The IPO Standoff

The NY Times suggests that the reason there have been no tech IPOs in the past quarter is that the tech sector is having a “standoff” with the public markets.

The logic goes like this:

  • many of the tech IPOs that happened in 2015 are now underwater so public market investors are tired of losing money on IPOs
  • the prevailing valuations that exist in the private markets are higher than comparable companies in the public markets
  • it is relatively straightforward to raise capital in the private markets using convertible debt or other structures that are driven off the eventual IPO price

So why rush to the public markets now when you would be forced to take a lower valuation than you could get in the private markets and maybe a lower valuation than you got in your last round?

Eventually someone is going to blink. If the public markets wait long enough many of these IPO price driven structures will force the companies that issued them to go public and “price their stock.” You can only kick the can down the road for long enough.

I do think this “standoff” could go on for a while longer, maybe for most or all of this year. Unless a courageous company or two decides to go public regardless of price, gets the capital and liquid stock that comes with the IPO, and shows that you can in fact do well as a public company.

I am hoping for that latter scenario to play out. I think its better for everyone than the standoff we are having now.


Comments (Archived):

  1. Heart&Cart

    I was wondering about this…

  2. LE

    Courage? Pioneers get shot in the back.

  3. William Mougayar

    If that’s the case, would Slack withstand at least $3.8B in the public market?That would be a good test, given that the transaction is fresh.

  4. Ana Milicevic

    Rather than a straight-up IPO I in turn wonder if we’ll see more examples of companies Kickstarting their way to funds the way that Tesla just did (which I think can apply to both public and private companies equally).

  5. dan_malven

    I think part of the reason for raising money privately is liquidity too. Early investors and executives can sell into a private round much easier than they can into an IPO.

    1. pointsnfigures

      In an IPO, you can tender your shares. Depending on demand, you can get out of your entire position

  6. Tom Labus

    Will private investors/VCs allow these cos to take a valuation haircut and less money?

  7. Shalabh

    I think as far as money is available to the best companies (real IPO candidates) in the private market, this standoff will exist.

  8. David Lee

    check out this article by my friend lise buyer who was a key member of google’s investor relations team and my ‘go to person’ on this topic:http://classvgroup.blogspot

    1. fredwilson

      i agree with Lise. if you bought the 2015 tech IPO cohort at the start of the year, you’d be doing pretty well right now

  9. Salt Shaker

    Reality checks are often painful, and many of the 150+ companies w/ valuations in excess of $1B+ want to continue to hide under the covers. Can’t say I blame them or question a decline in investor confidence. There are very few North Carolina’s and Villanova’s out there, and a helluva lot more Florida Gold Coast’s and Hampton U’s.

    1. Jim Peterson

      Reality is painful. The reason most can’t go public is simple: they are not worth even close to their private market value.

    2. BillMcNeely

      But we all live for the Syracuse Juice!

  10. Twain Twain

    Is there data about which months were the most popular for IPOs over last decade?

  11. Dara Albright

    Or… the most pragmatic solution would simply be for companies to IPO earlier in their life cycle when most of their growth is ahead of them as opposed to behind them. Perhaps small investors are simply sick of serving as an exit strategy for VCs.

    1. Matt Kruza

      This pretty much. Retail investors (and really the funds who manage their money) are not going to take all the risk without the upside. The problem is to give upside you probably need 30-70% price write downs from last rounds… Fred wouldn’t be happy with his investments going pubic that far down. I think you could see this stand off occur for 2-3 years with minimal IPO’s, and likely many more acquisitions eventually.

      1. Dara Albright

        It will be interesting to see how the implementation of some of the JOBS Act legislation that allows retail investors an opportunity to access private equity will impact the IPO landscape.

        1. pointsnfigures

          until there is a transparent liquid exchange, not much.

          1. Dara Albright

            I completely agree. However, I understand that there is some progress being made on that front. There is also new legislation sitting in Senate that will broaden the accredited investor definition and allow more people to access PE. It will be interesting to see where this leads too.

      2. fredwilson

        i would be fine with it. an IPO is a financing, not an exit.

        1. Matt Kruza

          Fair point, although I don’t think most vc’s and ceo’s feel that way. You are in the minority in regards to at least being so public about how its right to IPO. I do think there is a cultural expectation for VC’s to exit majority or significant part of stock within first 3-9 months no? And if so, are there usually any explicit terms with LP’s on doing tihs, or is this just industry norm? I assume more just the norm, but am interested. Also, while just a financing this could easily wipe out VAST majority of stock options for employees (put them in the negative), so company could lose a lot of employees, and also lose those who now get liquidity if they were early enough (yeah there $10 million now may be 3-4.. but they still can get out!)

        2. David Semeria

          “An IPO is a financing, not an exit.”It looks like I missed some memos…

          1. LE

            An IPO is a financing, not an exitI would imagine that doesn’t take into account the psychological impact on employees holding the stock though that are not earning what they could in regular compensation.

          2. Donna Brewington White

            I’m glad you voiced this.Would love to see this fleshed out further in a post. Fred?

          3. LRT222

            Of course it is. That’s even the answer to “What is your exit strategy?” The first thing a VC says about why they sold their stock once a company is public is “that’s not our mandate. We invest in private companies not public ones.”

        3. JLM

          .An IPO is a financing but it can also be an exit or a path to an exit. It is always an improvement in the liquidity of the underlying security which greases the pathway to the door marked EXIT HERE.Hook ’em Heels!JLMwww.themusingsofthebigredca…

        4. Donna Brewington White

          An IPO is a financing, not an exit.Is it just me or does this need further explanation? An AVC post?

        5. sigmaalgebra

          The joke from about 1999, IIRC, from Forbes, was “Never be between a VC and the door when the lockup period is over.”.

    2. pointsnfigures

      Yes +1!

    3. Ryan Frew

      Bingo! Look how well TSLA has done with an early IPO.

    4. fredwilson

      i agree with you except for one thing. the company has to be ready to be needs a finance organization. it needs a legal organization. it needs a business model. it needs a fairly consistent and predictable revenue stream. and that takes time. not as much time as companies are now taking (my rant on uber at the Upfront Summit is a case in point). but this does take time.back in the late 90s, we were pushing too many companies public too soon on the public. that wasn’t good either.we need a balance. we don’t have it now. we didn’t have it then either.

      1. Dara Albright

        True. But when did “being ready to be public” become contingent on market cap? Intel went public in 1971 at a mere $58M valuation and went to become one of the most valuable companies in history with a mkt cap at one point in excess of $350B. See: https://daraalbright.files….

    5. kevando

      Am I missing something or is that kind of remarkable that Google and Facebook took almost the exact same time here?

  12. george

    There are probably multiple reasons that cause a company to hold-off from going public but valuation by far is the primary determinant. In general, the private markets tend to place premiums on unconventional strengths – the underlying innovation in the technology, product or service and its game-changing effects on peoples lives, that hopefully, materialize. In contrast, the public markets place the premium more on conventional strengths – the primary technologies value to create business model innovation and scale profitable revenue growth.From my viewpoint, the premium should be higher when the gap begins to narrow between the current position of the company and it’s desired future position. Great examples of this are Google, and Facebook – they were able to transition quickly into successful business models.Still cheering for Twitter…

  13. pointsnfigures

    Regulation plays a part too. Triple the accounting cost. I agree that it is better to go public than stay private. It’s good for corporate discipline, and it’s really good for your employees. The person that works as a receptionist might have some stock that will be a nice windfall for them when the company goes public. Liquidity is a big deal, and often you have to pay a price for it.

  14. Joe Yevoli

    Fred, Just so I’m sure I understand what you mean by: “Eventually someone is going to blink. If the public markets wait long enough many of these IPO price driven structures will force the companies that issued them to go public and “price their stock.” You can only kick the can down the road for long enough.”You mean, if the public market valuations remain lower than what you can get in the private sector long enough, private companies who have previously set their valuations based on the future public market valuation will eventually have no choice but to go public at the public market valuation prices. Is that correct?

  15. LE

    You can only kick the can down the road for long enough.I am wondering about this a bit.What happens if you kick the can for to long?Does that mean you have a stale company? One that is private so long that people have already figured out what the potential upside and novelty is? (That’s my guess …) Consequently it’s a case of “open your mouth and remove all doubt”. [1][1] As in “better to be thought a potential future success, than to last long enough such that the future is no longer material”.

  16. Semil Shah

    The best companies can stay private much, much longer. As a fan of both co’s, let’s look at Uber and Slack. Right now, both could go public, though both would have lower valuations in the public markets vs what they get privately today. The next company to go forward would be signaling that they’ve run out of capital sources and, by proxy, could be viewed “not as strong” to stay private. So, IMO less about courage, and more about timing.

  17. sigmaalgebra

    IMHO, the difference between a private unicorn valuation and an IPO valuation is apples and oranges, that is, not really comparable. That is, as I understand it, usually the private company is a unicorn only because of some too simplistic arithmetic on the data from its last funding event, from some version of private equity and not usual VC funding, where the terms were that the investor got so much in special conditions that they would have a hard time losing money on the deal — apples. That is, there were some implicit but quite valuable options in the deal — as in a quote below, downside protection. Well, an IPO, oranges, doesn’t offer such conditions, or at least not without buying some options — what would it be, buying way out of the money puts or some such?E.g., inBarry Kramer, Michael Patrick and Nicole Harper, The Terms Behind the Unicorn Valuations, March 31, 2015.at…is in part BackgroundThere has been much discussion about the high valuations of venture backed companies, and especially the “unicorns”, companies with a valuation of a billion dollars or higher. However, as the investors in these companies generally receive preferred stock, rather than the common stock that is issued in IPOs and held by public company investors, unicorn valuations are not directly comparable to public company valuations. For more on the differences between the apples and oranges, from the same source, on the late term financings, isOf these financings, approximately 25% were led by traditional VC investors and approximately 75% were led by investors who were not traditional VCs (e.g., mutual funds, hedge funds, sovereign wealth or corporate investors)….Investors received terms that provided a fair amount of downside protection for their investment, especially in the event of an acquisition, but relatively few upside benefits.For more on the differences between the apples and oranges, inPay To Play: How Investors Get Burned Fast In A Downturn, Posted Oct 29, 2015 by Connie Loizos (@cookie).at…is some background on pay to play terms. A later investor, the one whose investment is responsible for the unicorn valuation, might demand pay to play which can seriously dilute the ownership fraction of earlier investors. The analogous thing can’t happen to small stockholders of a public company.So, with this provision, and others, valuation can be higher for a late investor in a private company than for a public company which means that the public valuation stands to be lower.Or, so a central question about IPOs has to be: Why won’t the last private investor, i.e., the main investor who had the most recent opportunity to write the terms, want an IPO? Candidate answer: That investor is getting better terms in the market for private funding than the one for public funding. Or, that last investor is a large investor and, in the private market, is using the advantage of their size. Each dollar in their thicker checkbook is worth more than a dollar in a thinner one.So, the unicorn has a funny-money, more appropriately a funny-arithmetic, valuation; no wonder the IPO market won’t equal that.It’s like we’ve already agreed that the company is for sale and now all we are doing is just haggling over the price, borrowing from George Bernard Shaw? Winston Churchill? Groucho Marx? Max Aitken? Mark Twain? W. C. Fields?

  18. jason wright

    which sector had the most IPOs in the last quarter, and why?

  19. jason wright

    so when will USV be going public?

  20. BillMcNeely

    Heard an A16Z podcast with Dick Costelo saying just because your companies stock went from 16 to 40 in 2 weeks doesn’t really mean your company got anymore awesome in that short time period. For the most part,the same is true in reverse

    1. fredwilson

      I listened to that podcast yesterday. Ben and Rick were great

  21. Sujit Kalidas

    Greed drove private market valuations up, and fear is keeping them up. If the these companies cannot bridge the gap between private market valuations and fair market value (public market valuation) by creating lots of value quickly during the “standoff” period, which will last as long as the largest investors can tolerate illiquidity, then there’s going to be pain and lots of it.

  22. awaldstein

    Hold on–really a significant productivity hit?I trust you and this is saying i need to switch!Why?

    1. CJ

      I see what happened here. 😀

  23. LRT222

    Another thing different between public and private market valuation is a thing called “price discovery.” A public company each day has millions of people making independent decision about the value of a company with huge transparency and comparing it to millions of other choices. A private company valuation is a few old men sitting around a conference table high five-ing themselves about smart they are investing with NDA protected information and comparing it to whatever pile of business plans are also sitting on their desks and some IB’s comp table.