On Wednesday parent company Snapchat Inc. sold its first shares to the public at $17 a share, or a market value of about $24 billion, including magnificent outlay. It’s an unbelievable valuation for a company that has been bringing revenue for only about two years. Surely it’s almost futile to tell that Snapchat IPO buyers will be rewarded substantially for their coin-toss bet. Shares could fall on their face on the first day of trading Thursday.
Before the coming of Snapchat’s IPO, tech companies going public the last couple of years have researched to find out some of their defects, or they turn aside IPOs altogether rather than risk being kept off for their lack of profits or other oversights. This IPO gussying up, or avoidance was made in grant to public investors’ favor for companies with a healthy mix of cash flow and revenue growth.
Tech start-ups blueprinting for future IPOs know they need to worship at the deflect of profits, too. Some of them, including Dropbox Inc., are bouncing about their profits. A couple of years ago, they would have been talking only about revenue growth or the number of new users.
Snapchat showed no such deference to profits before it went to pitch its IPO. In the final quarter before its offering, Snapchat burned $1.14 in cash for each dollar of revenue. And it didn’t matter.
Though Snapchat’s stock price going down apart in coming months, the ability to get its IPO off the ground effectively should foster other young, richly valued tech companies with high revenue growth but finances that need some work. People close to Spotify have said they were watching Snapchat’s IPO process for hints about the reception to a possible initial offering from the promising-but-unprofitable digital music company.
It’s true that lowering the bar for companies to go public will give tremble to anyone with a memory of the dot-com bust. When investors stop caring about profits and ignoring business model red flags, things like Webvan happen.
On the other hand, it’s healthy for tech land to have an IPO exit path for a potentially dangerous weight of richly valued private tech start-ups.
Some investors in start-ups and others in the tech industry have been talking about alternatives to the customary IPO market for companies that need to pay out existing investors but find public markets a patchy fit. I’ll believe it when I see it.
The more than $11 billion pitched in Uber Technologies Inc. has to be paid back sometime. Do you think Saudi Arabia’s sovereign investment fund is going to wait around forever to get $3.5
billion back from Uber, plus a substantial return? Nope. And that is likely to happen only through an IPO.
Not every promising but oversight young tech company is going to have a happy outcome like Snapchat did. Most companies do not have the accent of Snapchat, which makes it possible to oversee the company’s defects. But for a special select few, Snapchat has proved a start-up doesn’t need to be perfect to have an IPO.
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