Tech Bubble And Wild Unicorns

There are always two sides to a story.  On one hand, we have the tech bubble camp and on the other we have the euphoric can't ever stop camp.  One has to give at some point, and logic says the bubble is real and ready to burst.

Last year, we saw a number of tech IPOs that had enormous valuations in their Wall Street debut.  With all the cash being thrown at these companies, we began to see a resurgence about another Silicon Valley bubble.

According to data analyzed by Reuters: Five of the 12 U.S.-based tech companies that went public this year, or 42 percent, priced their shares at a valuation below or nearly the same as their private market value, compared to 24 percent of the 29 that went public in 2014.

We just saw a major hit to the IPO market as Two of the biggest initial public offerings to hit Wall Street this year did not fair well.

U.S. payment processing company First Data Corp, controlled by private equity firm KKR & Co LP, raised $2.56 billion in its stock market debut, a steep drop from the $3.7 billion originally targeted. Its shares ended down 1.6 percent on its debut.

Albertsons plans to raise almost $2 billion dollars this month in its initial public offering changed abruptly following Walmart’s disappointing earnings announcement on October 14th and tepid investor interest in the $23-25 share price proposed by Albertsons management.

The aftermath was simple they would not get their $23 per share and even worse Albertsons seemed to be pricing in under $20. The company said it is considering releasing updated financials to improve investor comfort.  Investors cooled on Albertsons after Wal-Mart sent a shock through the retail space, a person familiar with the matter said. Institutional investors bidding for shares expressed interest in a price point much lower than the mid-$20s.

Some are already pushing back plans: Neiman Marcus recently decided to hold off on its IPO, after filing for the sale in August, in the wake of market volatility, Reuters reported.

One more big deal that probably should have waited was Ferrari, which was poised to raise about $900 million.  After almost two weeks that shares are just holding on.

These are the things that make or break the IPO market, and it appears we have broken down here.  We may see the remainder of what has already been a down year for IPO's to continue to be a lost cause.

Much of this problem stems from the increase in private valuations.  Many of the companies raising money privately are pricing themselves out of the public market.  A recent example is Pure Storage, whose IPO earlier this month gave the data storage company a $3.1 billion market cap that almost matched its valuation in the private market. The shift in the investing climate comes as payments company Square filed this week for its own IPO later this year, becoming one of the most prominent of the so-called "unicorns," or private companies valued at more than $1 billion, to try to go public.

Among the companies that saw their values grow in an IPO in 2014, the median increase from their value in the private market was 61 percent. Some companies saw increases of three-, four- and even five-fold. So far this year, that gain is 32 percent.  This is a huge drop and has a massive impact on the IPO market.

The difference affects the pre-IPO market, compelling many companies to delay or completely remove their IPO plans.  This will have a significant effect on late-stage investors as they will not be able to recoup their investments as fast and will begin to slow down funding in general.

With the amount of risk being taken the returns are not close to being worth it.  For those who invested in rounds with a potential upside of 40 percent are now likely to see a much smaller return around 8-10 percent.  This low return is not better than the S&P 500.  So why take the risk?  That is exactly the question being asked and making investment more difficult.

There is no question that delays in going public can be attributed to the increase in funding from late stage investors.  This allows for private companies to stay private longer but also increased the valuations at a rate that the public market can not sustain.  Venture firms will also need to keep their Unicorns flush with cash and as we have stated before this will take a toll on new companies seeking investments.

UNICORNS

There has been lots of talk about many of the top unicorns going public.  One of the ways to determine this is looking at how they are operating and when a company establishes a stable business model, rapidly expands its user base, and raises massive amounts in seed funding, talk of an initial public offering is inevitable.

When those same companies hire a CFO, it's usually a strong sign that an IPO or some other type of exit is on the horizon.  Some companies have openly admitted that they are eyeing an IPO while others have outright denied it.  Some of these companies hired their very first CFO, while others replaced their former CFO with an expert in acquisitions, fundraising, or initial public offerings

Airbnb

Airbnb hired Blackstone Group LP Chief Financial Officer Laurence Tosi as its finance head in July. With a $25.5 billion valuation, it's easy to imagine the "next level" being an IPO.

Spotify

In June, Spotify hired former Netflix finance chief Barry McCarthy as its first CFO. McCarthy was an instrumental figure in Netflix's IPO in 2002, and he remained with the streaming service until 2010. Spotify raised $526 million in a Series G funding round in June for a valuation of $1.1 billion.

Snapchat

In August, Snapchat announced the hiring of its first CFO. The company chose former Mattel executive Drew Vollero as its VP of finance and acting CFO. Vollero doesn't have much IPO experience, but Snapchat CEO Evan Spiegel told Re/code at its annual conference, "We need to IPO, we have a plan to do that."

Dropbox

In February, Dropbox announced the hiring of former Motorola finance chief Vanessa Wittman.

Wittman was chosen to replace Sujay Jaswa, a four-year veteran at the company.  Wittman, conversely, served as CFO of publicly traded consultancy Marsh & McLennan as well as senior roles at Microsoft and Morgan Stanley. Dropbox competitor Box went public in early 2014, with an IPO price of $14 and a market valuation of $1.7 billion.

WeWork

Arthur Minson Jr. was named as WeWork's CFO in June. He previously served as the finance chief at Time Warner Cable.  His appointment arrives at an exciting time for WeWork. The company recently raised $355 million in a new round of funding co-led by T. Rowe Price Associates Inc., Goldman Sachs Group, and clients of Wellington Management.  The Wall Street Journal reported in December 2014 that WeWork has its sights set on an IPO in the next two to three years.

Those are just a handful of unicorns who have taken the next step in the eevolutionof an IPO.  The issue is will there be any public money much less enthusiasm.  Some "unicorn" tech companies that were expected to go public this year have put those plans off. Among them are online lending company Prosper Marketplace and data storage company Nutanix.

"We take the idea of going public seriously," said CEO Aaron Vermut, "but there are other ways to achieve your goals while staying private longer." One of Prosper's public counterparts, online business lender OnDeck, saw its valuation fall from $1.3 billion during its IPO to about $624 million, according to Thomson Reuters data, likely contributing to Prosper's decision, bankers told Reuters.

Nutanix is also in a holding pattern, bankers told Reuters, although Nutanix investor Ravi Mhatre of Lightspeed Venture Partners said it "is fully capable of being a public company and operating as a public company." Neither company has filed publicly for an IPO.

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