Technology IPOs Ail From Stupidity and Greed
This was supposed to be the year of the technology IPO comeback. This prediction has definitely not panned out, with 14 initial public offerings by technology companies in the U.S., which means the number of listings is likely to fall short of the relatively mild 2015 total. Predictions have already started that 2018 will be technology's breakout IPO year. Hope springs eternal.
Instead of an IPO boom, 2017 has brought innovative ways not to go public. Some private tech companies have waited to go public for so long that the term "startup" fits about as well as boys clothes on a muscular 20-year-old. Spotify might go public using a relatively untested non-IPO mechanism. A technology investor last week kicked off a publicly traded investment fund for the purpose of helping technology companies go public without an IPO. 1
I'm already dubious about those back-door routes to going public. I'm also not wild about Peter Pan tech startups that put off IPOs as long as possible, although I recognize their pragmatism. Regardless, there is hand-wringing that the technology IPO market is sick and maybe the whole process needs to be bulldozed.
The trouble with all this discussion is it ignores glaring causes of the illness: stupidity and greed.
As Exhibit A, I give you Blue Apron Holdings Inc. No matter what, Blue Apron probably would have had a tough time navigating its way to the land of public companies. Once people saw the company's finances in June, many of them doubted the company was capable of profitably luring and keeping customers for its meal-kit deliveries. Amazon's acquisition of Whole Foods -- at the same time Blue Apron was pitching itself to potential investors -- made people rethink the economics of the entire food market.
But Blue Apron shot itself in the foot, too. Inexplicably, the company went through wrenching changes in its business in the months before and after its IPO. Those changes -- including the rocky opening of a new food distribution center, the related rocky debut of more flexible menu options and a management reshuffling -- may have been necessary, but it hurt Blue Apron's credibility and finances at the same time it was going public. 2
In its first quarterly report as a public company, Blue Apron disclosed that costs to open its new distribution facility left it with less money to spend on marketing to sign up new subscribers. In part because of those changes, Blue Apron shed customers. A company needs a rock-solid story to pitch to public market investors, with the finances to match. Blue Apron had a strategy for investors built on a shifting foundation that fueled investors' doubts. The stock price is 40 percent off Blue Apron's discounted IPO sale.
It's possible the company didn't have much of a choice in IPO timing. It needs the cash. But like a cook scrambling to finish one of Blue Apron's meals, trying to do too much at once burned Blue Apron's kitchen. And the IPO market is so small and fragile that a handful of prominent stumbles can infect the rest of the herd.
OK, there was our textbook example of stupidity. Now for a dose of greed.
Cloudera Inc. in April ran headlong into the reality that it wasn't worth nearly as much as investors thought a few years ago. Shares of the business-software company have declined since its first closing day as a public company in April. Then on Friday Cloudera disclosed it plans to sell a fresh batch of stock to pay tax bills for employees paid in stock. Some of its pre-IPO stockholders or members of management are likely to sell, too. (The company's initial securities document didn't give details about the number of shares the company plans to sell, nor the identity of stockholders who may sell.)
There's rarely a great time for longtime investors to sell stock of a newly public company. Five months after a wobbly market debut is definitely the worst time. Cloudera doesn't need more red flags. The company's stock fell about 5 percent Monday after Cloudera's disclosure about its additional stock sales.
Investors who grab shares in unproven young tech companies are already buying a lottery ticket. Those companies shouldn't add to the reasons for stock buyers to turn their back on stock debuts.
My Bloomberg View colleague Matt Levine is also dubious about a fund for tech IPO end-arounds.
Alex Barinka of Bloomberg News last week asked Blue Apron's CEO, Matt Salzberg, why the company made so many drastic business changes at the same time it was going public. "No company should sit still and do nothing," Salzberg said. "As we execute, over time people get to know us better in the public markets and they'll appreciate what we're doing."
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Daniel Niemi at email@example.com