Unicorn Sighting
In 2013, I was in Seattle making a, ahem, modest salary, single, traveling 25 weeks a year, and bored. Then I got a job offer from a hot tech startup in New York City with a double-digit pay bump. It was a tough sell.
At the time, AppNexus was a platform aimed at disrupting the duopoly of the Google/Facebook stranglehold on the digital advertising industry. It had a hip office in the heart of the Flatiron district; it had a fully built finance team; it had unfettered potential. The universe smiled on me.
Five years later, after a strenuous confidential S-1 filing, AT&T ultimately acquired AppNexus for $1.7B. This was a real life unicorn.
I had garnered multiple rounds of stock options at varying strike prices. All things considered, I walked away from the acquisition with an equity package that could only realistically be described as a mediocre signing bonus.
It was mostly underwhelming. But it was something.
Valuation Station
Unicorns were once considered rare creatures. Now they’re as common as… a regular horse? The metaphor works:
The issue with private valuations is that they’re more an art than a science. Given the absence of arms-length public transactions, the basis for deriving private firm value relies on some actual data - historical financials, capital structure - and a handful of estimates:
Public company comparables
Business forecast
Industry outlook
Estimated time to exit
Probability of exit scenarios
Volatility
If we’ve learned anything in 2019, it’s that private valuations are often grossly overestimated and unreliable. At one point, Uber was privately valued at over $100B; the public market has valued it at roughly $50B. Before it scrapped its IPO, WeWork was privately valued as high as $47B; it’s currently valued somewhere around $8B. Most likely, had SoftBank not bailed them out to save face, WeWork would actually be worth closer to zero.
Someone should get these unicorns some Head & Shoulders cuz their valuations are flaky AF.
Under the Spotlight
There seems to be a general assumption that an IPO represents the finish line for private companies. It’s the ultimate successful “exit.” You ring the bell, pop some champagne, and millions of dollars just roll into your bank account.
The truth is an IPO only marks the beginning of a highly scrutinized life in the public market. There’s a laundry list of additional demands and standards, not to mention increased responsibility to deliver firm value to a broader base of public stakeholders. It can get awfully hot under the spotlight.
Newly minted public companies in 2019 have not fared so well:
Sure, these trend lines are rather short-term and these companies may very well turn it around. But when all of the top unicorn IPOs follow the same (downward) trend line, something’s going on.
Case in point: Peloton was the only recent IPO that was holding its initial valuation. But last month, Peloton released an ad that was derided as sexist, classist, and bizarre. The market promptly responded with a 9% decline in stock price. In one day, Peloton lost nearly $1B in firm value simply because they aired a weird ad and people didn’t like it.
This public scrutiny has changed the mentality of prospective IPOs. Because of the pressure, and the ability to raise cheap capital at a rate never before seen in history, private companies are staying private longer. Before Amazon’s IPO in 1997, the Seattle giant raised less than $10M in private funding. SoftBank has already sank more than $13B into WeWork.
Ask yourself: If you could use private funds to build a $1B global company, while ignoring all the compliance and regulatory requirements of a public company, why would you ever IPO? The market has already answered:
They say the first one through the wall always gets shot. Well, Uber and WeWork stained the rug for future IPOs.
Because of a couple bad players, and a sensationalized VC environment that’s gotten high on its own supply, unicorns with inflated valuations and no sensible path to profitability now seem more like a fantasy, not reality (oddly, that metaphor seems appropriate).
My prediction? Expect much more scrutiny and turbulence in the public market for those brave souls who decide to IPO in 2020. The public market has been stung; but it won’t be embarrassed again. Live long and prosper.
Feeling very cool,
A