ANALYSIS:
A year that began with high hopes for a tech IPO revival has crashed into a wall of reality following sputtering public offerings from Snap and Blue Apron.
The catastrophe that is Blue Apron was driven home in recent days thanks to multiple shareholder lawsuits claiming management misled investors. Less than two months after its initial public offering, Blue Apron’s stock has been hovering at around half of its IPO price.
Snap, with the biggest tech IPO in years, has fallen below its initial price of $ 17 per share over concerns that Facebook is suffocating its growth. This hasn’t been helped by two earnings reports confirming investors’ fears that management may not have any good plan to get the company growing fast enough to justify its valuation. The stock has regained some lost ground in recent days, but it has remained under its IPO price since mid-July.
While it would be overstating things to say Snap and Blue Apron have killed the tech IPO market, they’ve certainly put a damper on it. Just two months ago, following the Snap IPO, Quartz crowed: “The tech IPO window is wide open, and Silicon Valley is rushing to cash in.”
That euphoria proved short-lived. According to Renaissance Capital, there have been 16 tech IPOs so far this year. The total for 2017 could still conceivably top the 29 in 2016. But that’s not saying much, because 2016 was a historically low moment for tech IPOs, according to Kathleen Smith, a principal at Renaissance Capital and manager of IPO ETFs.
One bit of mildly good news: The 16 recent IPOs are trading up 11 percent, despite what Smith called the drag from “those busted IPOs.”
“It’s not dead,” Smith said of the tech IPO market. And there have been some notable bright spots, including the recent Redfin IPO, which closed Wednesday at $ 25.75, well above its $ 15 IPO price.
Still, the disappointing Snap and Blue Apron IPOs are going to make life difficult for the herd of unicorns still waiting desperately to find an exit of some kind. Venture capitalists had been hoping that the IPO floodgates might at least crack open a bit this year to allow some of those startups to finally produce a return of some kind.
“They have a negative impact, there is no doubt,” Smith said of Blue Apron and Snap. “Especially for all those unicorns that are lined up…When a stock breaks below the IPO price, that puts fears into the hearts of investors.”
As it stands, the pressure is continuing to mount with no obvious release valve in sight. The Wall Street Journal counts 167 private companies valued at $ 1 billion or more, a number that has climbed by 10 since the start of the year.
This dynamic — a limp IPO market coupled with private valuations that continue to rise — points to a tension Smith thinks is nearing the breaking point.
Indeed, to address the unicorn issue, Social Capital Hedosophia Holdings has filed for an IPO to raise $ 500 million to create a holding company. That shell company would then acquire unicorns facing valuation issues that can’t figure out a path to an IPO.
Smith said this points to a problem with unicorns rather then the IPO market itself. A startup with a reasonable valuation may still find a way to an IPO, if they have strong balance sheets and a clear path to growth and profitability. The problem is that many unicorns don’t fit this criteria.
So Smith expects to see a reckoning later this year, as valuations are forced down and startups are sold below their investment value — something that could ricochet back to slow overall venture capital investments.
“There’s still a divide between the funding going in and the ability to exit,” Smith said. “It’s gummed up.”
