A friend saw my IPO post and asked a question: what was the driving force behind so many IPOs in 2021? In my opinion, two things happened simultaneously:

• Sales explosion – Many companies, especially tech companies, saw sales explode during 2020 and 2021 because of COVID-19. Years of projected growth were realized in months in some of the more extreme examples. In many (not all) cases, sales growth leads to higher free cash flow or profit. In others, companies accelerate their reinvestment into growth initiatives, driving even more sales growth but forgoing higher profits and free cash flow. When valuation multiples are applied to exploding sales, free cash flow, or profit (investors pick the appropriate metric based on the industry), you get an explosion in what the company is worth, too.
• Multiples explosion – Many companies are valued based on a multiple—for example, price to earnings. Investors love growth, and rightfully so. Sustained sales, free cash flow, or profit growth can lead to staggering results over a long period of time once compounding is factored in. This, as well as other factors like ZIRP, makes investors comfortable paying a higher valuation multiple for a growth company. When they pay a higher multiple, that means the multiple has grown or expanded.

Growth companies usually benefit from a single tailwind, sales growth, increasing company value. The multiples used to value them would fluctuate a bit, but not much. In 2020 and 2021, companies found themselves in a rare situation. Sales and multiples were exploding simultaneously. This wasn’t a tailwind. It was twin tailwinds on steroids. The result was an explosion in what companies were worth well beyond what we’d seen before. Valuations went to the stratosphere.

Let’s use an example to quantify the difference. Suppose that a $100 million annual revenue SaaS company is growing at 40% annually and valuations are determined by a sales multiple of ~10X trailing annual revenue. There’s no pandemic. Here’s what the company is worth a year later:

• $140 million annual revenue ($100M * 1.4) * 10 (sales multiple) = $1.4 billion valuation

Now let’s factor in the pandemic. The same $100 million annual revenue SaaS company grows 100% and multiples expand to 20x annual sales because of COVID tailwinds (they peaked at 29x in 2021 per the BVP Cloud Index):

• $200 million annual revenue ($100M * 2) * 20 (sales multiple) = $4 billion valuation

In the COVID scenario, revenue is ~43% higher, the multiple is 100% higher, and valuation, as a result, is 185% higher—valuation expanded 4.3 times more than revenue. The company’s value is $2.8 billion more than it would have been without the pandemic’s effects. This demonstrates the power of twin tailwinds.

Here’s the math:

• $140M revenue * 1.43 (43% more) = $200M revenue post COVID
• $1.4B valuation * 2.85 (185% more) = $4B valuation post COVID
• 185% (post COVID valuation growth) / 43% (post-COVID revenue growth) = 4.3x

Given this situation, many founders and investors opted to take their companies public while valuations benefited from the twin tailwinds. They were able to sell some or all of their companies’ shares at valuations that were abnormally high by historical standards.