https://www.wsj.com/articles/unicorns-need-ipos-1515361043
Get ready for the Unicorn Jailbreak. Tech stocks have taken off this year like a bat out of hell. But several hundred startups valued at over $1 billion, so-called unicorns, are watching with envy. Sure, 57 startups became unicorns in 2017, according to Recode. Their valuations are rising with venture-capital money, but what’s the fun in that? Liquidity is where it’s at.
This market is dominated by investors suffering from split personality disorder, rotating between risk-on and risk-off modes. Risk off means uncertainty and caution—and investors avoid risk like they’re retiring next week. Today the market is definitely risk on. Heck, the Cboe Volatility Index, or “fear gauge,” briefly hit an all-time low last week.
It’s time for the whole blessing of unicorns—look it up—to break out, hit the public markets and trade every day like real companies. Spotify has done a confidential filing for a direct listing on the New York Stock Exchange. It’s a great start, but others will need a bigger splash.
I’ve rarely seen a frothier market. Fed-driven low interest rates mean investors are begging for things to buy. They’re chasing mirages like cryptocurrencies and initial coin offerings. Calpers just raised its equity allocation, more as a magic wand to stave off municipalities actually kicking in more dough. But no matter, they need stock. As they say on Wall Street, when the ducks are quacking, feed them.
Where are all the IPOs? One problem is that SoftBank’s $93 billion Vision Fund is bagging unicorns like Teddy Roosevelt shooting wild buffalo from his train. It put $4.4 billion into office-space provider WeWork, $2.5 billion into the Indian online retailer Flipkart, and $1 billion into Fanatics, which sells football jerseys. And don’t forget the $7 billion it just invested in Uber, shrinking the ride-sharing giant’s valuation to $45 billion from $68 billion at the previous round. Only public markets can judge whether these valuations are right. For now, it’s shoot and wish.
Some worry about recent initial public offerings. Snap is still below its opening price. Meal-prep company Blue Apron stayed in the oven too long and its stock burned to $4. On the other hand, newly public companies Stitch Fix and Roku are well up over their offering price. Time to make the doughnuts.
There are so many great new companies and, be warned, plenty of duds. How can you tell them apart? Let the market sort it out. Slack is almost the standard for in-company chats. Uber’s highly reported problems show up everywhere but its growth rate. Airbnb bookedthree million guests on New Year’s Eve, up from 1,400 in 2009.
Bring the new batch on: Robinhood, Peloton, Dropbox, Xiaomi, Pinterest, Houzz, Compass, GitHub. Even Reddit, valued at $1.8 billion this past summer, should go public. Then there’s Leonardo DiCaprio-backed Rubicon Global, which automates trash collection and recycling. IPO Leo! The market could absorb a deal a day.
For all I know, since financials are annoyingly hard to come by, all these companies are in the red. Uber certainly is, losing almost $1.5 billion in the third quarter of 2017. But in a risk-on phase, investors don’t care if you’re losing money—for now! Just show what the company will look like in five years.
I hear all the time that companies are not ready or are too nervous to go public. They should get a grip. If a company is afraid to go public—with all the transparency and responsibility that entails—it shouldn’t be in business. Being public provides cheap capital, compensation to attract talent, and a currency for acquisitions. Ask Facebook . If I were an investment banker, I’d be shaking the trees for deals. If managements and boards of directors don’t take companies public in this forgiving market, they’re guilty of malfeasance and shirking their fiduciary duty.
The economy needs this. The more companies are publicly traded, the more information quickly gets into the market. This is especially important in innovative industries. And for several years now, venture capitalists have been putting more into startups than they have been taking out in exits. That can’t last forever. Capitalism can’t perform at its highest potential with large opaque companies.
But if there is a Unicorn Jailbreak, don’t buy with your eyes closed. Study management teams and competition. Not many unicorns will turn into the next Facebook or Amazon. Or even be around in a decade. There is no guarantee this ends well. Companies are racing Fed rate increases, the ultimate IPO party pooper. The risk-off time will come soon enough. Until then, party like it’s 1999.
