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On Our Current IPO Market

December is a month during which annually updated versions of reminiscences and predictions are trotted out in unison across all forms of media. We are treated (or subjected) to farewells to the celebrities who died over the past twelve months, montages of the most outlandish plays in the sporting world, speculation about political developments and, increasingly, which privately held companies will take the plunge of going public. Eleven months ago, of course, almost all financial news outlets (and quite a few non-financial ones) announced their forecasts. With some notable exceptions (like WeWork), the reporting was on the mark. Indeed, we did witness the grand-scale debuts of Uber and Lyft. But, while naming the companies in the hopper accurately, some of the journalism was guilty of overt enthusiasm. Headlines blared: “2019, the Year of the IPO”, and “Expect a Record Year for Tech IPOs”.

 Of course, as 2019 progressed, the honeymoon seemed to come to a hasty conclusion. On CNBC and Bloomberg TV, Uber and Lyft drew more attention than fireworks at the library. Those two IPOs in particular gave the talking heads much to squawk about as the ride hailing giants failed to uphold the underwriters’ pricing, and today, along with the similarly high-profile Peloton, they are trading below their issue prices. More recently, the very public and almost painful to watch spectacle of WeWork’s non-IPO generated more fodder for loud tsk tsk’s. The tone of reporting on the 2019 IPO crop had transformed significantly by mid-year and completely by the third quarter. Ironically, the coup de grâce came from a company that never even conducted an IPO!

 Uber, Lyft, and WeWork notably had the effect of making the commentators forget all about 2019’s huge IPO successes like CrowdStrike, Zoom Video Communications, and Beyond Meat, but that’s a whole different story. It’s fine to report on good news, but it’s the juicy disaster stories that can really suck in the viewers, right?

 You may be wondering why you are picking up such negativity in your usually upbeat Iron Edge newsletter. You may be further confused that you’re receiving these vibes about the IPO market from a fund that thrives on providing pre-IPO opportunities to its investors. Our response: This gloomy commentary coming from the major outlets is good news.

 This is not the first time we have seen a cycle like this. There was the dot-com boom and bust, for instance. Granted, the scale was much larger, the stakes much higher, and the world was adorably more naïve then. But it is human nature to get wound up over whatever is new and exciting, and the trip back down to Earth can be a valuable experience. Believe it or not, it was almost twenty-three years ago that then-Fed Chairman Ben Bernanke asked, “How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”. That phrase — irrational exuberance — was repeated ad nauseum throughout the global stock slump that followed. It is a label that could easily be applied to companies that, because of a slick image and perhaps a cool concept, have attracted wildly unrealistic valuations despite a nasty habit of hemorrhaging money. I’m looking at you, WeWork.

 WeWork’s slow motion train wreck that played out over the past two months (for more, see “WeWork’s Big IPOoops”) had collateral damage. Egg wound up on the faces of not only the company itself, but also on those of armchair market prognosticators and VC investors. Most notable of these, of course, is SoftBank, which yesterday reported its first quarterly loss in fourteen years. The massive Japanese investor got over its skis, shall we say, with WeWork, absorbing a $4.6 billion loss on that one investment alone. That was not a typo: “billion” with a “B”. Add to that further pain from its sizeable Uber stake, and one could argue that SoftBank is suffering the biggest hangover of all from this raucous party.

 The silver lining we might discern from all of this? We can expect that this case of irrational exuberance has peaked, and calmer sensibilities will soon replace it. Large scale venture capital outfits and average Joe investors alike will quickly lose their penchants for leaping at the chance to overpay for young companies with quixotic growth projections and zero profit. In order to prosper and reach the status of a publicly traded company, late-stage startups will need to get back to basics and exercise fiscal responsibility. There will no longer be any tolerance for the likes of WeWork’s eccentric former CEO Adam Neumann. Again, read “WeWork’s Big IPOoops”; this guy is a total freak.

 For recent precedent that suggests more sober times ahead, look at Europe. Across the continent, 2019 IPO activity has been about half as robust as 2018 was, from the perspective of the number of new issues (78 vs. 154) and of total proceeds raised ($17 billion vs. $34.7 billion). Weak demand is to blame, and the suspected cause of this lethargy is a more cautious European macroeconomic outlook which tends to tighten purse strings. Case in point: last month, Italian luxury yacht builder Ferretti S.p.A. had its own minor WeWork moment when it had to cancel its IPO plans due to inadequate financial support. This is a company whose debut would once have drawn a lot of attention — and investors — with a flashy valuation befitting an Italian yacht maker, but today is the victim of the abundance of caution.

 The prevailing of the cooler heads will benefit all of us. Those who are serious about going public will need to do so with a more disciplined attitude toward valuation. This, in turn, will take us back to a place where initial pricings can be sustained, or even exceeded on a regular basis. Add to that one important thing to bear in mind: Iron Edge VC does not put investors in at the IPO; we arrange pre-IPO investments. Our valuations are set before the underwriters have a chance to whip up the frenzy. The vast majority of Lyft pre-IPO investors, for instance, earned a profit despite the post-IPO selloff.

 Warren Buffett famously said, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” Set this against the backdrop of all the Chicken Little alarmism about the state of the current IPO market, and the upcoming, more thoughtfully planned initial public offerings might look even more attractive.

 After all, we’re already hearing that 2020 is going to be the “Year of the IPO”.

 We at Iron Edge VC are proud to have access to a wide variety of private companies’ shares before they go public. If you would like to learn more, or if you know of anybody else who would, please do not hesitate to contact us by clicking “Get in Touch” below.

As always, shares are available on a first come, first served basis.

5f6e0d464e388c4975685025 Paul Min

Paul Maguire

Founder And Managing Partner