There has been a lot of IPO news lately. First and foremost was the launch of my book on How to Take a Company Public. In the weeks since publication there have been a couple of high-profile IPOs and S-1 filings in preparation for IPOs. It seems like few of those IPOs have gone very well, the freshest example is Square’s IPO. There seems to be a theme developing in the press that the stock market is no longer open to Tech IPOs. I do not think that is true, but I do think companies are making some clear mistakes in preparing for the IPO. This was a theme of my book, and I see the latest news as examples of some common IPO problems.
As of this writing, Square’s IPO is trading up on the day, but only after reducing their IPO price. The price reduction is not as bad as it seems. Yes, it means the company takes in about tens of millions of dollars less from investors, but they were always going to have raise money again at some point. Better to take the hit on valuation now and set the company up for success six months down the road when they come back to the Street for that secondary offering.
In a similar vein, last week we saw news that Fidelity had marked down the valuation for many (all?) of its position in privately held companies. Ben Thompson did a good write-up about this on his paid newsletter (and really, you should subscribe to that because he has been on fire lately). A few months ago, I warned about late-stage start-ups taking money from mutual fund companies un-accustomed to dealing with private companies. As predicted, the mutual fund companies are starting to question those valuations and probably internally they are asking themselves if they want to be in the venture capital business at all.
All this sounds bad, but I really think it is a healthy sign. It means that “the market” is making adjustments. By this point, I think we can agree that early stage valuations have gotten out of hand. Ben Evans made the point in August that the trend for start-ups to stay private longer means that a greater share of returns are going to non-public market investors. The flip side of that means they should also be taking greater risk. The public markets are the forcing function in that process.
The broad economy, and arguably the Tech Economy, is in better shape when the stock market can take the air out of the let’s-not-call-it-a-Bubble.