Ever since the day Square (SQ) officially filed with the SEC, the Valley has held its collective breath. One of the oldest and most celebrated Unicorns, run by an iconic entrepreneur, would finally travel East and explain to the Street how a thin-margined-loss-making payments tech company reached a private valuation of $6bn after raising a total of $591m during the last 5 years.
When Jack Dorsey announced the IPO range of $11-13 per share, proposing a market value of $3.9bn at mid-point—a 30% cut on the valuation of the last private round—it sounded like the end of the gold rush for the remaining Unicorns. Their magic was suddenly gone, while other bad news continued to accumulate: Fidelity slashed its book value of Snapchat by 25% and Zenefits by 48%; BlackRock cut its estimate of Dropbox per share value by 24%; Jawbone was laying off 15% of staff; Theranos is being challenged on its blood test kits; and finally, the SEC is launching an investigation on how Mutual Funds place a value on these assets.
When the Square final price was published at 8pm EST on Wednesday, November 19th, the night before its first day of trading, it was still only 5pm PST at Square’s new headquarters on 1455 Market Street in San Francisco. Concerned employees scurried to calculate the value of their Stock Options.
At $9 a share, it seemed to be game over. Here you had one of the most prominent tech companies in recent times pricing itself at $2.9bn, an unprecedented 25% discount from mid range, and a staggering 50% cut on the last stage private financing round. Finally, this seemed like the reality check the Street had foretold from the beginning of this year.
The night was short for those who celebrated the return of common sense and the wisdom of the public markets. It felt even shorter to the nervous 152 remaining world-wide Unicorns, whose “paper value” totaled over $520bn at that moment.
Nevertheless the next morning on the trading floors of the NY Stock exchange, the smile on the face of the deal’s market maker seemed pretty unusual for a man who was in charge of unloading a “dog” on its first trading day. Within seconds after the opening bell rang, the screen indicated a premarket range of $10.5-11.5 followed by a salve of auto-congratulatory statements like “well-priced IPO, fair reward to IPO investors, excellent book building limited to a dozen of cornerstone investors, etc.”.
At 10:10am, Square shares opened at $11.20. When it reached $12 and an enticing +33.33% profit for our Fund, we decided to sell our allocation but quickly realized we jumped off the wagon too soon. The stock was in for a wild ride! Indeed, it reached a day high of $14.78 (+64%) and eventually closed at $13.07 (+45.2%)!
An unprecedented chain of events—a severe down round IPO, a way-below-range pricing, and a soaring first day pop—made the Square IPO debut extraordinary. We have to go back as far as 1998 to find a similar event. TheGlobe.com, which priced below the range in like manner ($9 price vs $11-13 range), enjoyed a huge pop on their opening day. But the comparison to Square stops there. TheGlobe did not suffer any discount from its last private round – quite the contrary. Its valuation was all hype, whereas Square still had the semblance of a nascent, but promising, revenue generating business on opening day. TheGlobe’s bubble collapsed spectacularly, and it remains to be seen where Square goes from here.
Even after the dust settles on Square’s IPO, we still don’t know if Unicorns are outrageously overvalued or not. But as IPO investors, we have learned that a markdown, or a pricing below the initial range, is not necessarily a failure or a bad sign. It’s likely an indication of the new normal, and we are now looking forward to more deals following the same pattern and hopefully the same fate.
Also, Square’s successful debut does not undeniably indicate that public investors agree with the inflated share values, but it does show an irrational attraction for disruptive companies which promise to change the way we travel (Uber, Lyft and Airbnb), shop (Instacart, Postmates and Blue Apron), make our payments (Square), and even the way we date (Match)!
Because yes, we participated in the Match (MTCH) IPO, ending with a sweet breakup on opening day that netted the Fund a +12.5% profit. The other good news of the month came from Canada—our first deal on the Toronto Stock Exchange—where Hydro One brought us a decent 4.78% return. And on the Tokyo Stock Exchange, the three-headed IPO of Japan Post returned +16.86%, 15.52% and 35.91%! .
This total of 6 winners gave our Fund a steep increase in our Year to Date ROI which is now at + 42.16%.