What Snapchat IPO Rumors Tell Us About the IPO Market

Oct 13, 2016

Swinging pendulums are a thing of beauty. Witness the possible shift in attitudes toward initial public offerings, or IPOs. For years now technology companies that could stay private did. Ample funding and low startup costs fueled the trend, as companies backed by venture capitalists tried growing without having to disclose their financials to their competitors.

Maybe that is changing. Matt Murphy, a veteran Silicon Valley capitalist, told The New York Times Wednesday that “in the last three months a number of companies have started saying that it’s not all that bad to be public.” He added: “If you’re a mature company with more than $50 million in revenue, an IPO is very much on your mind now.”

The occasion for this hopeful thinking is word that the parent company of the popular messaging service Snapchat has taken the first steps toward an IPO. The IPOs of standout companies typically mean little to the multitude of also-rans that would like to go public. Private-company investors like VCs would like nothing more, however, than to see the IPO market reopen.

Murphy’s second comment is telling. Referencing “mature” companies is a signal that VCs invested more than five years ago and would like their money back. Merely saying that a company has “more than $50 million in revenue” reveals nothing of its readiness to go public. Are its revenues growing? Does the company have a path to profitability? Is there competition on the horizon? These are the types of things public investors—read: mutual funds—will consider, not a company's age and size.

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In the late 1990s companies went public because they could, not because they were ready. I always thought it was reckless for an investment bank to underwrite the IPO of a fledgling tech company whose revenues were nascent and profits nonexistent. The investment banks that specialized in such deals argued it was a pure form of capitalism: There was plenty of demand, and they were creating supply.

Those banks are all gone now, as are most of their clients. Is an IPO boom coming? VCs certainly would like to think so. A Snapchat IPO won’t tell us a thing.

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