IPO Indications from Mentimeter

RESEARCH NOTE

Is Swedish SaaS Superstar Mentimeter Heading for IPO?

As an active investor in the Swedish startup ecosystem, you get a sense of where the market is heading. During the past months, we have gotten strong indications that the tech IPO market is starting to open up again, mainly from discussions with major financial advisors and Nasdaq representatives. It is interesting to see which private companies might test the public waters. One clear candidate is the SaaS success story Mentimeter.

In August, there was big news when GP Bullhound and Burd Equity invested SEK 727 ($72m) million in what looks like a secondary transaction, with investment firms Alfvén and Didrikson among the main sellers. The valuation in that transaction seems to have been SEK 3.53bn, as Creades, who owns 7% of the company, has stated that his stake in Menitmeter is worth SEK 248m.

IPO indications

Bure usually focuses on holding public companies in its portfolio; about 85% of its total portfolio value comes from publicly traded holdings. Mentimter's CEO, Johnny Warström, said in an interview that he views the stock market as a natural place for Mentimter within a couple of years.

Looking for a Head of Investor Relations

Well, now the plans seem to be in work. Around a week ago, Mentimeter posted a Head of Investor Relations position. The responsibility list and qualifications are long, but here are some quotes that might imply a coming IPO:

This is very exciting news. Things can change, and nothing is set in stone, but another strong SaaS company for a Swedish IPO is always welcome. We believe it is likely that the company plans for an IPO in late 2025 or early 2026. Now, let’s dig into some numbers, valuation, and Mentimeter's equity story.

ARR development of Mentimeter

Mentimter has shown an impressive ramp-up of ARR and reached SEK 496m in 2023.

The ARR CAGR during the past four years has been 58%, and the growth during 2024 was 24%. The net add to ARR has been relatively consistent, and so has the company's free cash flow.

Employee development

Mentimeter is investing heavily in building its company. The number of employees has grown from 60 in 2019 to 343 in 2023, corresponding to a CAGR of 55%, so it is very close to the growth of ARR. According to LinkedIn, there are currently 420 employees, and the growth during the past year has been 16%. It seems like the hiring phase is slowing down to some degree.

Shifting to Enterprise focus

It is a bit worrisome that the company does not see more operational leverage on the ARR per employee. However, a high-growth startup like Mentimeter usually invests ahead of the curve. Mentimeter has also made the strategic decision to focus more and more on its enterprise solutions than the original self-serve. This means that another type of organization is needed, but that the churn dynamics and the value of those customers are vastly different.

The Enterprise ARR has been showing a higher growth rate than Self-serve, and it is likely that in 2024, Mentimeter will have more ARR from the larger clients than the small ones.

Mentimeter's strategy focuses on reaching more organizational customers by driving organic growth through existing customer referrals and upselling to larger plans. The company emphasizes its commitment to providing a smooth onboarding experience and ensuring new users recognize the value of its self-service product. The company has developed tailored resources and training materials, including courses on its Mentimeter Academy platform, to help its sales team build confidence in presenting use cases relevant to enterprise customers.

The growth model of Mentimeter, their true advantage

Mentimeter utilizes a product-led growth (PLG) model to drive adoption and expansion. We find that their growth model is what gives them a competitive advantage and is truly a core part of the future growth story. Here's a breakdown:

• Freemium Model: Mentimeter offers a free plan with core features, allowing users to experience the platform's value before committing to a paid subscription.

• Viral Loop: Free users often introduce Mentimeter to their colleagues or students during presentations or meetings. This exposure sparks interest, leading these individuals to register for their own accounts, thus fueling organic growth. Mentimeter reported that 98% of newly registered accounts in 2023 came from unpaid marketing channels, illustrating the effectiveness of this strategy.

• Land and Expand: As individual usage grows within an organization, Mentimeter focuses on converting these users into paying customers. They encourage teams to use the platform collaboratively, demonstrating the benefits of a centralized subscription.

• Enterprise Sales: Once a critical mass of users exists within an organization, Mentimeter's enterprise sales team engages to secure central subscription deals. These deals offer enhanced features, organizational-level security, and centralized license management, catering to the specific needs of larger institutions.

Example Customer Journey

Here’s an example of how a customer might progress from initial discovery to widespread organizational adoption:

• Discovery: A teacher discovers Mentimeter while searching for ways to make their lessons more interactive.

• Individual Use (Free Tier): The teacher signs up for a free Mentimeter account and starts using basic features like live polling and word clouds in their classroom.

• Viral Spread: Students enjoy using Mentimeter and tell their friends in other classes about it. Some teachers, observing the positive impact on student engagement, decide to try Mentimeter themselves.

• Team Use (Freemium to Paid): A group of teachers within a department begins using Mentimeter regularly. They decide to upgrade to a paid plan to access more features and collaborate more effectively.

• Organizational Adoption (Enterprise): The school principal notices Mentimeter's increasing use and its positive effect on student learning and engagement. They contact Mentimeter's sales team to discuss a school-wide subscription.

• Expansion and Value: The school implements Mentimeter across various departments and use cases, including staff meetings, professional development sessions, and parent-teacher conferences. Mentimeter becomes an integral part of the school's communication and engagement strategy.

Free Cash Flow vs. EBITDA and EBIT

Despite investing so heavily in the business, Mentimeter has continued to show positive free cash flow. As growth rates slow down, we think the company will likely look to increase both cash flows and accounting profits.

Free cash flow can be significantly higher than EBITDA and EBIT, especially for companies like Mentimeter, which operates on a subscription-based model with negative working capital. Here's why:

• Mentimeter's Business Model: Mentimeter's customers are invoiced upfront for their subscriptions, resulting in a significant inflow of cash at the beginning of the subscription period. This cash inflow is reflected in the free cash flow. However, the revenue is recognized over the subscription period, not all at once, which impacts the reported EBIT and EBITDA.

• Negative Working Capital: Mentimeter operates with negative working capital, meaning its current liabilities exceed its current assets. This is primarily due to the company's subscription-based model, where it receives cash from customers upfront for services that are delivered over time. This upfront cash inflow further boosts the free cash flow, while EBIT and EBITDA primarily reflect the costs incurred during the period.

• Investments in Growth: While Mentimeter is profitable on a cash flow basis, its EBIT and EBITDA are impacted by investments in future growth, such as research and development and marketing. These investments are expensed on the income statement, reducing EBIT and EBITDA, but they don't necessarily reflect a cash outflow in the same period, thus having a smaller impact on free cash flow.

• Non-Cash Expenses: EBITDA, in particular, adds back depreciation and amortization, which are non-cash expenses. These expenses don't impact the company's cash flow, so free cash flow can be higher than EBITDA.

Historical valuation & IPO pricing

In 2022, the company completed an investment round valued at around SEK 2.5bn, and the valuation in the latest transaction was approximately SEK 3.5bn.

Based on our numbers, the rounds have been done at around 6.0x underlying ARR. Given the company's growth rates and position, we do not view that as too high or too low but as reasonable valuation levels.

Like all SaaS, Mentimeter's growth rate is slowing down; growth decay is well documented for SaaS companies after they hit some scale. Launching a new product add-on/offering could change the trajectory, but otherwise, it seems like the company will reach around SEK 900m in ARR by 2026. We have assumed higher growth for the Enterprise segment, and the net add for Self-serve continues at similar levels as today.

Slower growth in 2026 would affect the valuation multiples, but again, the cash flow is likely much higher, and overall, we believe the market environment will have improved. There is also a positive addition of less liquidity risk for investors than raising private rounds. We believe the IPO valuation could be motivated at 7-8x ARR. Using a middle of 7.5x and applying it to the 2026 estimated ARR leads to an enterprise valuation of SEK 6.75bn.

We want to highlight that we have no insight into the true SaaS metrics that matter a lot regarding valuation, like NRR, payback period, sales efficiency, etc. Our estimate is based on our data and similar companies' overall market valuation and would most likely change if we had deeper insights into the business's value driver metrics.

The equity story of Mentimeter, as we view it

Democratizing Engagement

• Mentimeter's platform breaks down traditional communication barriers by providing a space for every voice to be heard, regardless of rank, personality, or comfort level in speaking up.

• The platform's features, such as live polling, word clouds, and anonymous Q&A, ensure that everyone feels comfortable contributing, fostering a more equitable and dynamic environment for interaction.

• By shifting away from one-sided presentations toward interactive dialogues, Mentimeter cultivates a sense of shared ownership and accountability, creating more meaningful and productive discussions.

Empowering Voices

• Mentimeter enables individuals to confidently share their thoughts and perspectives, even in large or intimidating settings. The platform's anonymity features empower those who might otherwise hesitate to speak up, ensuring that all voices contribute to the conversation.

• By providing real-time feedback and insights, Mentimeter empowers presenters to gauge audience understanding, tailor their content, and address concerns effectively. This creates a continuous feedback loop, fostering a more engaging and impactful experience for both presenters and participants.

A Mission-Driven Company with a Positive Impact

• Mentimeter's dedication to positive social impact is evident in its work with organizations like ASPI, which utilizes the platform to promote child well-being and prevent abuse.

• The company's core values of inclusion, smart work, a consultant mindset, humility, and fun permeate its culture, fostering a positive and supportive work environment.

• Mentimeter's commitment to sustainability, including achieving net-zero carbon emissions and promoting diversity and inclusion within its workforce, aligns with the values of socially conscious investors.

Growth Model and Viral Adoption

• The company's successful product-led growth strategy, driven by its freemium model and "viral loop," has enabled it to organically reach a vast user base and minimize customer acquisition costs. Almost all growth comes from unpaid marketing, which creates a distinct advantage over competitors that spend vast amounts of their budgets on paid acquisition.

Strong Financial Performance and Future Potential

• Founded in 2012, Mentimeter has experienced impressive growth, amassing over 726 million users by Q4 2023. This rapid adoption underscores the widespread demand for tools that enhance engagement and facilitate more inclusive communication.

• Despite investing heavily in growth, Mentimeter has maintained strong financial performance. Due to its business model, negative working capital, and investments in growth, Mentimeter's free cash flow is significantly higher than its EBIT and EBITDA. It is highly plausible that the company will reach an ARR level close to SEK 1bn within a couple of years.

• Mentimeter's commitment to innovation, particularly in integrating AI to enhance its product offerings, positions it to remain a leader in the evolving digital engagement landscape.

A Mission-Driven Company with a Positive Impact

• Mentimeter's dedication to positive social impact is evident in its work with organizations like ASPI, which utilizes the platform to promote child well-being and prevent abuse.

• The company's core values of inclusion, smart work, a consultant mindset, humility, and fun permeate its culture, fostering a positive and supportive work environment.

• Mentimeter's commitment to sustainability, including achieving net-zero carbon emissions and promoting diversity and inclusion within its workforce, aligns with the values of socially conscious investors.

Strong Management and Reasonable Pricing

• CEO Johnny Warström continues to be the largest shareholder and seems committed to building Mentimeter into a global SaaS leader over the next ten years.

• The historical valuation multiples seem to have been done at reasonable levels; this indicates that Johnny understands the dynamic of valuation and performance and the importance of giving reasonable expectations to investors.

• Future valuation will likely follow in a similar fashion to private rounds, which can create a compelling growth investment for potential buyers in an IPO and beyond.

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