A few days ago, I wrote about the importance for startup CEOs to have certain level of familiarity with public market dynamics. Apparently, the blog post sparked some very interesting debates about the relationship between public and private markets dynamics. So it’s time to follow up with a new post ;)
While public and private markets operate under fundamentally different models they also share a lot of commonalities. More importantly, public and private markets influence each other through different elements, the most important of which tends to drive entrepreneurs crazy and puzzle the minds of investors: COMPANY VALUATION. Let’s take a look at a couple of recent examples about the relationship between public and private markets.
Private Markets Influencing Public Markets: Spotify, Pandora and Unicorns
Last week, music service Spotify announced that it is raising $400 Million at a $8.4 Billion valuation. The result of the announcement had an immediate impact rival music service Pandora which shares rose almost 4%.
Pandora’s stock behavior during last week is a classic example of how a private market valuation can influence a public market stock. Pandora’s current market cap is about $3.5 billion. Although puzzling, the reasoning was very simple. People likely did the math and applied Spotify’s value to Pandora, which if it were Spotify, would be valued at about 2.5x its current price, theoretically putting the company’s share price closer to the $42 levels it traded at in the past.
The Unicorns Example
Is just been a quarter since the start of the year but it’s pretty obvious that the number of public offerings has slowed down compared to previous years. Among other reasons, investors believe the recent high valuations in private markets has something to do with that. Investors often refer to that phenomenon as “the unicorn effect”.
Unicorns is a recent term used in the technology industry to refer to companies like Uber, Slack, Dropbox, Pinterest, etc that have are currently valued over $1 Billion Dollars. Years ago, public markets was the only available vehicle to achieve those valuations. Today, the large amount of private funds available have allowed the unicorns to hit valuations that will be hard to live up to in an IPO offering. As a result, those companies have decided to stay private impacting the current IPO climate.
Public Markets Influencing Private Markets: The Box and Dropbox
The public-private market relationship is completely bidirectional. A great example of this is how IPO valuations influence private market valuations. Let’s take Box and Dropbox as an example.
Enterprise software company Box went public a few months ago at an astonishing $2.7 Billion market cap. The public offering came right after a private round of funding that valued Box at $2.4 Billion making the IPO not a great return for the lead investors in that round. Box is often compared with rival Dropbox which current private valuation is bordering the $10 Billion mark. Even though Dropbox doesn’t seem to be currently raising a new round, it is pretty obvious that any new valuations will be inevitably compared against Box’s current market cap.
The previous examples illustrate some of the tangible relationships between private and public markets. While both type of markets operate under different models, they are inevitably linked by the dynamics of valuations.