Red Hot Valuations Contribute To Tech IPO Freeze

Creating hype is easy. Silicon Valley has evolved a rather sophisticated machine to help you do so. But living up to that hype on IPO day, well, that is shaking out to be harder than expected, as the tech unicorns of the last few years now heading out to the public markets are learning now.

The hard way.

Dropbox, reports The Wall Street Journal, didn’t have any problem raising its valuation by more than 50 percent to $10 billion (from $4 billion) in 2014. But staring down an IPO in 2016, investment bankers are already warning that Dropbox might not be able to match that — let alone pull off the “pop” that makes everyone rich on a single morning.

BlackRock Inc., which led the $350 million deal that brought Dropbox all the way to the $10 billion mark, has dropped the firm’s per-share value by 24 percent, according to securities filings.

And Dropbox is starting to look like a grim harbinger of things to come, as some are wondering if VCs have simply priced tech startups far above the level that investors are willing to buy in. The majority of U.S. firms that have gone after the public offering this year have seen their stock prices sink and managed zero return on their IPO price. And investors are increasingly interested in selling off those shares at the first legal opportunity instead of holding them in the hopes of value gain (because they just aren’t gaining value).

As of the end of last week, 11 of 49 (over 20 percent) of U.S. VC-backed tech firms that went with an IPO since the beginning of 2014 have gone on to see their stock trading below the level of their last valuation (based on private funding).

“We’re seeing financing rounds where founders are coming back and lowering the price over and over again,” Venture capitalist Bill Gurley, a partner at Benchmark, noted of the changes he saw in Q3.

The takeaway, suggests WSJ?

Even the most “valuable” startups from the Valley may, in fact, be overvalued in the eyes of investors on the outside.

“The thing that worries me the most about all these [billion-dollar valuations] is that you need a public market to get liquid,” says Chris Douvos, managing director of Venture Investment Associates, a New Jersey firm that invests in funds and startups. “But who’s going to buy at these valuations? It’s all priced for perfection.”

And there is a lot of perfect pricing out there. As of 2015, there are 124 private firms valued by VCs at $1 billion or more (twice the number of a year ago). And those startups are still touching off bidding wars that are running up billion-dollar valuations in the blink of an eye.

However, as public markets are looking increasingly unwilling to let these firms cash out, it is becoming an increasing concern that the enthusiasm for innovation in the Valley has infected some investors with a type of “groupthink” that means writing checks to fit in before understanding why one is writing (such large) checks.

On the other side of the coin, some venture capitalists and executives at startup companies remain unconcerned, noting that startups are cheaper to build than ever and that scale is easier to achieve than ever due to the penetration of smartphones.

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