May 17, 2021
Work management platform Monday.com confidentially filed IPO paperwork in early May and released its F-1 on May 17. The Tel Aviv-based SaaS provider was founded in 2012 and achieved a valuation of $2.7 billion in a funding round uncovered by Bloomberg in May 2020.
The F-1 reveals impressive revenue growth since then, with total revenue for 2020 more than doubling that of 2019 to reach $161 million. At the same time, however, Monday.com disclosed exorbitant sales and marketing costs that suggest a difficult path to profitability.
Monday.com will go public via Nasdaq under the "MNDY" ticker symbol. It has yet to disclose a target valuation or date for its trading debut.
What Does Monday.com Do?
Monday.com is a work management tool. For readers fortunate enough to not know what that means, work management tools help companies track project workflows and related employee activity. The platforms are cloud-based, so employees can update the status of projects in real time, yielding a set of dashboards that (in theory) provide a bird's-eye view of everything getting accomplished within an organization.
Monday.com's platform consists of modular building blocks such as columns, widgets, views and automations. As with Slack or Teams, the Monday.com platform allows third-party software providers to make and distribute integrations. For example, the Twilio integration allows Monday.com users to send project updates out through SMS, the Mailchimp integration provides real-time newsletter statistics directly in a Monday.com card and the Salesforce integration makes it easier to track sales leads in project dashboards.
In its F-1, Monday.com emphasizes the importance of platform customization. It calls its platform a "no-code and low-code framework" that allows "customers to create their own software applications and work management tools with robust capabilities and an enjoyable user experience."
Monday.com isn't profitable, but it has posted consistent revenue growth in recent years. Between 2019 and 2020, the company more than doubled annual revenue from $78 million to $161 million. It is nearly on track to maintain that growth rate in 2021, as it reported $59 million in the first three months of the year, up nearly 85% from the same period in 2020.
Monday.com generates revenue through the SaaS model. At the end of March 2021, it had just under 128,000 customers spanning over 190 countries. Larger companies account for a disproportionate share of total revenue, and Monday.com's ability to grow that client segment has helped increase revenue in recent years: It had 76 customers with more than $50,000 in annual recurring revenue at the end of 2019, but by the end of 2020, that figure grew 247% to reach 264 such clients.
While Monday.com is headquartered in Tel Aviv, end customers located in the U.S. accounted for 48% of total revenue in 2020. This proportion has remained fairly consistent over time, even as revenues have scaled several times over.
The biggest area of concern for Monday.com — and a key reason why it isn't profitable — is exorbitant sales and marketing costs. Sales and marketing costs have exceeded revenue in every quarter reported by the company since the middle of 2019. That means even if all other costs were reduced to zero, the sales and marketing cost alone would be enough to make Monday.com unprofitable. In Q1 2021, for instance, Monday.com generated $59 million in revenue with $63 million in associated sales and marketing costs.
Overall, Monday.com posted a net loss of $92 million in 2019 and $152 million in 2020. Though this is obviously moving in the wrong direction, this change represents an improvement of net loss relative to total revenue — net loss exceeded total revenue in 2019 but was slightly below total revenue for 2020. The first three months of 2021 were even more promising on this front, as Monday.com posted a net loss of $39 million alongside total revenue of $59 million.
What Could Go Wrong
Two risk factors stand out from Monday.com's F-1: sales and marketing costs, and competition.
Interpreting the sales and marketing line item is fundamental to judging Monday.com's long-term business outlook:
- The sales and marketing cost can be generously interpreted as Monday.com still being in a growth phase, and thus placing more emphasis on acquiring new customers rather than turning a short-term profit. Once a company has adopted a certain work management tool, it becomes a pain to switch — employees are used to a certain user interface, projects are already in the system and the accounting department has already budgeted for the software spend.
- A less generous interpretation, however, would be that Monday.com has to spend a lot of money convincing clients to use its software because there isn't much differentiation between different work management tools. Even with the high operational switching costs (i.e., it being a pain to switch), there are so many viable alternatives out there that work management providers can compete on price, thus keeping margins low or negative.
In Monday.com's risks section, it details numerous risks associated with its sales and marketing costs:
- Since it is a SaaS business, Monday.com will always need to pay attention to where its customers are on the sales cycle and allocate resources accordingly. The company writes: "While many of our subscriptions provide for automatic renewal, organizations have no obligation to renew a subscription after the expiration of its term … Organizations may or may not renew their subscriptions as a result of a number of factors, including their satisfaction or dissatisfaction with our Work OS, our services, our pricing or pricing structure, the pricing or capabilities of the products and services offered by our competitors, the effects of economic conditions, decreases in the number of users at the organization, or reductions in our paying customers' spending levels."
- All of these sales efforts require salespeople, and they don't come cheap: "There is significant competition in our industry for sales personnel with the skills and technical knowledge that we require," the company writes. "Our ability to achieve revenue growth will depend, in large part, on our success in recruiting, training and retaining sufficient numbers of sales personnel to support our growth."
And adding to the pressure on sales teams, there's stiff competition in the workplace management industry.
- There are dozens of other companies that are operating primarily in this software segment. The F-1 specifically calls out some of these competitors, including Asana, Wrike, Smartsheet, Notion, Citrix, Zendesk and Freshworks.
- Monday.com also mentions companies that have products that overlap with their Work OS offering, including Workday and Atlassian (maker of Trello and Jira).
- The company writes that it "will likely face increased competition from a number of Work OS providers."
- Monday.com identifies its "principal competitive factor" as "open and modular infrastructure, leading in flexibility and adaptability, and our ability to scale our vertical and horizontal offerings as we continue to rapidly build end-to-end Product Solutions."
- Potential investors must ask themselves: How replicable is that competitive factor? And what can Monday.com do to assure that it remains ahead of others on that front?
Add to that the ever-present threat of Microsoft or Google deciding to grow their presence in the work management space.
- For Microsoft and Google, work management would only be one part of their broader enterprise productivity suite portfolio. They therefore wouldn't necessarily need to turn a profit on work management as a standalone platform revenue stream.
- Monday.com writes: "Some of our larger competitors have substantially broader product offerings and leverage their relationships based on other products or incorporate functionality into existing products to gain business in a manner that discourages users from purchasing our Work OS, including through selling at zero or negative margins, product bundling, or closed technology platforms."
- The company hints at this being an anticompetitive threat, as it writes: "Even if the features of our Work OS are superior compared to that of our competitors, potential customers may not purchase our offerings."
Who Gets Rich?
Monday.com disclosed the following ownership stakes, as they stood prior to any offering:
- Insight Partners owned a 42.7% stake.
- Monday.com co-founder and CEO Roy Mann owned a 15.3% stake.
- Sonnipe Limited owned a 12.4% stake.
- Stripes owned a 7.8% stake.
What People Are Saying
- "Even though the global economy is in a major crisis due to the pandemic, many tech companies have seen their stock prices surge over recent months. Israeli companies have been among those to take advantage of this, with JFrog going public at a valuation of $4 billion that almost doubled post-IPO. With this in mind, Monday.com may ultimately decide to target a higher valuation in the region of $5-6 billion." —Golan Hazani wrote in October 2020.
- "We believe that we are on the cusp of a massive change in work software. If the last 10 years were defined by the SaaS cloud, then the next 10 years will be focused on giving people the power to create software that fits their needs." — Monday.com co-founders and co-CEOs Roy Mann and Eran Zinman wrote in the F-1.