March 15, 2017

No better options

by Breakingviews

Snap’s $3.4 billion float opened the gates to a series of initial public offerings by unicorns and smaller beasts alike. All are expanding, yet losing money. These highly valued private startups need more cash, and investors are desperate for growth. Both sides have likely decided a marriage of convenience, if not of love, is the best they can hope for.

The Snap deal showed public investors demand little of a company with potential. Its shares don’t have voting rights. The company was valued at a premium to Facebook’s valuation when it went public despite Snap’s burning about $1 billion over the last two years and rapidly slowing user growth.

Others have taken note. Easy money allowed private companies to raise funds at high prices in 2014 and 2015. Over 60 private firms surpassed the $1 billion valuation threshold – making them unicorns in Silicon Valley parlance – in those two years, according to CB Insights. That spigot has turned tighter. Only a dozen joined the club last year, and established firms found it harder to raise new funds. Meanwhile, rising markets since the election are raising public appetite for riskier assets.

Several are taking the public-market plunge. MuleSoft, a producer of software that allows companies to connect different applications, is the best of the lot. Underwriters estimate it is worth about $2 billion. The company lost $59 million last year. It has about $100 million in the bank, and much of its costs are related to equity compensation. But it could use more cash. Okta and Yext can’t wait. The cloud-based security company and the smaller firm which makes sure clients’ information appears correctly on third-party sites, respectively, are suffering accelerating losses.

While public investors now lack self-esteem, tech firms aren’t filled with joy either. Happiness is relative, and they look wistfully at the rapidly rising private valuations of a few years ago. Snap’s valuation per share when it went public wasn’t much higher than its previous round. Alteryx, which makes data-analytic software, has tentatively priced itself at around $800 million, close to where it was valued privately at two years ago.

Snap’s fall since its IPO – it trades nearly 15 percent below its first-day closing price – may make it even harder to avoid a down round. It’s over to public investors to roll over or resist. Past performance indicates they will choose the former.

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