There may never be a perfect time to talk about the prospects of Tech IPOs, but these days are particularly complex for tech companies to go public. It’s a year that both Snap and Blue Apron would like to forget, after losing 38% and 24% of their IPO share price, respectively, but they are not the only ones. Almost every tech company that chose to go public in New York during the last 12 months is now traded below its share price at the IPO: Apptio (-22.4%), Cloudera (-8.3%), Okta (-1.3%), and Yext (-1.2%) are just several examples. Only one tech IPO turned out to be a success story, the adtech firm Trade Desk that went up by almost 72% and is now traded at app. $2.1B. Also worth mentioning is, application network company, Mulesoft that has gained some positive momentum (up 4% from its IPO share price) in the public market.
Therefore, it is no surprise that unicorns such as Dropbox, Spotify, Airbnb and even Uber have postponed their plans to go public. Other unicorns, such as WeWork, Lyft, Pinterest, and Houzz, walked the road most taken, and recently turned to the private investment market to raise hundreds of millions of dollars at skyrocketing valuations. Will they ever go public? Does staying private forever pay off? Here are five reasons why you should take your company public, and five reasons not to do so and keep it hidden under the obscurity of the private market.
5 Reasons to Go Public
1. Because it is a great way to raise money and sense of credibility in the market: When the private investment market cools off, the public market as an arena to raise funding becomes even more relevant. In fact, the stock market was created in the first place as an arena to give companies exposure to financing from the general public. To date, it is a powerful vehicle to raise large amounts of money and to expand the business when profits cannot support the expansion or the speed in which the company wishes to expand. A public company gains a greater deal of “legitimacy” and also a greater exposure profile, as the company is on the radar of analysts and reporters. However, in order to raise money in the public market, you need to convince the public market in your ability to consistently grow on a steady basis and show a clear track to profitability.
2. Because investors and employees seek liquidity: Since it is customary to grant shares to employees in tech companies, an IPO is a necessary step to release pressure from employees as well as investors (especially early stage), who hold shares and options, to provide liquidity. Google and Facebook’s IPOs produced thousands of millionaires within a few months after going public. Facebook even created eight billionaires resulting from its IPO, including Dustin Moskovitz, Eduardo Saverin, and Sheryl Sandberg. However, you need to take into consideration, that not every public company is Google or Facebook, so when the stocks’ price goes below its price at the IPO, and many times, soon after the IPO, the stock price declines maybe even dramatically, which does limit the financial benefit from such liquidity.
3. Because eventually, your investors will take you there: Uber has once been the prototype of the unicorn that stays private forever. Reaching almost a $70B valuation at the peak, it was an example of a tech giant that disregards the public market in its way to take over the world, leaving behind public automotive companies such as Ford, General Motors, and Tesla, who are traded at a lower valuation. Now, Uber’s investors are trying hard to turn the ship around and aim to an IPO. Uber’s board has taken corrective steps to clean up its corporate culture, showing the CEO Travis Kalanick the door. Also, the board has put some pressure on the company to settle the lawsuit from Waymo, and reduce expenses. Losses went down in the first quarter of the year from $991 million in the last quarter of 2016, to $708 million. An IPO is still not yet imminent, but the investors will seek a new CEO that will make that happen.
4. Because you may have a healthy monopoly in your hands: If your company enjoys being the first and the only player in the market, and it can set its prices, you have, congratulations – a monopoly. Being a monopoly is a privilege that so few in the tech market are enjoying, so feel lucky if you’re one of them. You don’t have to be profitable in order to go public because you enjoy a high level of growth and can commercialize your user base quickly. Eventually, even monopolies can’t ignore the stock market, and are better off using it to their advantage as it helps them grow even faster and ease investors’ and employees’ pressure to create liquidity, as was the case with the monopolies we know today: Google, Facebook, Microsoft, Amazon and Alibaba. If you want to assess the level of competition around you, ask Nigel, the digital company analyst, designed by Zirra. Zirra is a company that develops A.I. and NLP-based technology for company and market analysis that we, at Thelephant.io, work with to provide analysis on private companies listed on our trading arena. Asking Nigel about the competition will result in a list of companies rated from zero to one. The number indicates how closely those companies are related to each other on the multidimensional semantic model. Scores of above 0.5 are almost always direct competitors, while a score of 0.3-0.5 tells about some relationship, although it is often mild competition.
5. Attracting talents without paying high in stock and minimizing dilution to shareholders: In order to attract new high-level employees and talents, public companies with cash at hand can offer less stock options as an incentive since they since they already have liquidity for these options and in addition they can offer a more cash based compensation package, thus limiting the number of options to be granted, and the dilution to existing shareholders. In a private company, where there is a liquidity risk, the number of options that need to be granted is higher, which leads to greater dilution to the existing shareholders.
5 Reasons to Stay Private
1. As a public company, your company’s valuation depends too much on meeting your projections, the market’s mood, and not always on your own actions: Following Snap and Blue Apron’s crash on the stock market in the recent weeks, companies such as Airbnb, Dropbox, and even Uber are now considering to postpone their IPO due to the negative sentiment in the IPO market. Dick Costolo, Twitter’s former CEO, recently said in an interview that he expects two more years of declining valuations at the IPO stage. Moreover, he said that “lots of money in the private market chases few deals”, and driving up prices. It also very much depends on timing; Blue Apron’s IPO could have seen better days had Amazon not chosen to acquire Whole Foods at the same time. If, as a public company you do not meet your projections you are “punished” immediately as investors and shareholders follow your reports. When you are a private company you may have time to correct this before the public or even your own shareholders are exposed to the news. Once you have a negative sentiment in your stock price and investors are “dumping” your shares, it is difficult to turn this in the positive direction.
2. Because your company is far from being profitable, suffering from fierce competition and is seeking rapid expansion: Most of the startups, let’s face it, are suffering fierce competition and are raising large amounts of money to acquire users and customers to maintain growth. Snap and Blue Apron carried their IPO counting on growing significantly within a year, but failed to fulfil the same level of growth afterwards. In fact, there were a few signs showing a slow-down in their growth at the time of IPO. Blue Apron had suffered from a sharp increase in the cost of acquiring new customers in 2016, and at the same time suffered from a sharp decline in the life time value of each customer that spends less and less on Blue Apron’s meal kits. At the same time, the company suffered from a fierce competition from dozens of meal kit delivery companies such as Hello Fresh and Plated. In other words, if you’re not a Peter Thiel-style technology monopoly such as Facebook or Google in their first years, growing fast alone in a blue ocean of opportunities, think twice before going public.
3. Because you can raise money in ICO: Some private companies are taking the idea of Initial Coin Offering (ICO) seriously as a way to create liquidity, yet staying private. Take social company Kik as an example. Kik would like to sell 10% of its currency (called Kin) to investors and 20% on a yearly basis to developers who help build up Kik currency’s economy. The ICO’s success depends on the extent to which the currency becomes self-sustaining, so that the stake in the hands of Kik being more valuable than the potential exit valuation of the company. But in order for Kik to get a high valuation, Kin’s market cap should be as high as billions of dollars. The chances of Kin to be valued among the highest currencies such as Litecoin ($2.5B at the time of writing), Ripple ($8.3B), Ethereum ($20.9B) or Bitcoin ($40B) are not necessarily high. Cryptography has its own challenges such as high volatility and low reliability.
4. Investor relations are a hassle: that diverts you from managing the company – to managing public investors: CEOs are requested to spend time with their investors, many of them request face time. Staying private, means less investors and more autonomy in the company’s management.
5. Liquidity in the secondary market: For private companies’ shareholders, it is becoming increasingly accessible to achieve liquidity via the secondary market. While VCs and investors sell their shares to secondary funds, entrepreneurs and employees are using more and more the secondary market to sell their stocks in pre-IPO private tech companies. Recently, this process was simplified and more accessible by the rise of peer-to-peer platforms. We at Thelephant.io directly connect shareholders of tech companies with accredited investors, without the need to go through corporate management. We allow more shareholders (mainly employees, former employees and early stage investors) to enjoy an earlier exit and will help democratize the tech industry, allowing more people to enjoy the wealth created by it.
The stock market is a great mechanism to raise money, but the success of an IPO depends on many factors some of which may not be controlled by the company and may not even be related to the company. A negative market sentiment, a lack of analysts that comprehend technological trends and disruptions, and an excessive need for investor relations, can turn the IPO into a nightmare. At the same time, an abundance of private equity and VC funds hungry for investments can cause growth companies to postpone their IPO even further.
Here is a short list of giants that have never been to an IPO, yet they manage their business successfully: Koch Industries ($100B), PWC ($35.4B), Mars ($33B), Deloitte ($35.2B), E&Y ($28.7B), Fidelity ($15.9B), Toys`R`Us ($11.8B).
Therefore, each company should consider carefully what the correct path is for itself, based on its specific needs and situation, and to re-consider this on a regular basis, as market sentiment is flexible. While the timing may not be right now, that is not to say that it will not be so soon after.
Written by Thelephant with the assistance of Zirra Analysts
- How New Secondary Markets Are Helping Pre-IPO Shareholders Cash Out | Posted on August 01, 2017
- Lessons for Pre-IPO companies to be learnt from Snap’s IPO | Posted on July 25, 2017
- Employees of Mature Pre-IPO European Companies are Invited to Liquidize Their Private High-tech Shares | Posted on March 31, 2016