IPOBoutique Brief 1.22.2015 – “Failure is Coming”

Fortune quotes a partner at venture capitalist Benchmark, Bill Gurley, in their February cover story:

“I think you’re going to see a lot of failure in 2015.”

The idea that tech start-ups can have a $1b valuation relatively easy is head scratching to some money-managers. The downfalls of repeated rounds of funding is laid out in Fortune.

Here is Gurley’s primary concern: Privately-held companies that raise lots of funding at higher and higher valuations eventually build up tons of liquidation preferences. For the jargon-challenged, liquidation preferences are inserted into venture funding deals to ensure that the VC gets paid first (and how much) if the company is sold (i.e., generates liquidity). If a company is sold at a massive valuation increase, then it’s largely academic, as everyone gets rich. But if the company is sold at a price below where it last raised money, it could leave a bunch of people out in the cold, including employees who were largely compensated with stock options

We have seen companies who have high valuations go public in the last three months at a discount to their last round of funding. Hortonworks (Nasdaq: HDP), New Relic (Nasdaq: NEWR) are a few examples. Box, Inc (NYSE: BOX) is a deal in that same boat going public this week.But another even greater risk for VC’s are the ones that never go public and have financials that can’t live up to the hype. Fab, a design-focused e-commerce site believed it would rake in revenues of $250 million in 2013. The company only made around $30 million and has since changed its focus.The number of companies going public with high valuations, yet are losing money, continues to rise. And there are plenty of company’s who are public who still are in the red (See Amazon: Nasdaq: AMZN). Right now, these companies are chasing high valuations, but…as Fortune’s article points out… soon enough they will be chasing profitability.

An example of a company who chased profitability and clearly succeeded would be Google (Nasdaq: GOOG).

Throwback Thursday, #TBT: A 1999 innovative IPO

This may be a stretch and did not have the weight of a lofty valuation in its time but did have innovative technology and came public was Red Hat (Nasdaq: RHT). So, for the purpose of a ‘Throwback Thursday’, let’s look back at the tech company who went public in 1999.

The company was supposed to be an alternative to Microsoft as it was a Linux Software maker. The company priced its IPO at $14 and closed the first day of trading at $52.06–good for a 272% gain. Within the first three months, ‘RHT’ hit a high of $302.62!!Less than a year after that $300+ stock price, ‘RHT’ traded at a low equivalent to $11.93 (after the 2:1 split) which was $2.07 below the IPO price.

Today, ‘RHT’ is trading just under $65.00 a share.