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Sizing Up Bill Gurley's "Bubble" And The End Of The IPO

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POST WRITTEN BY
Rett Wallace
This article is more than 9 years old.

Bill Gurley is one of the best and most prominent venture capitalists in the U.S. right now.  And let’s be honest, the current tech valuation climate has been very kind to him.  So when he blogs about the "b word" (bubble) and follows it up with a media tour, no wonder serious people pay attention. Interestingly, in the intervening two weeks the market has made him look like a genius, while totally disregarding his warnings.

Mr. Gurley claimed that large fund managers are recklessly plowing billions of dollars into next-generation growth companies like Uber and Airbnb in the wild-west private market, rather than the regulated public market. He describes a mania of investors “desperately afraid of missing out” as they ante-up in the “high-stakes, late-stage game.”

He should know, it’s hard to find a more expert witness. Mr. Gurley’s firm Benchmark Capital has invested in at least eight of the 80 “unicorn” companies he noted for having valuations over $1 billion. Mr. Gurley himself sits on the boards of more than a dozen public and private companies including the big dog of the moment Uber. Previously he was a star tech analyst on Wall Street when those jobs mattered.  So obviously he knows what he’s talking about.

No sooner had his cautionary blitz concluded than we saw, as if on cue, news that three of the biggest “unicorns” – Airbnb, Pinterest, and Snapchat – are all raising huge amounts of money in the private market at valuations far north of their most recent marks. The price talk for all of these deals in nice, round billions shows how much rigor there is in the valuations.

For good measure, we saw news last week that one-time “unicorn” Fab.com was sold for scrap at exactly the price Mr. Gurley quoted in his published cautionary tale a week earlier: $15 million.

In his blog post, Mr. Gurley argues convincingly that private companies are risky investments because:

  • Private companies receive no scrutiny from bankers, lawyers, auditors, and the SEC as IPO candidates do.
  • The presentation of financial data by private companies is often unclear, methodologically questionable, incomplete, and not comparable to audited financials.
  • The complex capitalization tables of private companies with multiple classes of preferred stock represent brain damage that most mortals can’t tolerate, and IPOs used to cure.

These are very good reasons, all else being equal, why investors might prefer to invest in public companies vs. private companies. But obviously all things are not equal. So far this year, 27 times more primary capital has gone into U.S. technology companies privately than publicly.  (Primary issuance is when investors buy stock directly from the company, vs. secondary transactions when investors trade with each other.) And if Box.com had actually gotten its IPO done on schedule last year, it would be 88 times more.

The only U.S. tech company to file and price so far this year is MaxPoint Interactive, a North Carolina adtech outfit that raised $75m in an IPO last week, and then watched its stock dive 10% at the open on its first trading day. Welcome to the public market!

Included in the number above is the extra $1 billion Uber tacked onto its most recent round.  For context, in all of 2014 there were only two U.S. tech IPOs that raised more than $1 billion in total proceeds: JD.com and Alibaba (both Chinese companies). The median proceeds of all U.S. tech IPOs in 2014: $147 million.

The numbers in the chart above don’t include the $100 million to $300 million that crafts marketplace Etsy will raise in its IPO, filed this week. But neither do they include many big private deals rumored in the market now: Airbnb (reportedly raising $1 billion), Spotify ($500 million), Snapchat ($500 million), and Lyft ($250 million to $500 million). So the gearing on an unscientific sample of visible in-market deals right now, by dollar volume, is about 25 to 1.

There were 26 tech IPOs in 2014. At $147m a pop, the private market has already done the equivalent of 45 IPOs worth of dollar volume this year – and it’s not yet mid-March. The primary market seems to be working just fine – it’s the public market that has a problem.

Mr. Gurley said it himself in the Financial Times: “In last year’s record market for initial public offerings, the companies that were ready to go public went public.  Those that did not, stayed private for a reason.” And he said on his blog that an IPO is “the very event that many of these entrepreneurs were hoping to avoid.”  Whatever the reasons and motivations, the data speak for themselves.

From a peak in 1997, the number of U.S. publicly-listed companies is down 40%.  In the same period the capitalization of U.S. publicly-listed companies is up 144% to $26.3 trillion. No wonder public-market investors are willing to consider alternatives to plowing more capital into a shrinking pool of public names.  The money needs somewhere to go.

Now the big question: how will these investors get liquid on tens of billions invested into late-stage private companies, when the median size of a tech IPO is $147m and tech CEOs seem more eager than ever to avoid an IPO entirely? If Mr. Gurley is right, they may not. Another knowledgeable investor chimed in with bubble warnings last week.  Mark Cuban was talking about angel investments, but what's true for $5,000 is more true for $5 billion. He asks "If stock in a company is worth what somebody will pay for it, what is the stock of a company worth when there is no place to sell it?"