s a lot of natter, speculation and opinion. In this instance, a lot of people think that there’s a huge misnomer with Twilio. Namely, the amount of money they lose per year.


Software as a Service has some interesting ways to measure the economics of the business. Namely, a contract term sheet might last a year, but the way to digest the payments is in monthly recurring revenue (MRR). Lifetime value (LTV) of a customer is determined by the number of months they pay as an attainable number to how much money it took to get them to sign a contract (e.g. it cost €n for marketing, €n for the sales rep, etc., divided into the total amount the customer pays us).

This might seem unusual in the more traditional method of buying low & selling high. But it’s very predictable, and easy to build a growth model for a business around this. And because it’s predicated on recurring revenue (monthly, annually, etc.) it sits nicely into software subscription services.

Because of this predictability you get companies, like Twilio, who otherwise appear to be haemorrhaging money.


Twilio’s revenue was filed at about $167m, with their losses at nearly $40m. They have no big capital investments, not doubling down on R&D (they use AWS as infrastructure rather than their own systems, for example), etc. This sounds awful, but peel a layer away.

One layer down and you can see hyper growth. They’re a startup that’s starting to etch a future into the path of scaleup. In 2013 they spent $22k on sales & marketing, $34k a year later and $49k last yer. They’ve been pushing the growth playbook successfully. Turn these numbers off and they’ll have made a profit. But they’ll have stalled growth.

That spend is giving them 80% YoY growth, which is a great number for a SaaS business that compounds over time. Assuming churn is in line with industry standards, then the users they sign on stick with the product. This means customers don’t leave, and their growth is a huge compounding number every single year. Classic SaaS playbook.

One worry for an investor is that the stock on the table isn’t that attractive. Outside of price and the hope that they scale nicely, Twilio’s giving no power to the shareholders.

40% playbook

SaaS companies have a lot of weird math rules, but one good one to follow is that your annual revenue growth rate + your operational margin should equal 40% of the business. Meaning 100% growth YoY allows you to lose 60% of your revenue, 40% growth is break even point and s0 0n. There’s more of that here:

Should I invest?

But basically, Twilio is a very healthy business. Their IPO is there purely as an exit for the VC’s to get some return from their investment a few years ago, and t0 give Twilio access to public markets (which are a bit volatile right now, which is a risk) to fuel their hypergrowth & scaleup phase.

Should anyone invest? Sure. It seems like a good company. But I wouldn’t expect to get rich. They don’t have a deep moat around them. Their only moat is that other operators or larger businesses like Google don’t really care about that sector. Which isn’t really a deep moat. It wouldn’t be that difficult to slide in underneath Twilio to disrupt them. But assuming they double down on R&D they could have new innovations to build that moat. Moreover, they could just be acquired by someone big — which could give investors a nice incentive to buy.