The Next Big Challenge for Unicorns: Wall Street

Silicon Valley's sky-high valuations fail the public market test
July 20, 2017 Updated: July 23, 2017

Shares of Snap Inc., the parent company of Snapchat, have been on a roller coaster since its initial public offering (IPO) in March.

The year’s hottest IPO was a relief for many “unicorns,” technology startups valued at more than a billion dollars. However, in the public market, unicorns are struggling to match the rich valuations they have received from private investors.

The share price of Snap (ticker symbol: SNAP) fell below the IPO price of $17. The company’s market value now stands at about $17.4 billion, down $11 billion from its peak of $28.4 billion the day after its IPO on March 2.

The company has failed to address worries about its growth and the competition coming from Facebook-owned Instagram, according to analysts.

“We have been wrong about Snap’s ability to innovate and improve its ad product this year,” wrote Brian Nowak, equity analyst at Morgan Stanley, in a research report. Morgan Stanley was the lead underwriter for the company’s IPO.


Nowak downgraded the stock and lowered its price target by 43 percent to $16 per share. The company is now trading slightly below its private valuation of $17.8 billion reached during its last fundraising round in May 2016.

“We believe Instagram has become more aggressive in competing for Snap’s ad dollars. As such, we see Snap ad revenue growth being materially slower than we previously expected,” he stated.

To take on Snapchat, Instagram has been enhancing its camera tool and has rolled out stories and face filters, similar to features offered by Snapchat.

Instagram Stories had 250 million daily active users in June, topping Snapchat’s daily active user base of 166 million.

Snap has also disappointed some investors by creating shares with different voting rights. Snap’s IPO was the first to offer only non-voting shares in the United States, concentrating the majority of the power with its two founders, CEO Evan Spiegel and CTO Bobby Murphy.

Snap is not the only company that has had rough times after its IPO. Shares of Blue Apron Holdings Inc. (ticker symbol: APRN), the largest meal-kit delivery company in the United States, fell 35 percent since its IPO on June 28.


Blue Apron IPO Crash

Similar to Snapchat, the New York-based Blue Apron is now confronting a giant rival. Three days before Blue Apron’s IPO, announced the acquisition of Whole Foods Market Inc. for $13.7 billion, dealing a blow to the food sector.

The company is now worth about $1.2 billion, less than its $2.2 billion private valuation reached during its last round of fundraising two years ago.

“It is important to note that this is not a technology company just because orders are received digitally,” wrote Chuck Cerankosky of Northcoast Research, in a report. He is the first analyst to rate the stock, and he expects the share price to fall further due to the severe cost challenges and mounting competitive pressures.

Blue Apron’s IPO has demonstrated a significant trend in IPOs backed by venture capitalists, according to William Smith, co-founder and CEO of Renaissance Capital, an IPO advisory firm.

In recent years, excessive capital and rich private valuations have pushed back the IPO timelines for some of the big startups, but that sentiment has changed in 2017.

“Blue Apron’s IPO was another sign that billion-dollar tech companies will come public when the need for capital outweighs the fear of valuation pushback,” Smith wrote in a report.

Most tech companies that went public this year had debt and cash shortages; hence, they needed to raise money in the public market, according to the report.


Lofty Valuations

There has been an excess of capital in the private market, which led to lofty valuations in recent years. As a result, the number of unicorns increased from 14 in 2012 to 147 in June 2016, according to the Financial Times.

“It is just basic supply and demand,” said David Ethridge, managing director and U.S. IPO services leader at consulting firm PwC.

There have been many similar booms over the last 25 years, and some are likely to flame out, he said.

“I don’t think there is any secret that numerous companies have gone below their private company valuation [during IPO], and it’s very hard to predict whether that will continue,” Ethridge said.

However, he believes the post-IPO experiences of Snap and Blue Apron have been mainly due to company specific issues and that these will not put off other unicorns in the IPO pipeline. It is not a bellwether for upcoming IPOs, as the companies still believe the market is favorable, he said.

Snap and Blue Apron happened to hold their IPOs around a time that major competitive pressures were building, with Instagram rolling out major new features and Amazon acquiring Whole Foods.

Ethridge said, “In a typical market, you don’t see that kind of narrative around an IPO.”

Follow Emel on Twitter: @mlakan