Saturday, November 7, 2015

Yikes! Square's IPO As A Down Round

Across the valley VC's are wondering, "Gawd, what if nobody wants this shit?"*
From Forbes:

Unicorn Square's IPO Triggers Terrifying Talk of Ratchets
One of the open secrets of the arcane world of finance is that simple sounding words mask big risks and complexity. And when you hear those words, you should grip your wallet firmly in two fists.
This comes to mind in considering the initial public offering of Square, the payments service run by Twitter CEO Jack Dorsey.

Square makes “a compact, square-shaped card reader that works with smartphones and tablets” to enable small companies to accept credit cards for payment, according to the New York Times. The company was valued at $6 billion — making it a member of the so-called unicorn club of private companies valued at over $1 billion.

But the latest IPO pricing range values Square below that level – at $4 billion, notes the Times.
As I’ve written, there are plenty of reasons to avoid investing in Square. The industry is full of rivals and price cutting, Square is struggling to find a niche in which it can get customers to pay more for a better service, its financial performance is not great, and its CEO has too much to do.

And that 33% discount to its latest valuation brings into the common vernacular a word you may never have heard before in the context of finance — ratchets.

Before getting into this new term — it’s not meant here as a kind of wrench, let’s revisit one that is pretty well known — unicorns. According to CB Insights, there are now 143 of them valued at $508 billion.

But the public appetite for these companies has proven to be very limited — especially compared to the insatiable hunger for IPOs that prevailed the year before the dot-com bubble burst.

16 years ago, there were 480 IPOs, so far in 2015, there have been a mere 156, according to Renaissance Capital — 43% below 2014.

Only 14% of 2015′s IPOs have been in tech companies, according to Dealogic.

And along with Pure Storage, that went public at roughly the same level as its previous private market valuation, Square’s IPO looks to be a disappointment to those who got in late.

This brings us to a term you probably do not know — ratchet — which is how different classes of shareholders are treated when a private company is valued at a lower level in a current round of financing than it was in the previous one.

Since Square’s IPO values it at a 33% discount to the $6 billion at which it was valued when it raised its last round of private financing, its ratchet will be triggered unless Square raises its IPO price range before selling shares to the public....MORE
*From the intro to a 2011 post:
...I'm reminded of a situation I watched back in the day. A trader sold a position to another firm a few minutes before a trading halt. The news was negative. The buyer D.K.'ed (Don't Know) the trade, meaning we'd still own the position, at which point the head of the firm got on the phone and told his counterpart "I don't want the shit, whyd'ya you think I sold it to you?"
If interested see also:
Where Are The Tech Unicorn IPOs?
Venture Capital: Who Will Buy My Sweet Young Unicorn?
...Funding would become scarce. The next round, if there is one, might be a down round, with lower valuations than prior rounds. Some investors and employees might have to watch their gains go up in smoke – without being able to sell. If there is an IPO or a buyout, it too might be a disappointment. And employees who broke their backs for these startups would realize just a how demoralizing the process can be. 
But those are the lucky ones....MORE
Aarrgh, them with the broken backs be the lucky ones and the living will envy the dead.
And way back in December 2014:
Cracks in Silicon Valley’s Billion-Dollar Startup Club: Two Firms Are Proposing IPO's as Downrounds