Snapchat’s IPO leads way for other overheated start-ups
Snapchat’s IPO shows public investors’ willingness to roll the dice on fast-growing but unprofitable companies with overheated valuations and some serious question marks
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New York: The smart-money types carefully examined a company with slowing user growth, a nascent business model and stock that permits zero influence from shareholders and said: Yep. Gimme some of that Snapchat.
Parent company Snap Inc. on Wednesday sold its first shares of stock to the public at $17 a share, or a market value of about $24 billion, including outstanding equity. It’s an incredible valuation for a company that has been generating revenue for only about two years. Of course it’s nearly impossible to tell whether Snapchat IPO buyers will be rewarded handsomely for their coin-toss bet. Shares could fall on their face on the first day of trading Thursday.
But Snapchat’s ability to get its controversial IPO out the door on the company’s terms does show public investors’ willingness to roll the dice on fast-growing but unprofitable companies with overheated valuations and some serious question marks.
Spotify, are you paying attention? Blue Apron? Dropbox? Uber? They should be. Snapchat’s IPO victory is their gain, too.
Until Snapchat’s IPO, tech companies going public the last couple of years have sought to spackle over some of their defects, or they avoided IPOs altogether rather than risk being shunned for their lack of profits or other flaws. This IPO gussying up, or avoidance, was made in deference to public investors’ preference for companies with a healthy mix of cash flow and revenue growth.
Software firm AppDynamics, for example, trimmed its cash loss from operations to $2.2 million in the nine months before its IPO planned for January, from $40 million in the same period a year earlier. (The company agreed to sell itself to Cisco Systems Inc. a day before its scheduled IPO stock sale.) Last year’s tech IPO hit, Twilio Inc., flipped to cash flow positive in the final months before it pitched itself to IPO investors.
Tech start-ups prepping for future IPOs know they need to worship at the altar of profits, too. Some of them, including Dropbox Inc., are boasting about their profits—or “profits.” A couple of years ago, they would have been talking only about revenue growth or the number of new users.
Other unprofitable start-ups with controversial business models are opting to hold off going public until they can get their financial houses in order. Spotify Ltd no longer looks like it will try to go public this year. Blue Apron Inc. recently put off its IPO preparations to do a some repair work to its costs before it goes asking for public cash.
Snapchat showed no such deference to profits before it went to pitch its IPO. In the final quarter before its offering, Snapchat burned $1.14 in cash for each dollar of revenue. And it didn’t matter.
Unless Snapchat’s stock price falls apart in coming months, the ability to get its IPO off the ground successfully should embolden those other young, richly valued tech companies with high revenue growth but finances that need some work. People close to Spotify have said they were watching Snapchat’s IPO process for hints about the reception to a potential initial offering from the promising-but-unprofitable digital music company.
It’s true that lowering the bar for companies to go public will give jitters to anyone with a memory of the dot-com bust. When investors stop caring about profits and ignoring business model red flags, things like Webvan happen.
On the other hand, it’s healthy for tech land to have an IPO exit path for a potentially dangerous clog of richly valued private tech start-ups.
Some investors in start-ups and others in the tech industry have been talking about alternatives to the traditional IPO market for companies that need to pay out existing investors but find public markets an awkward fit. I’ll believe it when I see it.
The more than $11 billion invested in Uber Technologies Inc. has to be paid back sometime. Do you think Saudi Arabia’s sovereign investment fund is going to wait around forever to get its $3.5 billion back from Uber, plus a handsome return? Nope. And that is likely to happen only through an IPO.
Not every promising but flawed young tech company is going to have a happy outcome like Snapchat did (for now). Most companies do not have the cachet of Snapchat, which makes it possible to overlook the company’s defects. But for a special select few, Snapchat has proved a start-up doesn’t need to be perfect to have an IPO happy ending. Bloomberg