My idle thoughts on tech startups
Why Do Consumer IPOs and B2B IPOs Get Treated Differently?
2019 is off to an exciting start for IPOs of VC-backed startups. In just the last month or so we’ve seen Lyft go public (my analysis of the company’s S-1 here) and more recently, Zoom and Pinterest.
Zoom is a B2B company Pinterest and Lyft are obviously B2C companies. All three have different business models… SaaS, media/ad, and consumer transactional. All three are impressive and valuable businesses in their own right.
In some respects though Zoom has had the most “successful” IPO of the three companies, which has surprised some folks. All three companies had significant investor interest during their road shows and increased their IPO price ranges, but I believe Zoom’s increased the most by the offering. Zoom had the largest first day “pop” when it started trading (+72% vs +28% for Pinterest and +9% for Lyft). And Zoom has become the most valuable of the three in terms of market cap though daily fluctuations put it and Lyft fairly close ($16B+).
In the last decade or so, high profile consumer IPOs have often gotten lofty valuations. I believe this was primarily because public market investors believed there was some chance that these high profile consumer companies would be once-in-a-generation type companies. Google was a one such company when they went public in 2004 and Facebook was too at their 2012 IPO. I don’t follow the Chinese startup market as closely as I follow the US, but Alibaba’s 2014 IPO was a similar watershed moment.
But by definition, once-in-a-generation companies only come along say once in a generation or perhaps once a decade or so. Fairly frequently public market investors believe that a new consumer company is “the next X”. We first saw this with Twitter in 2013 when they went public and many (both retail & institutional investors) believed that company might be the “next Facebook”. Something similar happened with Snapchat in 2017 with their IPO. Despite hype in the run up to their IPOs and strong enthusiasm in early weeks and months of trading, neither Twitter nor Snap has proven to be anything like the next Facebook (FB’s market cap is >10X the combined market cap of TWTR + SNAP).
In finance there’s a concept called an embedded option… in short, beyond the baseline value of a bond or other security you also ascribe an additional bucket of value to something triggered by future events. In some respects, when public market investors describe a newly public company as the next Facebook or Google or Amazon they are implicitly embedding value to in the company’s stock beyond the core business. In many ways, high profile consumer startups that have gone public in recent years have benefitted from an embedded option on potentially being the next once-in-a-decade company.
But in observing the recent IPOs of Zoom, Pinterest, and Lyft it would appear that public market investors are no longer ascribing this option value to the high profile consumer companies. That not only bodes well for strong companies seeking to go public, regardless of whether they’re B2B or B2C. It also signals a potentially healthier IPO market, albeit one occurring in the midst of a decade long bull market.
Beware whenever a transformative company is described as the next Facebook, Google, or Amazon. There will always be exceptional once-in-a-decade or once-in-a-generation companies, that’s one of the great strengths of capitalism’s creative destruction. But Amazon was different than Microsoft before it and Google was different than Amazon and Facebook different from that. If history tells us anything, it’s that the next truly once-in-a-decade company ($100B+ value) rarely looks exactly like the ones of the past.