Bigger doesn't always translate to better — at least when you're talking about white-hot tech startups that draw jumbo valuations with wealthy pre-IPO investors.
Private investments since 2015 in 6 of the 10 most well-funded technology startups have seen their stock prices dip below pre-IPO valuations, according to an analysis published by the Wall Street Journal. Now, public market investors are left to wonder if the hype - and the growth - in top IPOs was soaked up by an elite group of investors fortunate enough to get to buy in well before the offering.
It may be a sign that investors with billions in cash stockpiles have become too bullish on Silicon Valley's top entrepreneurs - or simply a sign that there is too much money being thrown around as we close in on a market peak. But - quite possibly - it is a signal that technology companies should go public on a timeline that doesn't encourage early-stage investors to cash out, or Wall Street banks to make fees by playing unicorn yenta with sovereign wealth funds, or the entrepreneurs behind these companies to needlessly allow their capital structure to swell to the point that it is unsustainable, putting pressure on everyone from the directors on the board to the staff in the mailrooms to deliver on an unrealistic valuation.
Underperformance Shows up in Job Postings
Box's ($BOX) IPO represented a win not just for CEO Aaron Levie, but also the investors and advisors who helped race the cloud storage company to public markets before its top competitor, Dropbox ($DBX), could make a public market debut. But it came at a cost - particularly for the late-stave venture investors participating in its final pre-IPO equity round. The company's public market debut was at a lower valuation than where its last round of funding was and the stock took years to surpass its private valuation. When Box's stock did rebound, so did job postings (see our second chart, below) - but when the company's alternative data reflected a 34% decrease in postings, it foreshadowed a 38% drop in stock. Later, CFO Dylan Smith acknowledged "decreased hiring plans," in a November earnings call. The company will report earnings June 3, next week - and, again, alternative data reflects a decline in job postings this quarter.
Right-Sized Valuations Allow Hiring to Flourish
In the 18 months following its public market debut, Snap ($SNAP) stock failed to impress investors, and hiring - which rose after its market debut - was effectively flat at the end of 2019 compared to Snap's IPO date (153 open positions at the end of 2018, compared to 147 openings March 2, 2017, for the IPO).
This year, was a different story - on several levels. After Snap saw its public market valuation more than cut in half, and began to impress investors with a growing user base, both stock price and hiring rose - shares doubled to $11.60, as of mid-day trading May 28, and the company posted 17% more positions in 2019.
Maintaining Momentum
One of the earlier - and the most successful - Silicon Valley IPOs since 2015 was Jack Dorsey's second startup, Square ($SQ). Our data doesn't track all the way back to the company's public market debut date in November 2015. For our purposes, it isn't critical - Square stock languished for more than a year before shares truly began to gain momentum. And, it was foreshadowed again by hires - the company nearly doubled job postings, from 110 in January 2017, to more than 200 by early November 2017. Share prices closely matched these gains, and by mid-November 2017 the stock had risen more than 250% on the year, to $48.80 per share.
Each of these cases reflects a heavily-funded startup with a huge capital structure that, in some instances, slows hiring - and possibly growth - as entrepreneurs and executives manage their private rocketship growth narrative in a public market environment. Our alternative data tracks the 2019 class of IPOs, as well, and similar statistics. Soon, we'll update readers on how Uber ($UBER), Lyft ($LYFT) and Pinterest ($PINS) established post-IPO plans, and what that data reflects.
