A spurt of delays could derail the end-of-year IPO cavalcade, pushing some major flotations into 2021 and possibly complicating next year’s public-liquidity run.
On Saturday, the NYT reported that gaming development platform Roblox would delay its IPO into the new year. Its CEO informed employees that the hiatus would allow Roblox to “improve [its] specific process” for shareholders of all types.
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What the hell does that mean?
That after watching shares of DoorDash, Airbnb and C3.ai soar last week, Roblox doesn’t want to allow current shareholders to sell in the IPO, only to see the value of their now-sold shares open sharply higher. (The Roblox IPO has a line in its offering explanation that reserves the ability for existing shareholders to sell, implying liquidity for employees and investors; this makes the pricing issue more personal than academic.)
One delayed IPO isn’t such a bad thing. Roblox will still go out, we will still watch, it will still be interesting. But now fintech startup Affirm will likely delay its IPO as well, Axios and the WSJ report. That’s two.
And if Affirm and Roblox delay, others may too. This morning we asked on the Equity podcast if there could be too much of a good thing. The answer appears to be yes, at least as far as IPO pops go. Investor enthusiasm was so high for last week’s mostly brand-name debuts that the whole well could be poisoned for a while.
Great.
This is particularly grating as the 2021 IPO cohort could be massive. If you thought 2020 had a lot of deals, next year could really impress you. But only if the prevailing climate is right, it appears. Because if there is one thing we’ve learned about unicorns, it’s that they are spotlight-shy. Say “GAAP” too loudly and they tend to scatter.
But at some point unicorns have to exit. This is especially true today, as the birth rate of unicorns in the United States — the pace at which net-new startups reached a $1 billion valuation — rebounded in the third quarter. From a local minima of just 11 new unicorns in Q2 2020, 17 made the cut in the third quarter. That brought the number of unexited unicorns in the United States to 216 in the U.S. alone, according to CB Insights.
There are more than 500 unicorns in the world, all of which will want to exit while stocks are at or near all-time highs.
If the liquidity train is derailed because some IPO did too well, I will lose my gosh-darn mind.
What more do you want?
It’s somewhat amazing that we’re in this situation. The IPOs in question that present a problem did, in fact, incredibly well.
Recall that Airbnb, DoorDash and C3.ai each managed to raise their IPO range and price above the embiggened interval. That’s dream territory.
Even more, Airbnb and DoorDash and C3.ai greatly improved on their final private valuations in the process. It’s not like they had to endure a discount to get out. No, they trashed their final valuations by going public, raised a mint apiece and then had kick-ass debuts.
But a bit like a DJ Khaled album cover, unicorns-in-waiting appear to view the above results as suffering from success rather than enjoying a better-than-expected pop thanks to some historically rare external factors.
After seeing Airbnb price at its IPO at a $47 billion diluted valuation — up more than 50% from its highest private valuation, far above its final private price of around $18 billion — DoorDash’s diluted valuation reached nearly $39 billion, way ahead of its summer-era $16 billion final private valuation. And C3.ai was valued at more than $4 billion in its IPO, far ahead of its final $3.3 billion private valuation (PitchBook data).
Boo-hoo, what a terrible set of IPOs. All that new money and liquid shares and investor and employee liquidity at newly raised prices? You can only imagine the pain.
Sure, you could argue that the companies left money on the table by underestimating the price that eager, small-holding public shareholders would be willing to pay for their stock at the open. But that doesn’t mean that the companies were long-term misvalued. Indeed, Airbnb and DoorDash have already given back 13% or 14% from their opening trades.
Perhaps we’re being impatient. But my god, if this is not the market you would want for an IPO, and you are unwilling or unable to wait for the IPO process to be sufficiently shaken-up that you can better price your IPO to prevent outsized first-day pops, what do you want?
Let’s hope that Affirm and Roblox are exceptions and not the start of a new rule.