IPOs Crash, Startup Valuations Plunge, Era Ends

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Includes: BOX, FIT, HDP, JAW, SQ, TWTR, YHOO
by: Wolf Richter

Summary

The Renaissance US IPO Index, which tracks newly public companies for two years, peaked in April 2015 and has since plunged 29% as of Tuesday's close.

Behind the scenes, it doesn't look any better.

There have been a spate of startups that recently raised money in a "down round," where the high-flying "valuations" were cut in half.

Hortonworks (NASDAQ:HDP) shares crashed 37% on Tuesday after it became known that it had filed a registration statement with the SEC last Friday for a proposed follow-on offering to raise $100 million. This will substantially dilute current stockholders.

The company, which sells big-data software based on Apache Hadoop, went public in December 2014 with great hoopla and an IPO price of $16. Shares then spiked to $29.20. Despite yesterday's plunge, they continue to fall this morning and as I'm writing this are trading at $10.17. That's 35% below the IPO price and 65% below their high.

The company has an unbroken record of net losses exceeding its revenues. And so far, the more it sells, the more it loses. Its $33 million in sales in the third quarter generated $44.5 million in losses. With cash going up in flames at this pace, it was time to raise new cash at the expense of current investors.

Digital payments company Square (NYSE:SQ) plunged 7.8% on Tuesday and another 9.5% this morning, to $8.57, plunging right through its $9 IPO price. When it went public last November, the startup exuberance of 2013 and 2014 had already curdled. To push the deal out the door, it had to cut its IPO price below its valuation established during the last funding round. When shares popped to $13.07 on the first day and then rose to their peak of $14.78, everyone breathed a sigh of relief. It just didn't last long.

Square's CEO Jack Dorsey also is CEO of another crashed IPO, Twitter (NYSE:TWTR), which on Tuesday plunged 7.0% and this morning another 6.6% to a new all-time low of $15.60, down 40% from its IPO price of $26, and down 80% from its all-time high.

Box (NYSE:BOX), which tries to fight it out with the big boys in the "cloud" collaboration and file-sharing environment, plunged 7.7% on Tuesday and 3.5% this morning, to $9.07. It had gone public a year ago at an IPO price of $14, jumped to $24.73, and went downhill. It's down 63% from its instant peak and down 35% from its IPO price.

It has been that kind of hell for startup companies.

The Renaissance US IPO Index, which tracks newly public companies for two years, peaked in April 2015 and has since plunged 29% as of Tuesday's close.

Behind the scenes, it doesn't look any better. There have been a spate of startups that recently raised money in a "down round," where the high-flying "valuations," negotiated by a handful of people and leaked to the media to create the requisite hype for future rounds of funding, were cut in half.

So Jawbone (Private:JAW), which makes activity trackers, raised $165 million "largely" from the Kuwait Investment Authority, Re/code reported on Friday. So far, the company has raised $1 billion. The prior round of funding gave it a "valuation" of $3 billion. This round cut that in half, to $1.5 billion.

That's a lot of imaginary wealth gone up in smoke. But not all lost equally. Re/code:

The restructuring of the cap table - which is what this is, diluting investors not participating in the new round (down) - has an unusual twist in it. Despite a lower valuation, a larger pool of equity for employees has apparently eliminated losses in value of their shares (up).

This way, employees who'd been counting on this money, can still, for the time being, count on it. This is supposed to keep employees focused on doing their jobs rather than polishing their LinkedIn profiles.

In the same breath, Jawbone's president Sameer Samat, who'd arrived from Google (NASDAQ:GOOG) (NASDAQ:GOOGL) in May, is throwing in the towel and is going back to Google. Jawbone competes with all kinds of makers of wearables, including Apple (NASDAQ:AAPL) (down 3% this morning and 29% from its high) and Fitbit (NYSE:FIT), another crashed IPO darling.

Fitbit went public in June 2015 at an IPO price of $20. Within weeks, shares hit $51.90. This morning, they plunged 9.1% to $16.02. That's 20% below their IPO price and 69% below their peak in August.

So the mood has soured. Some of this was already apparent late last year, which overall was a record-setting cash binge for VC-funded startups, with investors pumping $128.5 billion into them globally, according to CB Insights and KPMG. This money pushed "valuations" of 71 startups into the glorious $1-billion club. The third quarter set a record at $38.7 billion globally. But in the fourth quarter, the hot air hissed out and funding plunged almost 30% to $27.2 billion, the lowest since Q1 2013.

Investors are fretting about cash burn and about the current generation of startup managers that has no clue how to get their companies to generate a profit. Instead they're relying on easy-to-get VC money and then IPO money to fund their operations. Twitter still hasn't figured out how to make a real profit, and Hortonworks has to raise new money to be able to keep burning through investor cash, and look what happened to their shares.

Investors finally see these things and shudder.

In a letter to Yahoo (NASDAQ:YHOO), activist investor Canyon Capital Advisors admonished the company that it must not waste any more cash on buying startups, according to Reuters, which saw the letter. The letter contends that the company spent over $3 billion on acquiring startups, to which the stock market, as Reuters paraphrased the letter, "appears to ascribe absolutely no, or negative, value."

So how are startup investors going to cash out? That's the number one question.

The IPO window has become a bloody affair. The blind buy-anything-at-any-price euphoria has dissipated. Even the "smart money" is now figuring out what some of these startups are worth. Yahoo CEO Marissa Mayer, feeling the hot breath of activist investors on her neck, isn't going to splurge on startups for a while. Other big corporations whose stocks are crumbling, like IBM (NYSE:IBM) (down 43% from its high in 2013), are going to have second thoughts. And good exits may be tough to find.

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