The Unicorn Trap: Sky High Valuations Kill IPOs For Tech Startups

  • startups have never been cheaper to build and are maturing faster than fledgling companies did in the last tech boom, partly because the smartphone era creates an easily reachable market of two billion people
  • yet only 14% of IPOs in the U.S. were done by tech companies, the smallest percentage since at least the mid-1990s, according to Dealogic
  • the market for initial public offerings has turned chilly and inhospitable, largely because technology companies have sought valuations above what public investors are willing to pay
  • venture capital investors could have trouble cashing in if the IPO market isn’t able to support even higher valuations
  • lower valuations as a private or public company also can sap the morale of startup employees who endure pressure and all-nighters in return for the possibility of a big payday 
  • an analysis of funding rounds by law firm Fenwick & West LLP in March found that 30% of private companies valued at $1 billion or more promised a specified IPO price ... [some] companies agreed to give additional equity to investors if the IPO price wasn’t met
The problem“The thing that worries me the most about all these [billion-dollar valuations] is that you need a public market to get liquid,” says Chris Douvos, managing director of Venture Investment Associates, a Peapack, N.J., firm that invests in funds and startups. “But who’s going to buy at these valuations? It’s all priced for perfection.”

The riskThe data suggest that even some of the most promising startups in Silicon Valley might be worth far less in the eyes of the rest of the investment world. The risk is that the lackluster reception for tech startups in the stock market could ricochet through companies that are still private.

source: Wall Street Journal

Further reading: Price and Value: Discerning the Difference (pdf) (Aswath Damodaran, NYU Stern)


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