Wednesday, August 2, 2017

Snap, Blue Apron Shake Confidence In Startup Valuations

Both companies now trade below what some venture-capital investors paid for their pre-IPO stakes.


By Corrie Driebusch and Maureen Farrell
The Wall Street Journal
August 2, 2017

Snap Inc. SNAP -4.17% and Blue Apron Holdings Inc. were supposed to herald a return of the great technology IPO. They have instead become vehicles of market dismay.

Both companies now trade well below their initial public offering prices. More disturbingly for venture-capital investors, those prices are below what some paid for their pre-IPO stakes. The result is renewed doubt about valuations across Silicon Valley’s private companies, whose worth has been climbing for a decade.

On Monday Snap shares touched a fresh low in volatile trading after some early shareholders in the messaging-app owner were allowed to sell their holdings for the first time.

In another ominous sign, yoga-studio owner YogaWorks Inc. in mid-July postponed its IPO on the eve of its debut, citing market conditions. AppNexus Inc., an advertising-technology company that was planning to go public as early as this fall, is now more likely to wait until next year, people familiar with the matter said.

Analysts and underwriters say that the weak performance of Snap, the largest tech IPO in more than two years, is stoking doubts among late-stage private investors. Such doubts could interrupt the cycle of ever-increasing funding rounds that has underpinned the lofty valuations of many tech startups.

The relationship between private and public markets has never been so lopsided. Currently, nearly 170 private companies are valued by their owners at $1 billion or more, according to Dow Jones VentureSource. That’s up from about 60 just three years ago. Thirteen private companies now fetch a valuation of $10 billion or more. Before the financial crisis, no venture-backed company had ever achieved a billion-dollar valuation before going public, according to McKinsey & Co.

Funding dedicated to private startups is robust. North American venture firms as of July 2017 had nearly $96 billion in uninvested capital, the most on record, Preqin estimates. Separate from that,SoftBank Group Corp. recently launched a $100 billion vehicle to invest in private tech firms, the largest such fund ever.



The IPO market, meanwhile, is on shaky ground. While the roughly $30 billion raised in 105 offerings in the U.S. in through July is nearly triple the comparable amount last year, it’s an easy comparison: Last year marked the slowest for IPOs in more than a decade, according to Dealogic.

What’s more, IPOs, usually priced to outperform benchmarks, are generating weak returns. U.S. IPOs are up 11% this year through Friday, on average, according to Dealogic—only slightly better than the S&P 500’s 10% gain. Technology IPOs, which are up 19% on average, have underperformed the S&P 500 tech sector, which is up 22%.

Following the Blue Apron and Snap stumbles, entrepreneurs and investors are increasingly questioning whether the private market is in for a correction that would bring it more in line with its public counterpart. They point out that many of the most highly valued private companies, including Uber Technologies Inc., lose money and have an uncertain path to long-term growth and profit.

Roelof Botha, a partner at Sequoia Capital, the big Silicon Valley investor, said he expects more companies have and will continue to hit valuation bumps as investors become more discriminating in the pre-IPO markets.

“Private companies sometimes have unrealistic expectations that prices will go up consistently,” he said, adding that he doesn’t anticipate a sharp drop in pre-IPO valuations in the market more broadly.

Nearly two years ago, well-known venture capitalist Bill Gurley outlined in an interview with The Wall Street Journal reasons why he saw danger ahead for many of the most-highly valued startups. But valuations have kept rising.

In June, for example, Pinterest Inc. raised another $150 million, valuing the image-search startup at $12.3 billion, compared with $11 billion in 2015.

And even though late-stage private investors such as Fidelity are facing losses in the Blue Apron and Snap IPOs, there’s no sign they plan to exit from the market. Fidelity portfolio managers will continue to invest in private companies they believe are good long-term opportunities, according to a spokesman. He added that the investments in Snap and Blue Apron represent small positions in the Fidelity funds that make private investments, which have also bet on winners such as Facebook Inc.

Not all recent tech IPOs have disappointed. Last week, Redfin Corp., a Seattle online real-estate company, priced above expectations and its stock has since soared.

But it will take more than that to wash away memories of Snap and Blue Apron from investors’ minds.

When Blue Apron launched its IPO roadshow in June, its banking team pitched investors a price that would value the meal-kit delivery startup at nearly $3 billion, above the roughly $2 billion it fetched in a 2015 private round. Investors pushed back, citing concerns about the company’s marketing costs and customer turnover, according to fund managers.

Blue Apron priced its shares 40% below its target. The shares have since fallen more than 30%, making Blue Apron’s IPO the worst of the year for a company raising at least $100 million, according to Dealogic. Blue Apron is now worth under $1.3 billion.

The public markets have been similarly rough on Snap. The company’s shares soared 44% in their first day of trading in March after pricing above the targeted range, in what many viewed as a positive sign for the new-issue market. Since its first quarterly earnings report as a public company in May showed the Snapchat parent added new users at a disappointing pace, the stock has struggled. Snap shares on July 10 dropped below their $17 offering price.

Then, on July 11, came a bombshell: Analysts at Morgan Stanley, the lead underwriter on the marquee offering, cut their price target by more than 40% to $16. The shares fell nearly 9% more that day and have continued to slide. They closed Monday down 1% at $13.67 and now trade below the company’s last private funding round.


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