Crazy Like a Box: Going Public Can Give Start-Ups Outsize Power


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Stuart Goldenberg

In early 2014, when the cloud storage company Box filed for an initial public offering, many on Wall Street looked at its numbers and laughed. Box’s revenues were soaring, but its losses were growing nearly as quickly. It was pouring vast sums into sales and marketing, it had less than a year of cash remaining, and executives did not anticipate making a profit for years.

When Box eventually went public this January — after raising another round of private funds to delay its I.P.O. — its stock price briefly surged but has since lost about 40 percent of its value. Now, with a stock market valuation of about $1.7 billion, Box is technically in league with the “unicorn” private companies valued at more than a billion dollars — but compared with some of those highflying start-ups, it could easily be mistaken for a pony. Dropbox, a cloud storage competitor that remains private, was valued at about $10 billion in its last fund-raising round.

To many in Silicon Valley, Box’s inauspicious debut on the stock market, like several other recent tech offerings, serves as a cautionary tale. While floating an I.P.O. was once seen as a rite of passage in Silicon Valley, in the last few years it has become a much bemoaned annoyance to many tech founders. Companies are waiting longer to go public, and thanks to a surge of money from hedge funds and mutual funds looking to get in on the start-up scene, young companies have been given resources to stay private for years on end. Go out to the public markets before you’re bulletproof, the thinking goes, and you’ll get crushed. No one wants to be the next Etsy, Hortonworks or Box, all of which now trade below their I.P.O. price.

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“It’s great to be public,” said Aaron Levie, Box’s chief executive and co-founder, citing the unpredictability of the private funding market.

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Matt Edge for The New York Times

But what if Box gets the last laugh? Despite the company’s languishing stock price, it’s possible that a few years from now, many in the Valley may come to look back on Box’s I.P.O. as a masterly timed bit of corporate strategy — an initially painful move that ultimately rewarded investors, improved employees’ financial stability, provided executives with independence from unpredictable private investors and pushed the company to adopt a more structured path toward profitability.

We may also wonder why other unicorns didn’t go public sooner. I’ll float one crazy idea for a company that should jump into the stock market: the ride-hailing company Lyft. The company recently said it was on track to book $1 billion in gross revenue over the next year. John Zimmer, the president and co-founder, has no immediate plans for going public.

But why wait? Lyft is locked in a knock-down, drag-out fight with Uber, its aggressive, moneyed competitor. By going public first, it could rake in some funds, gain a currency of stock with which to make acquisitions, recruit employees with shares that they can actually sell and set a benchmark valuation that could even affect Uber’s valuation.

To understand why, it helps to look at the market for private tech funding, and how it is affected by public valuations. Several unicorns have recently discovered that taking money from mutual funds and other large investors brings surprising public scrutiny. The mutual fund company Fidelity and others must regularly report assessments of their private-company holdings, and lately they’ve calculated that start-ups like Snapchat and Dropbox are worth less than what the funds paid for them. Dropbox’s valuation, in fact, may now be tied directly to Box’s, since large investors look at comparable public companies to help determine the value of their private investments.

By going public first, Box has arguably boxed in Dropbox’s horizons — and if Dropbox ever goes public, it’s going to have to explain why investors should pay a premium over its already public competitor. (Dropbox declined to comment.)

The same logic applies to employees. If you’re an engineer looking to work at a cloud storage company, you could go to Dropbox, where you’ll receive stock options at a lofty $10 billion valuation that you’ll have a hard time turning into actual money. Or you can go to Box, in which you’ll get shares at a relatively reasonable valuation that can also be traded on the public market.

“It’s great to be public,” said Aaron Levie, Box’s chief executive and co-founder, citing the unpredictability of the private funding market. “We don’t have to worry about any of that right now.” While some tech founders are concerned that public companies have to report earnings every quarter, spurring short-term thinking, Mr. Levie said, “The three-month timeline allows you to create a strong internal rhythm of hitting your goals and accomplishing what you set out to do.”

James Park, chief executive of the wearable device maker Fitbit, which went public in June, said his company’s public offering was similarly beneficial. “It’s given us a lot more visibility and credibility and helped with recruiting,” he said. “It gave us currency in terms of cash and stock to make acquisitions.”

Mr. Levie and Mr. Park are biased, of course, but they’re not alone. Mark Zuckerberg, who delayed Facebook’s entrance to the stock market for years, now believes that going public made the social network a better company. Facebook ramped up its mobile ad business as a result of pressure from public investors, who were initially skeptical of the company’s 2012 initial offering. Facebook is now inching in on Google in the race to become the world’s largest mobile advertising company, and it’s hard not to credit the I.P.O. for the zeal with which it staked out that position.

Bill Gurley, a partner at the venture capital firm Benchmark, has drawn up an internal presentation outlining the advantages of going public. He argues that when businesses are hit with difficulties, public companies have more options for weathering the storm than their private counterparts do. The series of investments that make up a typical start-up’s fund-raising structure don’t do well in adversity, Mr. Gurley said.

“When growth slows, it gets complicated and expensive to raise any more money, and you hit this downward spiral,” he said.

In contrast, public companies can withstand long spells of skepticism. Amazon, Apple, Google, Netflix and dozens of other tech companies have gone through fallow periods in which the world doubted their long-term prospects. Those times were painful, but as public companies, each managed to survive the downturn. They weren’t wiped out by the doubts.

Mr. Gurley is an investor in Uber, by far the world’s most valuable private company. The New York Times recently reported the company was looking to raise $1 billion in a round that would value it at $60 billion to $70 billion. Mr. Gurley declined to say whether he had been pushing the company to go public but did note that Travis Kalanick, Uber’s chief executive and co-founder, was familiar with Mr. Gurley’s thinking on I.P.O.s. Mr. Kalanick, by contrast, has argued for patience.

This gets to Lyft’s opportunity. By going public before Uber does, the company could cash in on public investors’ interest in the ride-hailing business. Lyft, which is three years old, is looking to raise $500 million in a round that would value the company at $4 billion, a fraction of Uber’s total. Lyft operates in fewer markets in the United States, and it has set out a far less aggressive — and less expensive — overseas expansion plan.

Still, it says it hasn’t been shut out by its far larger competitor. Mr. Zimmer of Lyft recently said that the company had captured 40 percent of the ride-hailing business in San Francisco, its oldest market, and 45 percent in Austin, Tex., a newer market. The company argues these statistics show that it can overcome Uber’s funding advantage and head start.

But there are doubts about Lyft’s prospects. Bloomberg recently reported that the company has had problems meeting its revenue projections. Lyft declined to comment on that report. In an email, Mr. Zimmer described growth as strong.

“The simple answer is we will go public when we are ready,” he wrote. “We’ve built a world-class executive team and achieved 20 times growth over the past two years, growing faster than any other player in the U.S.” He added that the broader market for transportation in the United States was worth $2 trillion, an appealing target.

“Private market investors remain incredibly excited about our industry and specifically the large value upside in Lyft,” Mr. Zimmer wrote.

But if that’s true, wouldn’t public investors be thrilled, too?

Correction: December 2, 2015

An earlier version of this column misstated the current job title of Lyft’s co-founder John Zimmer. He is president, not chief executive.



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