Until shares can be sold, “valuations” remain fake wealth.
With Friends like these…
Goldman Sachs’ hedge fund, Goldman Sachs Investment Partners, has offloaded over $75 million of Spotify shares, or “less than half” of its stake, in recent weeks, Sky News “has learnt” from “insiders.” This is peculiar because the Swedish music streaming service is preparing to list its shares on the New York Stock Exchange at a valuation of $13 billion, and confusingly, Goldman Sachs is one of the three investment banks that are advising Spotify on this “direct listing.”
A source told Sky News that Goldman Sachs had “practical reasons to sell a small stake.”
So what does Goldman Sachs know that others don’t?
A “direct listing” is not an IPO. It bypasses underwriters and their hefty fees and avoids the whole issue of IPO pricing. It also means that Spotify would not raise any new capital via this listing, which is planned for later this year or early next year. If it succeeds, it’ll be the first major direct listing on the NYSE. If other companies follow the example, investment banks, losing out on underwriting fees, would not be happy campers.
Spotify is one of the 167 “unicorns” in the US, Europe, and Asia listed in the Billion Dollar Startup Club: venture-capital funded startups that have reached “valuations” during their last round of fund-raising of $1 billion or more.
They include 100 US startups. Seven of them have “valuations” of $10 billion or more, including Uber’s $68 billion, if it remains intact, which seems unlikely, given all its problems. Two more unicorns have valuations of just over $9 billion; one of them is Theranos, which has imploded and whose $9-billion “valuation” has become a painfully leftover joke in the list.
But these are boom times. The Nasdaq has surged 16% this year and hovers near its all-time high. Startup booms require this kind of relentlessly rising stock market.
Yet, it has been tough for tech unicorns to provide an exit for their investors. The moment when investors cash out and take their hoped-for huge profits requires deep pockets to come in behind them. This happens when startups sell shares to the public via an IPO (or now perhaps via a “direct listing”), or when they’re acquired by large companies.
But for unicorns, this just isn’t happening anymore. So they keep growing in number, and their valuations get higher and higher, and the exits are blocked. Three years ago, in August 2014, there were 67 unicorns. At the beginning of 2017, there were 157. Now they’re 167.
This year so far, there have been only eight exits among unicorns:
- One acquisition: AppDynamics was acquired by Cisco for $3.7 billion the day before its IPO.
- One collapse: Jawbone collapsed in July and is being liquidated.
- And six IPOs
Of these six unicorn IPOs, not all of them fared well:
- Software company Cloudera went public in April at $15 a share. Today shares closed at $17.48, up 16.5% from the IPO. But they’re down 24% from their post-IPO peak.
- Meal-kit company Blue Apron went public at $10 a share, rose to $11, but has since plunged 51% to $5.31, and is down 47% from its IPO price.
- Snapchat parent Snap Inc. went public at $17 a share, and now at $14.01, is down 21% from its IPO price and down 53% from its peak three days after the IPO.
- Software company MuleSoft went public at $17 and closed today at $20.91, up 23%. But this is down 27% from its post-IPO peak.
- Security software maker Okta went public at $17 a share and today closed at $24.56, up 44% from its IPO and down 9% from its post IPO peak.
- Delivery Hero went public at €25.50 in Germany and today closed at €27.36, up 7.3% from the IPO price, but down 6.6% from the post-IPO peak.
Those were the lucky ones that made it out of the gate.
Beneath the unicorns: Investors in small fry are still able to get out. According to the Wall Street Journal, citing Dealogic, 1,546 startup tech companies were acquired this year, about the same number as last year at this time. But the average deal size was only about $39 million – down 15% from last year’s average. Big companies doing big acquisitions appear to have become gun-shy, Cisco’s AppDynamics deal in January having been the exception.
And 17 tech startups of all sizes went public this year through August 15, including unicorns. In 2016 at this time, 26 companies had gone public. 2016 was already a down-year. Over the same period in 2014, 62 tech companies had gone public — almost four times as many as this year.
Startups with these stunningly high valuations, in relationships to the thin revenues and the thick losses they produce, appear to have trapped their investors: It’s easy to inflate valuations during funding negotiations among a handful of investors behind closed doors where everyone wins when valuations keep getting inflated.
But it’s now getting hard to persuade the outside world to pay these ludicrous valuations just so the original investors – and this includes employees with stock-based compensation – can cash out. Until shares can be sold, these “valuations” remain fake wealth. Many startup investors, particularly those that got in at later stages, may see their bets go up in smoke.
And Goldman Sachs might have been contemplating this when it sold “less than half” of its stake in Spotify even though it is advising the startup on its direct listing at a humongous valuation of $13 billion and could have waited to sell if it figured the listing would succeed and shares would rise afterwards.
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