IPOs: The New Down Rounds?

square nyse It’s become a meme in tech circles, “IPOs are the new down round,” venture capitalists quip. The dreaded “down round,” when a startup raises capital beneath its prior valuation, is getting pushed back to the public markets. While most companies grow their value in the stock market, Square, Box  and Hortonworks went public at market caps that were lower than what… Read More

Instructure Up 8% From IPO, CEO Sees “Huge Renaissance” In EdTech

instructure Instructure, the Utah-based educational technology company, went public on the New York Stock Exchange on Friday. After pricing at $16, shares were up 8 percent by early afternoon trading. Instructure builds educational software for both K-12 education and corporate learning. The Blackboard competitor says it has over 10 million users of its products in over 25 countries. Read More

Silicon Valley IPO market boom winding down, data shows


San Fransisco (Heather Somerville, Reuters) – Last year, many tech IPOs enjoyed soaring valuations in their Wall Street debut, raining cash on the companies and their investors and boosting concerns about another Silicon Valley bubble.

Now, the party is winding down, according to data analyzed by Reuters: Five of the 12 U.S.-based tech companies that went public this year, or 42 percent, priced their shares at a valuation below or nearly the same as their private market value, compared to 24 percent of the 29 that went public in 2014.

“People are no longer out of their minds with valuations and expectations,” said Adam Marcus, managing partner at OpenView Venture Partners in Boston.

A recent example is Pure Storage, whose IPO earlier this month gave the data storage company a $3.1 billion market cap that almost matched its valuation in the private market. The shift in the investing climate comes as payments company Square filed this week for its own IPO later this year, becoming one of the most prominent of the so-called “unicorns,” or private companies valued at more than $1 billion, to try to go public.

Even when valuations increase, they are growing by a smaller amount, according to the data, which was provided by Ipreo, a market intelligence company, and Pitchbook, a venture capital, private equity and M&A data provider, and analyzed by Reuters.

Among the companies that saw their values grow in an IPO in 2014, the median increase from their value in the private market was 61 percent. Some companies saw increases of three-, four- and even five-fold. So far this year, that gain is 32 percent. The data excludes eight companies that went public in 2014 because there was insufficient information to calculate their pre-IPO valuations.

The shrinking difference affects every corner of the pre-IPO market, compelling some companies to delay or withdraw their public-offering plans, bankers and industry analysts said. And some late-stage investors – while they will still get paid – may see smaller returns than they gambled on.

Those who invested in rounds with an eye on a 30 or 40 percent return will more likely get a return similar to the S&P 500 over the past year – about 8 percent, sources said. According to interviews with bankers, venture capitalists and late-stage investors, this shift in the venture investing climate is just getting underway and likely to accelerate.

It is also an about-face from the last few years, when hot tech companies found no shortage of investors for their private financing and experienced massive valuations, and then demanded an even higher market cap in an IPO. But now the public market is less willing to play along, venture capitalists said.

To be sure, some delays in going public can be attributed to the surge in funding from late stage investors, allowing tech startups to stay private longer. As their valuations grew in the private market, a big increase in the value of their shares in an IPO became harder to achieve. A valuation drop in an IPO doesn’t necessarily dim the long-term prospects of a company.

Hortonworks’ stock is up more than 34 percent from the IPO price, for instance, after its valuation took a 40 percent cut in its public offering last year. But lower valuations in the public market raise questions about the future of the nearly 150 companies that have filed confidential IPOs, according to estimates by some investors.

There is not enough market demand, they say, to support so many deals. In a confidential IPO, reserved for companies with less than $1 billion in revenue, companies file a draft registration with the Securities and Exchange Commission that is for non-public review.

And some “unicorn” tech companies that were expected to go public this year have put those plans off. Among them are online lending company Prosper Marketplace and data storage company Nutanix, according to sources familiar with those companies. After meeting with bankers, Prosper decided to stay private for about the next year, the sources said.

“We take the idea of going public seriously,” said CEO Aaron Vermut, “but there are other ways to achieve your goals while staying private longer.” One of Prosper’s public counterparts, online business lender OnDeck, saw its valuation fall from $1.3 billion during its IPO to about $624 million, according to Thomson Reuters data, likely contributing to Prosper’s decision, bankers told Reuters.

Nutanix is also in a holding pattern, bankers told Reuters, although Nutanix investor Ravi Mhatre of Lightspeed Venture Partners said it “is fully capable of being a public company and operating as a public company.” Neither company has filed publicly for an IPO.

Regardless, many companies will go public in current market conditions, as those that have raised large rounds since 2013 are under pressure to return cash to their investors and employees in the next year. Square is among those. It filed for a public offering this week, proposing to raise at $275 million.

But it, too, is expected to take a price cut. With its CEO, Jack Dorsey, now also leading Twitter, some investors expect the company’s $6 billion valuation will be discounted to compensate for Dorsey’s half-time role.

(Editing by Stephen R. Trousdale and John Pickering)

Jack Dorsey Owns 24.4% of Square

dorsey-hero Square’s newly revealed IPO filing shows that co-founder and CEO Jack Dorsey is the largest shareholder, owning 24.4% of the company. Square last raised capital at a $6 billion valuation, implying that Dorsey’s stake is worth at least $1.46 billion. We will get a better sense of what Square’s value as a public company when its expected share price range is revealed in the… Read More

Square officially files for IPO

Square Reader for chip cards Presale

Today Jack Dorsey’s fledgling payments company is stretching its wings. A recently filed document reveals that Square is officially seeking an initial public offering (IPO).

In the first half of 2015, Square took losses of $77.5 million on revenue of $560.5 million. In 2014, the company reported gross payment volume of $23.78 billion. The filing reveals that retail is, unsurprisingly, the biggest source of transactions for the company, constituting 21 percent of its gross payments volume. Retail transactions eclipse those from services, food, beauty, contractor, and transit.

But Starbucks, whose revenue is broken out unto itself, contributed $62 million in the first half of this year. The relationship with Starbucks is critical, but could very well end soon.  “We … anticipate that Starbucks will transition to another payment processor and will cease using our payment processing services prior to the scheduled expiration of our payment processing agreement with them in the third quarter of 2016,” the filing states.

Revenue sources for Square.

Above: Revenue sources for Square.

Image Credit: Jordan Novet/VentureBeat

Rumors of Square’s bid to go public have been circulating for months. The announcement comes as CEO Jack Dorsey has recently taken on additional duties as permanent CEO of Twitter, after serving as interim chief since Dick Costolo stepped down from the role over the summer.

With Square’s public offering now in the mix, Dorsey’s plate is quite full. He’s had difficulty in the past juggling two companies at once, though he certainly seems committed to Square’s success. Dorsey says he has given 20 percent of his equity to the company and to the Start Small Foundation, and plans to invest another 10 percent of that equity into Square. Still, Square’s executives made a point of mentioning Dorsey’s split attention in the filing:

Our future success is significantly dependent upon the continued service of our executives and other key employees. If we lose the services of any member of management or any key personnel, we may not be able to locate a suitable or qualified replacement, and we may incur additional expenses to recruit and train a replacement, which could severely disrupt our business and growth. Jack Dorsey, our co-founder, President, and Chief Executive Officer, also serves as Chief Executive Officer of Twitter. This may at times adversely affect his ability to devote time, attention, and effort to Square.

Square has experienced lots of highs and lows since its founding in 2009. The company enjoyed a propitious debut with the launch of its first product: a square credit card reader that connects to a smartphone through its headphone jack. This initial product floored prominent payments innovators like PayPal and Google, both of whom were working on digital payment technologies at the time.

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Since that initial product debut, the company has rolled out point-of-sale software for iPads (spurring a slew of tablet-based competitors) and created a host of back-office tools for inventory management, invoicing, analytics, appointments, payroll, staff management, and cash advances. It also created Square Cash, a peer-to-peer payment app, and bought up two restaurant delivery apps: Caviar and Fastbite.

While Square has enjoyed some success, it’s also made mistakes along the way. For instance, two attempts at consumer-based wallet apps both ended in failure. Square Wallet was an attempt to use mobile payments in stores by letting consumers check into an app and then give their name to the cashier. The app didn’t catch on as hoped, and three years after its launch, the company swapped it out for a similar app called Square Order. The latter allowed customers to pre-order food and drinks at cafes and pay in advance through the app. A year later, Square Order, too, shut down.

In addition to these missteps, negative press has been haunting Square for over a year. Right before the company transitioned from Square Wallet to Square Order, the Wall Street Journal released a report positing that Square had lost $100 million in 2013, after burning through a significant portion of its investor funding.

Though the report no doubt damaged Square’s credibility, the company has continued to press ahead with product launches and acquisitions. It’s also taken funding, including a $150 million round that brought the company’s valuation to a gargantuan $6 billion. In addition to funding, Square has gotten support from heavyweight investors like Khosla Ventures, Sequoia Capital, Rizvi Traverse, Lawrence Summers, Rizvi Traverse, Mary Meeker, and Ruth Simmons.

But Square still has a lot of competition to contend with, and the filing acknowledges a plan for staying relevant. “We seek to differentiate ourselves from competitors primarily on the basis of our cohesive commerce ecosystem and focus on accessibility, speed, transparency, and trust,” the company says. “Our ability to innovate quickly to accept new payment technologies such as NFC through Apple Pay, Android Pay, and other new currencies further differentiates our payments platform from our competition.”

Though Square has developed a name for itself as a disruptor of payment technology, many of its early competitors have caught up to its innovation with their own solutions. With the likes of Apple Pay, Android Pay, Samsung, Pay, chip and pin cards, and other new payment methods, it will not be easy for Square to stay ahead of the pack.

Plus, compared with other payment processors, Square’s payment volume is relatively low. Before Vantiv went public in 2012, its merchant services business was processing sales volume of $426 billion, annually. PayPal, which is more akin to Square in its offering, does volume of $235 billion, annually.

Still, Square is showing signs of growth. From 2013 to 2014 the company grew annual net revenues from $552 million to $850 million. The filing also indicates that though the company isn’t profitable yet, its losses are slimming.

Square is slated to start trading on the New York Stock Exchange under the symbol SQ.

Dell Files IPO for Cybersecurity Unit

13334048894_6e8b421c4e_o Dell Inc. has filed confidentially for an IPO for its SecureWorks cybersecurity unit, TechCrunch has confirmed. The IPO is anticipated to happen before the end of the year. First reported by the Wall Street Journal, SecureWorks could be valued at up to $2 billion. The report said that SecureWorks is working with Bank of America and Morgan Stanley to manage the IPO. Dell acquired SecureWorks… Read More

Dell Files IPO for Cybersecurity Unit

13334048894_6e8b421c4e_o Dell Inc. has filed confidentially for an IPO for its SecureWorks cybersecurity unit, TechCrunch has confirmed. The IPO is anticipated to happen before the end of the year. First reported by the Wall Street Journal, SecureWorks could be valued at up to $2 billion. The report said that SecureWorks is working with Bank of America and Morgan Stanley to manage the IPO. Dell acquired SecureWorks… Read More

Beyond Tech IPOs

ticker Technology darlings like Uber, Pinterest and Airbnb may be taking their time on the way to exit, but that doesn’t mean IPOs aren’t happening. They’re alive and well in the consumer space — from food brands to premium pet food and retail establishments. So why are these companies pursuing IPOs — and finding success in the markets — while tech companies are… Read More