Don’t be so afraid of a down round. That may be the message Silicon Valley takes from the initial public offering of Dropbox on March 22. In the weeks before the cloud-storage company’s stock market debut, it first targeted a price of $18 a share on the high end, giving the company a market valuation of $7.1bn. That would have been about a third lower than the $10bn it was valued at in its previous round of private fundraising—earning the IPO the “down round” stigma.
Things worked out better. Dropbox ultimately sold the stock for $21 a share, pulling its valuation past $8bn. And by the end of its first trading day, it rose an additional 36%, to a total value of $11.1bn. On the one hand, there’s a chance Dropbox could have raised more money, since investors were willing to value the company a good bit higher than where the shares sold.
But it was a sign that companies shouldn’t see the risk of a valuation haircut as an absolute obstacle to going public. In recent years, concerns about not living up to lofty private valuations slowed the IPO pipeline. Grumbles about the IPO market being broken have grown louder as tech giants such as Uber Technologies and Airbnb wait to go public. Jay Clayton, head of the US Securities and Exchange Commission, and New York Stock Exchange president Tom Farley have both said the listing process dissuades companies from going public.
But IPOs have been making a quiet comeback. More than $12bn in stock has been sold in new US listings this year, up a third from the same period in 2017. January’s $8bn was the biggest month since Alibaba Group Holding raised $25bn in its September 2014 IPO. Maybe public equities aren’t passé, after all. A robust IPO market needs two things: favourable stock market conditions and companies that want to sell shares. Even with a record one-day volatility surge in early February and some more bumps in March, the stock market has been stable enough to get deals done. Meanwhile, investors are still hungry for investment opportunities, according to Michael Millman, JPMorgan Chase & Co’s co-head of equity capital markets Americas and global head of technology banking. That leaves the companies. The bread and butter of the IPO market still isn’t the Dropboxes of the world. Since 2009 the average offering size is about $250mn, or a market value of about $1.7bn. That’s a fraction of the valuations for some of the biggest startups waiting in the wings. Uber sits at a $69bn value, Airbnb at $31bn, and WeWork Cos. at $20bn. All founded eight or more years ago, those companies have grown up in a funding world fundamentally different from their predecessors’—a world awash with cash for private companies.
The startups have been able to go through their growing pains without the scrutiny of public investors, unlike Apple, Amazon, and Google (now Alphabet), whose IPOs all came within six years of their founding. Last year saw $84bn in venture capital investment, the most since the dot-com era, according to PitchBook-NVCA Venture Monitor. Masayoshi Son’s conglomerate and investment vehicle SoftBank Group Corp, with its nearly $100bn Vision Fund, has taken stakes in private companies at sizes that dwarf all but the biggest IPOs. It was the biggest buyer of a $9.3bn sale of Uber stock; $4.4bn went toward WeWork.
The private funding world has become crowded with some investors that usually play in the public markets. Mutual funds, hedge funds, sovereign wealth funds, and even private equity firms (which typically buy public companies and make them private again) have sought out these potentially high-growth investments because years of low interest rates and muted economic growth have limited returns elsewhere.
“As more and more late-stage capital appears, the line of when companies go from private to public will keep shifting,” saysNeeraj Agrawal, general partner at tech-focused investment firm Battery Ventures. While money has been plentiful, there have been unintended consequences to all this investment. Many private market valuations became inflated, especially in years such as 2014, when Dropbox last raised funds privately, through 2016, says Agrawal.
Not all of these richly priced companies are ready for prime time. “Hypercompetition has made it so that the majority of venture capital’s biggest fear is missing out on the next investment,” Bill Gurley of Benchmark, which has invested privately in the likes of Uber, WeWork, and Snap, said in an interview with Bloomberg TV. “So they’re afraid to have a reputation as someone who asks too many questions or pushes too hard,” he said. “I think it’s led to a situation where there’s not a lot of stewardship for discipline and results.” Enter the down round. It’s a bad look that can dampen employee morale and prompt a deluge of negative press coverage.
Those immersed in the IPO industry point to payment-tech company Square’s 2015 offering as a deal that really stoked valuation concerns. The company, run by Twitter co-founder Jack Dorsey, listed at a $2.9bn public market value, a far cry from the $6bn valuation in its last private funding round. Two of last year’s buzziest deals have disappointed post-IPO. Disappearing-photo app-maker Snap listed with a 44% pop in its debut but went on to let down investors with slowing user growth and an app redesign, leaving it to flirt with its $20bn IPO market value, just above its $18bn valuation in its last private round.
Meal-kit delivery company Blue Apron Holdings is trading at just $354mn, less than a fifth of its 2015 private value, after fears of increasing competition, the resignation of its founder and chief executive officer, and disappointing earnings have dragged on the stock. Still, there are signs that more large startups are willing to face the scrutiny.
Uber’s new CEO, Dara Khosrowshahi, the ex-Expedia chief who took over after its founder and CEO was ousted, has said he wants to take Uber public as early as next year. Nine-year-old Pinterest added its first chief operating officer, aiming to scale its advertising business internationally—a move seen as a step toward taking the $12bn private company public.
There’s also the mammoth in the room outside of the tech industry. The Saudi Arabian government is hoping to raise a record $100bn selling shares in its oil company, Saudi Aramco, though the deal’s timing has become unclear. In April all eyes will be on music streaming service Spotify Technology.
It’s skipping the marketing roadshow and valuation-setting process typical of an IPO in favour of a direct listing. Its opening public value will be decided on listing day based on how many shares existing shareholders want to sell, who wants to buy stock, and the price they agree upon. Unlike most IPOs, the move won’t raise capital for the company but will give existing shareholders a chance to cash out.
Dropbox signage is displayed on a screen during the company’s initial public offering at the Nasdaq MarketSite in New York, on Friday, March 23. Dropbox ultimately sold the stock for $21 a share in the IPO, pulling its valuation past $8bn. And by the end of its first trading day, it rose an additional 36%, to a total value of $11.1bn.
