Lending Club, Etsy and now Grubhub are three really broken IPO’s …. This batch of Zynga’s and Groupon’s so far #ipo
— howardlindzon (@howardlindzon) July 2, 2015
So some of the recent high profile IPOs have come onto hard times, or in trader speak, are ‘broken.’ One of the reasons why this might be the case is that these firms waited much longer than they would have in a prior era to go public. In so doing the outsized returns from growth accrued to private investors as opposed to public investors. Or as Ivanhoff writes:
The growth that is supposed to come from young public companies isn’t likely to be come. Nowadays, many of the companies with a great growth story are staying private longer and going public as much more mature companies. As a result they leave a lot less meat on the bone for public investors. This trend is likely to accelerate.
Maybe that is why that public markets are treating some of these newly public companies with a great deal of skepticism. Farhad Manjoo at the New York Times writes about the many aspects of companies doing so-called ‘private IPOs’ including the spotlight on the companies that have recently gone public:
It also means Wall Street is doing what it failed to do in the last tech boom: using traditional metrics like growth and profitability to price companies. Investors have been tough on Twitter, for example, because its user growth has slowed. They have been tough on Box, the cloud-storage company that went public last year, because it remains unprofitable. And the e-commerce company Zulily, which went public last year, was likewise punished when it cut its guidance for future sales.
Ironically this very behavior by public markets, which on average is likely justified, is prompting the class of so-called unicorns to stay private even longer. Which in the long run will make their transition to the public markets even more difficult. Fred Wilson at A VC is quite clear that these companies are avoiding the public markets for the wrong reason(s). Wilson writes:
It is true that Wall Street will not be tolerant of missed expectations. It is true that Wall Street may focus too much on short term numbers. It is true that you may not be able to control what numbers Wall Street decides to obsess over when it comes to valuing your company.
But I think tech sector is making a huge mistake in thinking that they know their companies and how to value them better than Wall Street. That kind of thinking is arrogance and pride comes before the fall.
The 2012 JOBS Act was supposed to help accelerate the IPO process, in addition to allowing equity crowdfunding to go forward. However it is not clear that it did much to get reluctant companies to brave the public markets. This is one reason why we continue to see the number of publicly listed companies in the US shrink.
In that light investors have really only a couple of options. The first is to follow companies into the private markets. This is what the T. Rowe Prices ($TROW) and Fidelitys of the world are doing. The other is to broaden your opportunity set into the global markets. Most would agree that we have arrived at some sort of sub-optimal state where the public markets would do well to see more of these tech unicorns go public, but for now we are unlikely to see that as public investors treat these first movers with a great deal of skepticism.