A major piece from Fortune:
VCs have pumped up the value of the “unicorn” startups. Now tech IPOs are in trouble. Good luck getting out.
Of all the Silicon Valley IPOs in the past couple of years, Lending Club’s might have been the surest bet of all.
The San Francisco peer-to-peer lender is a star in the world of “fintech,” a growing sector made up of financial technology companies bent on disrupting the traditional banking sector. Its backers include venture capital royalty such as Kleiner Perkins and Union Square Ventures, not to mention Google and Alibaba. The startup’s gold-plated board of directors includes luminaries such as John Mack, the former CEO of Morgan Stanley; former Treasury Secretary Larry Summers; and Mary Meeker, the one-time doyenne of Internet IPOs who is now a Kleiner partner. In other words, Lending Club had assembled a very smart-money crowd. Its much-buzzed-about offering was viewed, understandably, as a slam dunk.
In December 2014, led by underwriters at Morgan Stanley and Goldman Sachs, Lending Club priced its shares at $15, above the high end of the proposed range of $12 to $14. The IPO was 20 times oversubscribed and instantly gave the company a market value of nearly $6 billion. On the first day of trading, Lending Club’s stock jumped almost 70% before pulling back to close at $23.42 a share, a one-day pop of 56%. For shareholders who got out quickly, it went in the books as another very successful offering.
Then reality set in. Lending Club’s stock peaked about a week after its IPO, at nearly $26 a share, and has been retreating ever since. Never mind that the startup delivered extraordinary financial results in its first year as a public company: Lending Club’s operating revenue was up more than 100% in the first nine months of 2015 compared with the same period in 2014, and its Ebitda, a measure of earnings before subtracting expenses such as interest and taxes, was up more than 200%. The stock recently traded around $8 a share, nearly 50% below its $15 IPO price.
Naturally, Lending Club CEO and co-founder Renaud Laplanche wishes the stock price were higher. But he’s trying to look past short-term vicissitudes. “Part of the main reason for going public was to continue to establish Lending Club’s brand and credibility,” he says. “We’re building a big company. It’s going to take a very long time, but we want to do it in the public eye with full transparency. I think from that standpoint, we got rewarded. I think the Lending Club brand is a lot more established now than it was a year ago.”
That may be true with customers and bankers, but ask any retail investor who made a bet on Lending Club at around $20 a share about the company’s brand today, and the response is likely to be a grimace followed by a torrent of vitriol.
Unfortunately the Lending Club story is not an isolated case. Time and time again during the current IPO cycle, Wall Street underwriters—egged on by ambitious CEOs, hungry venture capitalists, and favored institutional investors—have hyped one technology IPO after another. The bankers price the offerings for perfection, watch them soar on the first day of trading to deliver the coveted first-day spike, and don’t stick around to offer an explanation after the shares plunge below the first-day price. (Morgan Stanley and Goldman Sachs declined to comment for this story.)
Welcome to the world of zombie tech stocks—once-highflying IPOs wandering aimlessly in the wasteland of the public equity markets and understandably unloved by investors. Many have familiar names, such as Zynga (down about 75% from its IPO price) ZNGA, Twitter (down 30%) TWTR, and Groupon (down 85%). Online craft marketplace Etsy ETSY recently traded 56% below last year’s price at IPO and 77% under its first-day close. Others that are less well-known—like Nimble Storage (67% below IPO price) NMBL—have been just as disappointing.
To be fair, some major tech IPOs have soared in recent years, among them LinkedIn LNKD, Tesla Motors TSLA, and, after a rocky and controversial start, Facebook FB. But these are the exceptions. The detritus far outnumber the success stories, raising the question, Is the method by which companies go public as broken and inequitable as it ever was? That would certainly seem to be the case. And the problem is especially acute when it comes to tech companies for which relentless forward momentum is key not only to pleasing investors but also to attracting talent and keeping their competitive edge.....MUCH MORE
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And way back in December 2014:...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....MOREAarrgh, them with the broken backs be the lucky ones and the living will envy the dead.
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