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The Relationship Between Public and Private Markets Valuations

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

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”.

ipos

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.

 
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Posted by on April 15, 2015 in Uncategorized

 

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Violin Memory’s IPO Lessons: Public Markets Don’t Always Get Cool Technology

Violin Memory, one of super cool players in the flash memory storage space, had a very rough IPO last Friday. With an initial offering of $9 per share, we watched the stock dropped all day up to 22% at $7.02 per share. Since then, the stock has had ups and downs closing at $7.50 last night. This IPO was another example that, when come to highly competitive sectors, public markets care more about revenues and deal flow than about solid technology roadmap.

As a technologist, I always have a hard time reconciling innovation with public market perception. While there are no doubts about the game changing capabilities of Violin Memory technology, the fact of the matter is that solid state flash memory is a very competitive space with incumbents like Dell, HP, EMC and IBM moving in. Like any other utility technology, the expectations are that these types of technologies will be highly commoditized in the near future. The fact that other players in the space such as Fusion.io are going through a bit of a turmoil didn’t get Violin’s IPO either.

In those type of sectors, public markets tend to look for a solid path to profitability and deal pipeline to overcome some of the, sometimes unjustified fears. From that perspective, Violin Memory couldn’t present a great picture either after terminating a deal with its top reseller: HP who have helped to grow the company’s revenues by 500 in the first year. In terms of numbers, Violin posted revenue of $51.3 million in the first half of 2013, up from $30.3 million in the year-ago period. However net loss was $59.2 million in the first half of 2013, up from a net loss of $48.3 million. Not a great picture either from a public sector perspective.

Having said all that, I still feel optimistic about the future of Violin Memory. However, my perception has little to do with an empirical analysis and is more based on the fact that I have a really hard time betting against a super talented team that knows their space better than anyone else in the market. With the right support, Violin Memory will be able to innovate into new areas in the solid state flash memory space and keep differentiating itself from the competition.

 
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Posted by on October 4, 2013 in Uncategorized

 

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WorkDay vs. Facebook: Lessons from a Successful IPO

I rarely write about public markets because you are likely to end up offending somebody J However I thought I will take time to write down a few thoughts from a conversation I had last week with a several private equity investors about the characteristics of the monster Workday IPO compared with previous public offerings of other software companies such as Facebook, Groupon or Zynga.

For the ones of you not familiar with the topic, a few days ago, enterprise software firm Workday debuted in public market with an initial offer at $28 per share. During the day, the price raised 72% closing at an astonishing $48.05 per share making the biggest IPO since Facebook. Comparing this phenomenal success with the week and unstable public offerings of predecessor software companies have made a lot of people reflect in some aspects that are still relevant in public markets. Here are a few I consider important.

  • Focus on real revenue: Workday business model is to sale HR software to enterprises and by last January posted $134M in sales and a solid recurrent revenue model. Even the revenue number might seem small compared to companies like Zynga or Facebook, the IPO price was also very conservative and according to the company growth path with real customer and not based on artificial market share.
  • A clear path to profitability: I have a strong bias against companies going public without having turned a profit. However, in the case of Workday, even without being profitable,  the company offers a clear customer acquisition and revenue models that make investors very confident.
  • Wall Street Matters: Like it or not, when comes to public offerings the influence and help of Wall Street remains very relevant. Facebook’s IPO was sort of dismissive of Wall Street’s process and the result was a very unstable public offering. Workday worked diligently with Wall Street to structure a very solid public offering that can be sustained over time.
  • Secondary Markets can hurt: One of the aspects that hurt Facebook’s and Zynga’s public offering was all the noise inherited from the secondary market on which shares were trading at fairly high valuations without any input from the public markets. Workday was very cautious when came to handle secondary market offerings and it didn’t affect their initial public offering.
 
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Posted by on October 23, 2012 in Uncategorized

 

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