CoinDesk reported yesterday that crypto trading startup Coinbase is being valued at $77 billion on private exchanges. And Forbes reported that Stripe is being valued at $115 billion on secondary markets, where private shares can be bought and sold, albeit in a limited fashion.
I instantly wanted to write a piece headlined “Beware those super hot secondary market valuations,“ but after a little digging, I cannot. It turns out that the public markets are so hot, there is historical precedent for seemingly aggressive secondary market transactions being conservative compared to later IPO valuations. And there is further precedent for private market transactions that are more conservative in price terms than venture-determined valuations also working out.
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The hot equities market is making stock pickers out of many startup investors, regardless of whether they are leading priced rounds or buying shares on modern secondary markets.
It’s hard to overvalue a startup when the public market is willing to double its valuation the moment it starts to trade.
Let’s explore the new prices for Coinbase and Stripe by starting with a look at their dated private valuations, their new, reported secondary prices and where some companies that went public with notable secondary prices wound up trading today.
This will be fun! I promise!
Overprice me, I dare you
Coinbase was last valued by private-market money at around $8 billion, per Crunchbase data back in October of 2018. More recently we’ve seen secondary transactions that value the firm at $50 billion, other notes concerning a $75 billion possible valuation, and even some enthusiastic chat from a former employee that the company could be worth $100 billion.
Its new $77 billion price tag might seem somewhat pedestrian in that mix, but recall that we’re largely discussing the valuations associated with Coinbase set by buyers not in the know; retail secondary buyers of shares in the cryptocurrency exchange are probably not its board members.
So, the public is, to some degree, repricing Coinbase. The question is whether those prices make any sense. Hold your answer, we have more work to do.
Stripe at $115 billion on secondary exchanges is perhaps bonkers, or perhaps nothing more than rationality. In its last round, a $600 million Series G that came in mid-2020, Stripe was valued at around $36 billion. And, it is rumored to be raising capital at a $100 billion valuation.
If that round happens at the expected valuation, secondary transactions would only be paying a 15% premium on what big private money was willing to cough up. But, the smaller fries would still be paying 3.2x per-share more than what bigger pockets managed to pay for Stripe stock just last year. So it still pays to be a VC.
If the $100 billion round happens, the recent, secondary market Stripe valuation news becomes old hat; if the round doesn’t materialize at its expected price, the secondary market transactions’ implied valuation for the company could prove wild. Right? Hold your answer, we have more work to do.
To get a feel for how things have gone for secondary market transactions, let’s turn to Airbnb. Going back in time to August 2020, ValueTheMarkets wrote the following (Bolding: TechCrunch):
The big question is, what will Airbnb be valued at when the IPO commences? The group was last valued at $31 billion in 2017. But according to the Financial Times, private investors were trading indirect stakes in November 2019, valuing the company closer to $42 billion. However, in April this year, when it raised $2 billion, the equity portion of this was at a pre-money valuation of $17 billion.
You might have thought that the private market investors were getting ahead of their own skis, right? Smart money had just talked the company into taking capital at a sub-$20 billion valuation, why would the secondary markets pay more than double just a few months later?
Well, Airbnb is worth $116 billion today, and that’s after shedding 4% during this morning’s trading. So the seemingly aggressive secondary transactions were higher than what private investors paid, but far less than what the public was willing to bear.
This example really only holds for companies that are legitimately hot, I think. But as we’re discussing Stripe and Coinbase, I simply don’t mind using it.
Palantir is an interesting example, in reverse. Private money actually got more bearish on the company than its major investors. Every one of them was wrong about its value, however. Despite a 7% drop today, Palantir wasn’t worth $10 billion or $20 billion after it went public, but north of $40 billion.
You can also parse old Uber secondary market data and more to generate more examples of our concept. But what was surprising to me while prepping this short piece for you was that it wasn’t super easy to come up with mockery for secondary market deals pricing hot tech companies at price points above their eventual public-market valuations. Not recently, at least.
It is possible to find examples of down IPOs, like Casper’s or Lemonade’s, but in the case of the mattress company the mismatch appears to have been driven by overenthusiastic private investors, and in the case of the latter, poor IPO pricing as the insurance company’s stock skyrocketed after its debut.
Returning to our earlier point, the stock market is so hot that it appears somewhat difficult to overpay for startup equity in hot companies. Unless you go truly bonkers I suppose, but what does that even mean in 2021? I certainly don’t know.
Would I line up to pay $77 billion for Coinbase? Probably not, but that doesn’t mean that the public markets won’t. So before we mock these heady trades, let’s see what a more liquid market has to say.
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