When you’re an executive at a “unicorn,” a privately held company that has reached a valuation of at least $1 billion, you pay a lot of attention to the initial public offerings of other companies.
That’s according to the CFOs of three tech unicorns — Kabbage, SimpliVity, and Thumbtack — who recently spoke at the MIT Sloan CFO Summit.
Kabbage CFO Kevin Phillips said popular IPOs drive private market valuations by setting certain expectations for the overall marketplace.
“We pay a lot of attention to IPOs,” Phillips said. “We particularly paid attention to Square. Just like us they are thin tech, more thin than tech.”
Square was an interesting case study because of the company’s decision to drastically cut its $11 to $13 IPO price to $9 just one day before going public.
That decision reduced the company’s valuation from $4.2 billion to $2.9 billion. The company went public on November 19, 2015, and is currently trading at $11.98.
“We specifically pay attention to the late-stage private markets,” he said. “We look at the overall picture and the opportunity. We went out to raise $75 million but instead took $130 million. We knew what to take based on what was going on at similar companies in the markets at that time.”
SimpliVity CFO Tom Beaudoin said finance leaders at unicorns definitely “spend a lot of time watching. Like any market, you want to stay close to the results.”
Beaudoin said it’s important to watch IPOs to gain a sense of “what you aspire to do” and to learn what it will take to find a similar level of success.
“Watching other companies is really how great leaders figure out what is needed to drive growth and fund activities,” he said. “They figure out how their similar business model was perceived by the people they are trying to attract.”
Thumbtack CFO Servase Tholen offered a straightforward perspective on why the Square IPO’s price fluctuation made sense: “Square was private for so long with such a high valuation that it’s not surprising that the share price starts to behave like a public market with its ups and downs.”
Tholen said it’s worth paying attention to the IPO market but not necessarily to news reports about a company’s market valuation.
Think of the Square IPO like a satirical Onion headline, said Tholen, “where people ‘pay less for shares than they did six months ago.’ The fact this happened shouldn’t be news, and it will become increasingly less newsworthy as bigger companies stay private longer.”
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