Private Market Valuations Exceed IPO Valuations: Is This a Bubble??

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private-company-valuations-temp-112614-4Brokerdealer.com blog update inspired by 2 Jan WSJ column by business news journalist Liam Denning

For broker-dealers, investment bankers, and those following the investment strategies of private equity and venture capital firms, this is one of the better plain-speak summaries profiling the current climate of investing in private companies. The recent outsized valuations during 2014 have caused greybeard investors to scratch their heads…as the outsized pre-IPO valuations are counter-intuitive to traditional investment analysis of private companies, particularly given the assortment of “lower-than-last-private round” post IPO valuations that these same companies are being given in the public marketplace.

For private companies that wish to network with deep-pocketed angel and/or institutional investors, Brokerdealer.com provides an investor forum that connects start-up entrepreneurs with those who can see the forest through the trees.

Below please find excerpts of Liam Denning’s reporting..

Buying a stock, with all its attendant filings, analyst coverage and forecasts, still can be a gamble. So imagine getting excited about one isolated price signal on a private company with all the disclosure of the Air Force’s Area 51.

Yet that is what is setting pulses racing as 2015 dawns. Xiaomi, a closely held Chinese smartphone maker, recently raised $1.1 billion at an implied valuation of more than $46 billion. That puts it ahead of Uber Technologies, the unlisted ride-booking application developer that got new funding in December valuing it at $41 billion. Both numbers also are higher than the market capitalizations of roughly three-quarters of the S&P 500’s members.

In theory, such startup valuations matter little to anyone but a relative handful of founders, employees and venture capitalists. The average investor doesn’t get a seat at the table or more than an occasional glimpse of what even is on the table.

In practice, news of such amazing, and seemingly unobtainable, investments stoke bullish sentiment, leaving individual investors potentially vulnerable.
Venture capitalists and other insiders usually do extensive due diligence before committing to the likes of Uber. But their basis for valuation differs from the approach of mainstream investors buying stocks, with venture funds also considering exit timelines, the cash needs of a startup to keep expanding and maintaining incentives for management and owners as equity stakes get parceled out. They also can, of course, just get things wrong.

Ordinary investors also must consider the wider context. In a world thirsting for yield amid ultralow interest rates, money has sought riskier corners of the market. Almost $24 billion of new commitments flowed to U.S. venture funds in the first nine months of 2014, according to the latest data from Thomson Reuters and the National Venture Capital Association. That is more than in each of the preceding five years in their entirety and sets up 2014 to have been the biggest year for new venture money since before the financial crisis.

This raises the risk of dollars being deployed into questionable businesses, which then eventually find their way into the wider market via initial public offerings, which are priced off the back of those high startup valuations.

For the entire WSJ story, please click here.

IPO Market Recovers, Gives Some Hope to Silicon Valley, But Not Much

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Silicon_valley_titleBrokerdealer.com blog update profiles the recovery of the IPO market and the effects it had on Silicon Valley companies courtesy of Venture Beat’s Chris O’Brien.

Although it was a great year for IPOs, it was not necessarily a good for brokerdealers, as O’Brien explains later on, returns on IPOs in 2014 took a dramatic drop compared to returns on IPOs in 2013. Nonetheless, a strong IPO showing is projected for 2015, which could create big returns for brokerdealers in the New Year. In addition, Silicon Valley has plenty to stress as about as there wasn’t a huge IPO growth made in tech industries, the surge of IPOs came from health and biotech fields.

A tech industry that had spent years waiting for a revived IPO market finally got its wish in 2014.

The overall IPO market reached a level not seen since 2000. And Silicon Valley companies rode that wave as venture-backed IPOs soared, according to year-end data from Renaissance Capital.

Within these ample gold and silver linings, there are a few clouds looming for the tech industry as well.

First, let’s start with the good news. Here are the highlights from Renaissance:

  • The 273 IPOs in 2014 was the most since 406 IPOs in 2000.
  • IPOs were up 23 percent over 2013, even though there were some global scares like the Ukraine crisis and Ebola that in years past might have causes stock markets to freak out.
  • Money raised climbed 55 percent to $85 billion, though Alibaba accounted for $22 billion of that.
  • The number of venture-backed IPOs climbed to 124 this year, up from just seven in the dark economic year of 2008.
  • A solid pipeline and strong US economy should mean another strong IPO showing in 2015.

So, what’s there to worry about amid all this rosy news?

1. Returns were down: The boom in the number of IPOs was not necessarily great for investors. Average IPO returns were only 16 percent, a big drop from the 41 percent return on IPOs in 2013. That could put a chill on IPOs in 2015 if the trend continues.

2. Tech is not king: The surge in IPOs was led by healthcare and biotech IPOs. In particular, the overall numbers were padded by the 100 healthcare IPOs in 2014, a jump from 54 the year before. Slice off that healthcare increase, which mainly included a lot of small-cap companies, and the number of IPO offerings was about the same as 2013.

3. 2014 was very good, not great, for tech: There were 55 tech IPOs in 2014, up from 45 the year before. Those IPOs raised $32 billion, though that includes Alibaba’s $22 billion haul. Back that out, and you still have a nice increase from the $7.9 billion raised in 2013. But tech companies are hardly printing money. And talk of a bubble remains just plain silly.

4. China rules: This year will be remembered for the monster Alibaba IPO offering, followed by China’s JD.com offering that raised $1.8 billion. Those were the only two tech companies to make the list of the year’s 10 largest IPOs. And with China’s Internet population more than double that of the U.S., the center of the tech world could continue its shift to Asia.

None of these things should dampen the tech industry’s celebration of a solid year. But they’re a good reminder that Silicon Valley shouldn’t get overconfident when it comes to IPOs and think just any company with a little momentum can go public. Investors can afford to be selective.

And, really, that’s probably a good thing for all of us.

For O’Brien’s original article in Venture Beat, click here

 

BrokerDealers Help Mint Billionaires in 2014; Greed Is Good, Funding is Fun

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startup valuationsBrokerdealer.com blog update courtesy of extracts from 29 Dec edition of the Wall Street Journal, with reporting by Evelyn M. Rusli

As brokerdealers, investment bankers, institutional investors and entrepreneurs “close the books” on 2014, all will agree this has been a remarkable year in which “billion dollar valuations” have seemingly been the norm. Most notably, technological start-ups have enjoyed increasing valuations with each subsequent round of financing from private equity and venture capital firms, albeit many financial industry professionals are wondering whether those valuations can carry over when these private companies embark on initial public offerings (IPOs).

While “Wall Street” protagonist Gordon Gekko coined the phrase “Greed is Good!,” the Broker-Dealers mantra for 2014 was “Funding is Fun!”

Below please find highlights of the WSJ article.

Chinese smartphone maker Xiaomi Corp. is now officially the world’s most valuable tech startup, worth $46 billion—the exclamation point on a year of extraordinary valuations. Continue reading →

New IPO makes Brokerdealers Hungrier for 2015

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timthumbBrokerdealer.com blog update courtesy of Forbes.

Brokerdealers everywhere have rejoiced, Shake Shack, a newer chain restaurant, recently applied for an IPO and set to go public in 2015. Shake Shack is known for its fresh cut fires, 100% all beef burgers and hot dogs, and most of all its delicious shakes. The chain has been growing ever since its opening in New York City in 2000 and now has 63  locations open  worldwide.

Shake Shack, the New York-based burger chain created by famous restaurateur Danny Meyer, is set to go public in 2015, after filing for an IPO Monday.

The chain, which plans to list on the New York Stock Exchange under the symbol “SHAK,” details a rapid growth effort that has seen an increase from a single shack in Manhattan’s Madison Square Park to 63 locations worldwide today (about half are owned by the company, with the remainder operated by licensees.”

Restaurant concepts have proven a mixed bag in the market, as investors pore over growth prospects looking for chains that could prove as lucrative as Chipotle Mexican Grill CMG -1.73%, which has returned more than 1500% since being spun out of McDonald’s MCD -0.87% in 2006.

IPOs from companies like Noodles & Co, Potbelly and Zoe’s Kitchen were greeted with immense demand, though both stocks have taken their share of hits since debuting. More recently, burger chain Habit Restaurants has surged more than 80% since its mid-November IPO.

At a time when many legacy restaurant operators are struggling to find growth — McDonald’s certainly among them — younger chains with smaller footprints and more runway for expansion are proving attractive.

Shake Shack reported $140 million in system-wide sales for its 2013 fiscal year, up from $81 million the prior year, with 56% of revenue from its domestic, company-owned locations. Total revenue, which only includes licensing revenue from non-owned locations, was $83.8 million in 2013, up 41% from the prior year. Net income declined to $3.5 million, from $4.4 million the year before, due to a sharp increase in expenses, largely attributable to higher food costs and costs associated with opening new locations.

Growth is likely to come both abroad and at home. Aside from New York, with 15 locations, no U.S. state has more than four Shake Shacks.

“Fast-growing restaurant concepts are still hot,” says Paul Bard of IPO research firm Renaissance Capital. “Habit opened up 100% so comparable companies will see that as an opportunity and there’s a whole crop of fast-casual burger chains out there.”

Bard also points to chicken chain Bojangles and Focus Brands, a franchiser of Cinnabon and Carvel, as potential names to watch for on the 2015 IPO market as investors continue to look for growth in the consumer space.

The U.S. economy’s slow recovery and improved consumer spending is certainly a help to restaurants, but Shake Shack’s filing notes that the company’s initial expansion occurred in a far more difficult environment.

“We’ve never believed that Shake Shack only thrives in a down economy, but growing from one to 15 Shacks smack dab in the heart of the recession told us that we also don’t need a robust economy to build our business,” Meyer and CEO Randy Garutti wrote in a letter to prospective shareholders.

Meyer is listed among the shareholders who control at least 5% of Shake Shack’s shares, along with affiliates of private equity firm Leonard Green, Select Equity Group, Alliance Consumer Growth, and Jeff Flug, president of Union Square Hospitality Group, the parent company of Meyer’s other restaurant ventures, and a Shake Shack board member.

The language in the Shake Shack filing also reveals the controlling hand Meyer will maintain at the company post-IPO. He and his affiliates will be entitled to nominate a certain number of directors — five as long as he maintains 50% of his post-offering holdings, and sliding down from there — and must grant approval for a variety of corporate actions, including a sale of the company, firing or hiring of a new CEO or a change in board size, so long as the group keeps 10% of its post-IPO shares.

 

For the original Forbes article, click here.

 

Virgin America Flies High With IPO; Investors Touched For The Very First Time

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Shares of the Discount Airline Close at $30, Up 30% from the IPO Price

BrokerDealer.com blog update courtesy of extract from WSJ. A complete directory of brokerdealers who participated in underwriting the airline industry’s first initial public offering in quite a while can be found via the brokerdealer.com database.

Virgin America Inc. took off Friday, as shares of the discount airline rose more than 30% in their market debut.

Virgin America Fly Girls PremiereThe stock, which began trading on the Nasdaq Stock Market under the symbol “VA,” closed at $30, giving the company a market value of about $1.3 billion. Earlier Friday, shares opened at $27 and hit a high of $31.19. Virgin America’s initial public offering of about 13.3 million shares was priced at $23 each, at the higher end of the carrier’s initial range of $21 to $24 a share and valuing the Burlingame, Calif., company at $994 million. The first-day pop exceeds the average 13% gain IPOs have notched so far this year according to IPO ETF manager Renaissance Capital.

Virgin America currently has a market capitalization of $1.3 billion.

Following the IPO, Virgin America expects to have about 43.2 million shares in total, leaving Cyrus Capital Partners LP and Virgin Group Ltd. as the company’s largest shareholders.

PAR Investment Partners LP has agreed separately to purchase 2.3 million shares for about 96% of the IPO price, or about $50 million, from the controlling shareholders in a private placement. The IPO is expected to raise about $220 million in net proceeds, which Virgin America said it plans to use for working capital, sales and marketing, and capital expenditures. Selling shareholders won’t receive any proceeds.

For the full story from WSJ, please click here