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12/11 OpenView Capital Markets Roundup
In 2020 there have been 19 IPOs that have doubled (closed up >100%) on their IPO day. This compares with just 25 over the nine years before that (2010-2019). In fact the market is so exuberant for new issues that it might be the first time ever that a company chose to postpone their IPO because of uncertainty. Roblox just isn’t sure how high its stock might go (the video game maker cited Airbnb and DoorDash IPOs as examples of how difficult would be to price their shares). Of course, this exuberance is driven by what we all know and what I have covered in the roundup throughout this year.
Airbnb was one of these 2x IPOs this week, opening at 113% above IPO price and closing the first day trading at the same. If you find that hard to believe so did CEO Brian Chesky, who in an interview with Bloomberg appeared visibly shocked to learn where his company’s stock was indicated to open. It is particularly hard to believe the headline valuation and pop because not only does a pandemic continue to rage around us but as recently as April, Chesky’s company rushed to close a $1B debt financing. The debt was expensive: interest of Libor+10% and warrants for 1% of the company at an $18B strike price (~50% discount to last round of privately raised financing). Today, those warrants are worth somewhere around $1B. A high cost of capital. But it was a lifeline back then for the company whose business collapsed overnight and for which March/April uncertainty could surely have sunk the company.
But I contrast Airbnb’s raise with that of Uber this week ($1B convertible note). Uber raised this $1B and “strong investor demand resulted in a 0.00% coupon and 52.5% conversion premium, representing the low-end of the marketed coupon range and 5.0% above the high-end of the marketed premium range…[it was] the lowest theoretical value achieved by a non-Investment Grade issuer over the last 2 years…[and] only 2 U.S issuers in history have achieved a higher premium with a zero-coupon.” Now suspend disbelief - I understand that we’re in a completely different stage of this pandemic and what we know and believe now we didn’t back in April. But, the terms on which Uber was able to secure financing are crazy. As Shopify’s CEO has noted, being a public company that is trusted to act autonomy to act like a private one is the best place to be; among other advantages, it lowers the cost of capital.
Airbnb should have gone public sooner (and Roblox should still go public this year). The cost of the debt in April would have been lower, almost certainly, as a public company. Either way, it isn’t making a huge difference (if any at all) to the shareholders who bore the cost of that capital (dilution) given the IPO day price performance.
Learning from this… investment style is a psychological construct used to generalize the different approaches folks take to beating the market. Just as liquidity is the only reality, what you’re comfortable with as an investor is what you convince yourself you are. Maybe that is being a venture, growth, value, fundamental, or momentum investor. Or maybe that is not caring about labels because they really don’t matter. All one needs to do is determine where companies are creating value, understand the magnitude by which the market is missing that (if at all), and then understand what type of investment (debt, equity, etc.) will both (1) win the deal and (2) offer the best risk adjusted returns. When everyone else was following consensus – fleeing for safety in March/April – Silver Lake and Sixth Street did this. Yes, Airbnb was struggling but the underlying assets didn’t go anywhere and short term metrics didn’t matter.
Market & Economic Data
There were some bumps this week, and the public market indices we track (except for the SaaS index) closed the week down from last: SaaS +0.53%, Dow -0.57%, NASDAQ -1.22%, S&P 500 -0.96%.
The biggest market risks for 2021, according to a Deutsche Bank survey of fund managers (#4 on that list – “the tech bubble bursts” – was selected by more than one third of respondents…):
What We’re Reading
The Base Rate Book: Integrating the Past to Better Anticipate the Future. What’s Hot in Enterprise IT/VC.