Understanding Activation Rates and the Role of IPO Pops in Company Valuation

Understanding Activation Rates and the Role of IPO Pops in Company Valuation

Introduction:
Activation rates and IPO pops are two distinct concepts that play significant roles in different domains. Activation rates are a metric used to measure the effectiveness of a product's onboarding process, while IPO pops reflect the market's response to a company going public. Despite their differences, these two topics share commonalities in terms of predictive value and the influence of external factors. In this article, we will explore the nuances of activation rates and IPO pops, highlighting the importance of understanding both in their respective contexts.

Activation Rates: A Measure of User Engagement
Activation rates serve as a crucial metric for growth teams to evaluate user engagement and predict long-term value delivery. To calculate activation rates, divide the number of users who hit a specific activation milestone by the total number of users who completed the signup flow. The activation milestone should be carefully chosen to correlate strongly with long-term retention.

For example, Facebook considers a user activated when they have made at least seven friends within ten days. Twitter counts a user as activated when they follow thirty people, and Dropbox defines activation as uploading at least one file. These milestones are indicative of users experiencing the core value of the product, leading to a higher likelihood of long-term retention.

The average activation rate for SaaS products is 36%, with a median of 30%. However, it is important to note that simply completing the signup flow is unlikely to demonstrate the value of the product adequately. Therefore, it is crucial to select an activation milestone early in the user's journey that strongly correlates with long-term retention.

IPO Pops: Market Response to Public Listings
When a company goes public through an initial public offering (IPO), the market's response to its stock price is often referred to as the IPO pop. This pop represents the percentage increase or decrease in a company's stock price on its first day of trading.

In 2020, only 25% of companies ended their first trading day with prices lower than their IPO price. Conversely, more than 25% of companies experienced a pop of over 50%, indicating a significant increase in their stock value. The median IPO pop for the 61 companies that went public in the US in 2020 was 20%.

The discrepancy between the IPO price and the market valuation at the end of the first trading day highlights the influence of institutional investors. These investors aim to acquire stocks at the lowest possible price to maximize their returns on investment. As a result, companies often raise less capital through their IPOs than they could have if their stocks were priced based on market valuation.

Connecting the Dots: Predictive Value and External Factors
Both activation rates and IPO pops possess predictive value and are influenced by external factors. Activation rates predict long-term value delivery to users, indicating the likelihood of retention and monetization. Similarly, IPO pops reflect market sentiment and investors' perception of a company's potential.

In the context of activation rates, the chosen activation milestone should be a leading indicator of users sticking around and becoming customers. This aligns with the goal of IPO pops, where institutional investors aim to acquire stocks at a low price and gain returns on their investments. The predictive nature of both activation rates and IPO pops underscores their significance in evaluating user engagement and company valuations.

Actionable Advice for Growth Teams and Investors:

1. For growth teams: Choose an activation milestone that aligns with your product's core value proposition and demonstrates the potential for long-term user retention. Continuously analyze and optimize your onboarding process to improve activation rates and drive user engagement.

2. For investors: Evaluate IPO pops as indicators of market sentiment and the potential for future growth. Consider the discrepancy between IPO prices and market valuations when assessing investment opportunities. Conduct thorough research on a company's fundamentals and growth prospects to make informed investment decisions.

3. For companies going public: Collaborate closely with underwriters and institutional investors to ensure a fair IPO pricing that reflects the market's valuation of your company. Communicate your growth prospects and long-term vision to investors to attract support and maximize capital raised.

Conclusion:
Activation rates and IPO pops play distinct yet interconnected roles in evaluating user engagement and company valuations. Understanding the predictive value of activation rates and the influence of IPO pops can guide growth teams in optimizing their onboarding processes and assist investors in making informed decisions. By considering the actionable advice provided, growth teams can drive user engagement, and investors can navigate the dynamic landscape of IPOs with greater confidence.