Show me the money!
 
When a company holds its initial public offering, or IPO, some will call the IPO the “initial profit opportunity” as it can be an opportunity for pre-IPO investors to sell their stock and generate significant profits.  This post will discuss what investors in private equity funds need to know about IPOs.

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The Fortune article "Snapchat Actually Isn't the Hottest IPO This Year" argues that MuleSoft is actually a hotter initial public offering than Snap.  This argument is based on post-IPO trading metrics, such as first day "pop" (first day closing trade price vs IPO price) and price-to sales metrics.  It's an interesting article.  Link: http://fortune.com/2017/03/30/snapchat-ipo-snap-stock-mulesoft/ 

I knew the market for initial public offerings was bad, but wow.  Here's a link to the Fortune article "IPO Market Is Worst Since the Financial Crisis."

Link:
http://fortune.com/2016/08/01/ipo-drought-sorry-private-equity/

There were no initial public offerings (IPOs) of tech companies in the first quarter of 2016, according to the National Venture Capital Association (NVCA).  This is the first time since the depths of the Great Recession that no tech companies have gone public in a quarter.  Six life science companies did hold IPOs, but the total of six venture-backed IPOs in the first quarter of 2016 is the lowest tally since the third quarter of 2011, when there were five IPOs.  To add to the misery, there were 79 reported mergers and acquisitions of venture-backed companies, down from 105 in the fourth quarter of 2015 and down from 97 in the first quarter of 2015.

As liquidity events are crucial to the venture capital lifecycle, this is troubling news.  

Link:
http://nvca.org/pressreleases/biotechnology-companies-leading-way-six-venture-backed-ipos-recorded-first-quarter/

According to the Business Insider article "'The Great Reset': Venture Capitalists and Startups Have Shifted from Greed to Fear," the technology startups and venture capitalists have begun to temper valuation expectations.  This is driven by a number of factors, including (1) the slowdown in the tech IPO market, (2) public tech company valuations have declined, some significantly, making many private tech companies looking overvalued, and (3) some tech companies are now laying off people.  

The article indicates that the conversation is changing between venture capitalists and startups, with VCs asking tougher questions, and now looking for "cockroaches" - companies that can survive in any market.

It's an interesting article and worth a read.

Link:
http://www.businessinsider.com/the-great-reset-vcs-startups-go-from-greed-to-fear-2016-2?op=1

Investment in US venture-backed companies reached $15.7 billion in the first quarter of 2015, according to data provided by Dow Jones VentureSource and quoted in today's WSJ.com article "Startup Funding Hits 15-Year High While Valuations Set Record."  A few highlights from the article:

• The $15.7 billion invested in 1Q2015 is up from the $15.6 billion invested in 4Q2014 and up from $12.4 billion invested in 1Q2014.
• Venture-backed companies had the highest median valuations on record during the first quarter.
• The largest financing in the quarter was a $1 billion round by SpaceX.
• There were 12 venture-backed IPOs in 1Q2015, down from 23 IPOs in 4Q2014.
• M&A was down in 1Q2015, with 104 deals in the quarter, down from 109 in 4Q2014, and the amount paid in 1Q2015 was down a whopping 71%, at $9.9 billion, compared to the $33.8 billion paid in 4Q2014.

Link to article: 
http://blogs.wsj.com/digits/2015/04/20/startup-funding-hits-15-year-high-while-valuations-set-record/

Scott Kupor, Managing Partner of venture capital firm Andreessen Horowitz, has an interesting blog post "What's Holding Tech M&A Back?" that's worth a read.  In the post, Kupor asserts that only 10% of tech mergers & acquisitions have been "growth" transactions - deals "involving rapidly expanding, venture-financed private companies or modern software-as-a-service providers."  Worse, 40% of this deal volume has been by five acquirers - Facebook, Google, Microsoft, Oracle and SAP.

This paucity of growth transactions is due to two main factors: (1) venture-backed companies are staying private longer due to the significant availability of private capital available to these companies; and (2) public companies are hamstrung due to activist investors, which are demanding actions like stock buybacks, dividend distributions and breakups - short-term actions to books stock price - at the expense of actions that enhance long term shareholder value such as investing in R&D or growth-oriented acquisitions.

It's a thought-provoking piece that's worth a read.

Link to blog post: http://a16z.com/2015/04/10/whats-holding-tech-ma-back/

Twitter posted its roadshow presentation on RetailRoadshow.com this past Friday.  It's a video presentation with slides which lasts 37 minutes (note that the roadshow slides are only available for a limited time).  Here's a link to RetailRoadshow.com's available roadshow page: http://www.retailroadshow.com/roadshows.asp.  

In case you don't have time to watch the video, Business Insider has posted the slides here:http://www.businessinsider.com/twitters-ipo-roadshow-presentation-heres-what-twitter-will-be-telling-investors-2013-10?

Twitter announced yesterday (via a tweet) that it had confidentially filed its S-1 registration statement with the SEC for its initial public offering.  Since then, the press has gone crazy with speculation over IPO valuation, revenue, timing of the IPO and bankers on the deal.  Here we'll try to sift through the facts and the rumors.

IPO Valuation.

• What we know for certain: nothing.  The only time we'll actually know when the IPO is priced.  Having said that, there were reports (see for example, here and here)  of private sales of Twitter stock earlier this year and late last year at valuations ranging from $9 to $11 billion.  The NY Times quotes a WedBush analyst that Twitter is now being valued at $15-$16 billion based on recent private sales.
• Speculation:  $10 to $20 billion.  See for example, here, here and here.
  

Revenue.

• What we know for certain:  Twitter has under $1 billion revenue.  We know that because a company must have under $1 billion in revenue to be able to file for an IPO confidentially under the JOBS Act.
• Speculation: 2013E revenues of around $600 million and 2014E revenues of close to $1 billion, according to this article in the NY Times.  

IPO Timing.

• What we know for certain: nothing.
• Speculation: Dan Primack of Fortune writes that Twitter's S-1 may be made public within the next few weeks, and that a 2013 IPO is possible.  

Bankers.

• What we know for certain: nothing.
• Speculation:  Goldman Sachs is the lead banker.  Multiple new sources are reporting this, see here and here for examples.

Overall, all we really know at this point is that Twitter has under $1 billion in revenue.  Much more will be known when (and if) its S-1 registration statement is made public.

Here's a link to a good article from the Wall Street Journal's Venture Capital Dispatch blog discussing some of Twitter's private investors, including venture firms Union Square Ventures, Charles River Ventures, Spark Capital, Bezos Expeditions, Benchmark Capital, BlackRock Private Equity Partners, Insight Venture Partners, Institutional Venture Partners and Kleiner Perkins Caufiled & Byers.

Six companies priced their initial public offerings on Friday in a strong showing for the IPO market.  Among the companies that prices was Cvent, Inc. the cloud-based event management software company.

Cvent priced 5.6 million shares of common stock at $21.00 per share, for gross proceeds of $117.6 million.  Cvent opened at an eye-opening $38 per share, and closed the day at $32.92.  Morgan Stanley was the "lead left" book running manager with Goldman Sachs as the joint-book running manager, with Stifel, Pacific Crest and Needham acting as co-managers.  The company is listed on the New York Stock Exchange with ticker "CVT".

Venture backers of Cvent include New Enterprise Associates, Insight Venture Partners and Greenspring Associates.

Cvent prospectus:  http://www.sec.gov/Archives/edgar/data/1122897/000119312513327950/d520989d424b1.htm

Cvent IPO press release:  http://www.cvent.com/en/company/cvent-announces-pricing-of-initial-public-offering.shtml

The market for initial public offerings is hot, possibly even white hot, according to the article "The IPO Market's Baby Boomlet" by Jack Willoughby that appeared yesterday on Barron's.com.  Forty-four IPOs priced in the second quarter of this year, the most since the fourth quarter of 2006.  Conditions are good for the IPO market: the stock market is up, volatility has been low and IPOs have performed well out of the gate, with IPOs in the first half of 2013 up nearly 17% on the first day of trading.  Other factors cited have been the passage of the JOBS Act last year as well as institutional investors shifting away from being risk averse to seeking growth.  The article goes on to discuss how biotech deals have benefited from this trend.  The article also identifies companies that are rumored IPO candidates, including:

• Twitter (social media);
• Dropbox (file sharing);
• Chegg (online textbook rentals);
• Violin Memory (flash memory arrays);
• Sugar CRM (salesforce automation);
• Foursquare (social networking);
• Spotify (subscription music streaming); and
• King (mobile games).
  

It's a good article and worth a read.  Here's the link:  http://online.barrons.com/article/SB50001424052748704329604578638300022357518.html#articleTabs_article%3D1

Investment in Chinese funds plummeted to $73 million in just two funds in the second quarter of 2013, according to an article appearing on China Money Network.  This amount was less than a tenth of the amount raised in the first quarter.  The vast majority of the funds raised were by Envision Capital's Growth Fund II, according to the article.  Investment in Chinese venture-backed companies was also down - $438 million was invested in 47 deals, with deal value down 9% from the first quarter.

Exits actually improved, albeit from pretty dismal levels.  There were two venture-backed IPOs in the second quarter, up from zero in the first quarter.  Also, there were nine venture-backed merger and acquisition exits in the first half of 2013, up from four in the first half of 2012.

I continue to hear from venture capitalists that the Chinese venture market is challenged, but these figures seem worse than what I'm hearing.

Link:  http://www.chinamoneypodcast.com/2013/08/01/venture-capital-fundraising-plummets-in-china

CNBC has posted an article and video of an interesting interview with Marc Andreessen, co-founder of the venture capital firm Andreessen Horowitz.  While the article covers the main points, I recommend watching the video as it provides a fuller sense of Andreessen's thoughts.  In the video, Mr. Andreessen discusses the following:

• Tech Bubble or Boom?  Andreesen thinks its a tech boom.  The internet has entered prime time.  Consumers love the internet.  E-commerce and advertising are moving online.  A lot of things we've been talking about for 15 years are happening in a big way now.
• The IPO market is deeply broken.  It's becoming a two class market: public companies and private companies. In general, the private companies are growin very fast and doing very well and delaying their IPOs much longer than they used to.  There is a small number of public tech companies doing well, but a much larger number of companies that should be public but aren't.  We're at an all-time low in tech IPOs and it's regulations like Sarbanes-Oxley and Reg FD that need reform.
• Andressesn Horowitz like to work with entrepreneurs who want to build big independent long-term companies, and its' these companies that will ultimately go public.  They tell these companies to build a fortress before going public,   make sure the business is well established, have a lot of predictability, there's a strong patent portfolio, etc.
• Insider trading.  He's glad to see the crackdown on insider trading.  The market manipulation has become a problem for young public tech companies that see their stocks get whipped around by hedge funds.
• Immigration reform needs to happen.  2/3 of Silicon Valley companies are co-founded by immigrants and those companies over the last 40 years have created millions of jobs.  If one wants more high tech success stories, having more highly skilled immigrants is something easy to do.
• Looking forward over a 5-10-15 year basis, he is bullish on the economy.
• An area they like is crowd funding.  The feel there's a whole phenomenon around how the economy would work if one can uncover signals and know in advance if consumers will want the product before it's built.  Another is collaborative consumption.  This includes companies like AirBnB and Lyft, which involve resource sharing where people are sharing their cars and homes.  They think this is a powerful trend.

Link to the article and video:
http://www.cnbc.com/id/100880994?

There's a buzz around the new Spread Pricing Liquidity Act that was introduced to Congress last week by Congressman David Schweikert (R-AZ).  Essentially, the act allows public companies that have a public float of $500 million or less and an average trading volume of less than 500,000 shares may have their shares quoted and traded in increments of $0.05 or $0.10, depending on average trading price.  According to Rep. Schweikert's press release, "[t]he bill is in  response to overwhelming evidence that wider ticks for small-cap companies will stimulate liquidity, encourage capital formation, and grow jobs. The SEC has been inactive on this issue."

Dan Primack, of Fortune's Term Sheet blog, reported on the bill and indicated that the change could "affect more than 3,000 companies currently listed on the NASDAQ and NYSE, with hopes that the wider 'ticks' would encourage coverage that has grown progressively sparse since 'decimalization' was introduced in 2001."

Felix Salmon of SeekingAlpha has mixed views on the Act.  He points out moving to a quote in increments of $0.05 and $0.10 will be to the detriment of small investors and to the benefit of the brokerage houses.  He also points out that there is no guarantee that the profits generated by the brokerage houses will be reinvested into deeper coverage of small-cap companies.

In my opinion. I think the bill is an interesting step to address one of the many issues confronting small-cap stocks.  I don't believe this bill is a panacea, but it seems like it would encourage brokerages to undertake research on smaller public companies.  This in turn could help pave the way for more, and more successful, initial public offerings of smaller companies.

Links:
Text of HR 1952:  http://www.govtrack.us/congress/bills/113/hr1952/text
Rep. Schweikert's press release:  http://schweikert.house.gov/press-releases/rep-schweikert-introduces-tick-size-bill/
Dan Primack's article: http://finance.fortune.cnn.com/2013/05/13/small-cap-stocks-decimalization/
Felix Salmon's article:  http://seekingalpha.com/article/1443041-why-dedecimalization-is-a-bad-idea

Glenn Solomon, a partner at GGV Capital who also has a blog Going Long, yesterday posted an article on Fortune called "Is your Company IPO ready" that I found interesting.  Rather than focusing on whether a company has a $100 million revenue run rate, which many banks used to use as a metric (along with several quarters of profitability), Glenn identifies three key attributes that the company must have to go public: (1) predictability and visibility; (2) underlying growth potential; and (3) no single points of failure (no significant vulnerabilities).  It's a good and useful article.

From my investment banking days at Bear Stearns and CIBC Oppenheimer during the Internet bubble, these points ring true. However, while these may be three key attributes that a company must have in order to go public, they are by no means the only attributes a company must have in order to be ready to hold a successful initial public offering.  Other attributes could include a phenomenal management team, differentiation from competitors, strong IP portfolio, impressive and consistent financial performance (for most tech companies this is rapid revenue growth), real cash revenues (no reciprocal agreements), operating in a large, rapidly growing market, sterling reputation, well-developed internal business processes and controls, and on and on.  And while a tech company may not need $100 million in current revenue run rate to go public, they should be close (for example, a $20 million revenue run rate won't do it, but if a company has all of the other attributes, perhaps a $70 million revenue run rate might be sufficient).  There are a lot of pieces to the puzzle that are required to fit for a company to be ready to go public and have a successful IPO, and the three attributes that Glenn identifies in his article are essential.

Here's a link to the article:  
http://finance.fortune.cnn.com/2013/02/25/are-you-ipo-ready/

Sandy Miller of Institutional Venture Partners has recently posted an insightful piece on the current status of the IPO market and what must occur for the IPO market to really recover.  It appeared on AllThingsD.com on Jan. 23, 2013 and is titled "Stop Bashing the IPO Market - It's Ripe for Recovery."  He uses an analogy of a three-legged stool, and finds that two of the legs are in place (an abundance of venture-backed innovative growth companies and a favorable regulatory environment), and that the third leg of the stool, the investment banking system, is where the effort needs to focus.  It's a well-written, insightful article and worth a read.  Here's the link:  http://allthingsd.com/20130123/stop-bashing-the-ipo-market-its-ripe-for-recovery/

On the heels of Fortune's list of IPOs to watch in 2013 (see my prior post) is Forbes slide show of "The Next Hot IPOs."  Here's Forbes list of initial public offerings to watch for in 2013 or 2014:

• Twitter - microblog
• Square - mobile payments
• Dropbox - onlline file storage, backup and sharing
• Box - online content management and collaberation 
• LivingSocial - daily deals
• Coupons.com
• Atlassian - issue tracking, collaboration and software development tools
• Glam Media - lifestyle-focused content sites
• Spotify - online music
• Rovio - maker of the Angry Bird games
• AirBNB - short term travel accomodation rentals
• Hipmunk - travel website
• Jawbone -  maker of bluetooth headsets, speakers and wearable technology devices
• Pinterest - social network
• Survey Monkey - online surveys
• Alibaba - Chinese e-commerce company
• Inrix - location-based traffic information and directions
• Cloudera - big data company
• Marketo - marketing automation software company
• Marin Software - online advertising management platform
• Tableau Software - business analytics software

Here's the link to the slide show:  
http://www.forbes.com/pictures/emlm45egjdk/the-next-hot-ipos/

Link to post on Fortune's list of IPOs to watch in 2013:  
http://www.allenlatta.com/1/post/2013/01/10-ipos-to-look-for-in-2013-fortune-article.html

Fortune has published its list of 10 initial public offerings to look for in 2013, aptly called "10 IPOs to look for in 2013."  The article identifies the companies and adds some background on them.  Here's the list:

1. Twitter
2. Violin Memory
3. Square
4. Xoom
5. Dropbox
6. Arista Networks
7. Box
8. Marin Software
9. Kabam
10. Opower

Link:  
http://money.cnn.com/gallery/investing/2013/01/02/ipo-predictions-2013.fortune/index.html

A recent article from the Tech Europe section of WSJ.com "London Aims to Make Tech IPOs Easier" looks at some of the proposals being considered to make it easier for tech companies to launch their initial public offerings in London, and to make London the high-tech capital of Europe.  UK regulators have looked at the recently-enacted US law Jumpstart Our Business Startups (JOBS) Act for ideas on how to smooth the IPO process for growing tech companies.  The two main proposals being considered are (1) allowing companies to list a smaller proportion of their shares in an IPO; and (2) reduced reporting requirements for a period of time.

Link:  
http://blogs.wsj.com/tech-europe/2012/09/20/london-aims-to-make-tech-ipos-easier/ 

Fred Wilson, a managing partner at Union Square Ventures and author of the blog A VC, has a good post called "Lockups and Insider Selling" that is a good read.  He begins the post by pointing out that the job of a venture capitalist to return capital to limited partners, and then says it again.  He continues by discussing why VCs typically don't hold on to their stocks after a lockup expiration.  Its a good post and worth a read.  Here's the link:   http://www.avc.com/a_vc/2012/08/lockups-and-insider-selling.html

SmartMoney is reporting that CalPERS, the nation's largest public pension fund and one of the world's largest investors, is threatening to boycott any stock that allows minority shareholders to control a majority of the votes through dual class or multi-class share structures.  The article indicates that one in eight initial public offerings this year had multi-class structures, while this number was one in 12 in 2009.

The knock on multi-class share structures is that they render shareholders mute.  By controlling the company, the minority shareholders (usually the founders sometimes combined with pre-IPO investors) elect the board and effectively make all major corporate decisions.  From a corporate governance perspective, it's certainly not good for shareholders.  On the other hand, it is precisely because these founders have been able to execute on a strategic vision that these companies are able to go public.  In this sense, the multi-class structures lock in the founders and their vision for the company.

Recent IPOs that have dual or multi-class share structures include Facebook (two classes of common stock), Zynga (three), Groupon (two), Kayak (two), Yelp! (two), Zillow (two) and LinkedIn (two).  Of these, LinkedIn, Zillow, Yelp, Kayak are trading above their IPO prices and Facebook, Zynga and Groupon are trading below their IPO prices.

In my view, whether a company can list with a multi-class share structure is really about demand for the IPO and the marketing of the IPO.  If the IPO is in strong demand, then the underwriters may be able to structure an IPO that enables multi-tier structures, selling shareholders in the IPO, a larger number of shares sold, or a higher IPO price, or some combination of the above.  The marketing of an IPO is both art and science, and the underwriters develop the structure of an IPO based upon market factors.

If CalPERS boycotts IPOs with multi-class structures that enable minority shareholders to control the company, AND if other large IPO investors join the boycott, then this might make it more difficult for IPOs to have these structures.  Also, if the post-IPO performance of companies with multi-class share structures is poor, then IPO investors may shy away from these structures and they may fade away.

Link to SmartMoney article:  http://www.smartmoney.com/news/on/?story=ON-20120820-000058

When a company holds its initial public offering, the prospectus will contain a provision that says that all of the company's officers, directors, employees and substantially all of the company's stockholders have agreed with the company and the underwriters not to sell shares for a specified period of time, usually 180 days, but sometimes less.  This period of time is known as the lockup period, and the purpose of the lockup period is to limit the number of shares of the company's stock that is available for sale after the company goes public.  The concern is that if a large number of shares is put up for sale soon after an IPO that the market for the company's stock will be roiled and the stock price will drop.  

To find lockup information in the IPO prospectus (known as a 424B4 SEC filing), look in the "Shares Eligible For Future Sale" section and the sub-heading "Lockup Arrangements" or "Lock-Up Arrangements."  Here's a link to Zynga's prospectus and the "Shares Eligible For Future Sale" section, where Zynga had a 165 day lockup period.  Facebook has a staggered lockup period, with one period expiring 91 days after the IPO, another at 181 days and a final period expiring after 211 days.

Stock Price Drop on Lockup Expiration.  Even though the market has advance notice that a lockup period is expiring and so the event should be priced into the market, it is still a common occurrence that a the stock price will fall when a lockup period expires.  As an example, when Groupon's lockup period expired on June 1, 2012, the stock fell almost nine percent, on trading volume that was nearly four times greater than the prior day.  Note that Groupon had a very large overhang of stock (up to 603 million shares) that was eligible for trading when the lockup expired, when the IPO was for 35 million shares, so a 17x overhang.  Note also that Groupon's original 180 day lockup period was extended when the company restated earnings at the end of March.

Secondary Offerings.  One way companies and underwriters manage this process is to undertake a secondary offering prior to the lockup expiration.  This typically only occurs if the stock has been trading up in the aftermarket.  The benefit of a secondary offering is that the offering is marketed by the company and the underwriters, and it is an orderly process with usually minimal impact on the share price.  It also reduces the number of shares that will flood the market when the lockup period expires.  Typically in secondary offerings the shares are being sold by insiders and pre-IPO investors (such as venture capital and private equity firms) and not by the company.

As an example, Zynga held a secondary offering in March 2012 in which all of the shares sold were from selling stockholders.  Zynga's IPO priced at $10 per share in December 2011 and the secondary offering priced at $12 per share in March 2012.  There were 100 million shares issued in Zynga's IPO and almost 43 million issued in the secondary offering, for a secondary offering size of less than half that of the IPO.  This secondary offering helped to reduce the number of shares that would be available for trading when the lockup restriction expires.