Tsunamis may not reach shore for hours after an earthquake hits. For venture capital investors who spent hundreds of millions in Silicon Valley in 2014-2015, it is time to face the reckoning of their own delayed deluge.
A flood of recent US initial public offerings is being priced below valuations suggested in earlier, private funding rounds.
On Thursday, for example, Cloudera priced its initial public offering at $US15 per share, valuing the business software start-up at roughly $US2 billion ($2.7 billion). That was above the pricing range, and the shares swiftly commanded a premium.
Other recent tech IPOs, such as Snap and Mulesoft, have also produced juicy first-day trading pops.
However, Cloudera’s biggest investor, Intel, still bears hefty paper losses having bought in at about $US31 per share in a private fundraising round in 2014. That year belonged to the so-called “tourist” era.
Mutual funds, public companies, sovereign wealth funds, pensions and other less experienced hands drove up valuations of any business that had a whiteboard and a dream.
A healthy US equity market is enabling those businesses to offer shares finally. But the Cloudera IPO could augur a stream of “down round” listings where the valuation falls below the peak figure, leaving investors such as Intel with losses on their books.
That is awkward. But they should remain optimistic. Cloudera shareholders appear to be: none are selling their holdings. They are waiting for better prices, perhaps even a deep-pocketed acquirer. The listing, at least, gives them a straightforward escape route if they decide to sell.
Two “down round” IPOs from recent years, Box and Square, now trade modestly above their IPO prices. Public markets have some ability to restore rationality to corporate valuations after the guesswork of private financings. After the deluge, let the rebuilding and recovery begin.