Square Inc’s initial public offering, priced at a 30 percent discount from the payments and lending company’s private valuation, is one of the loudest signals yet that technology firms are struggling to keep their multibillion-dollar market caps.
While some of these “unicorns” — private companies valued at US$1 billion or more — are set to buck that trend, bankers expect a procession of others to have to cut their values over the next year.
Investors have begun to price private companies more consistently with the public market, which has taken a more conservative approach to valuation.
Already this year, one-third of US-based tech companies that went public priced their shares below their private value, according to data provided by market intelligence company Ipreo Holdings LLC and data provider Pitchbook Data Inc.
A 30 percent drop puts Square’s valuation discount among the steepest since the start of last year, below the 40 percent of big-data company Hortonworks Inc and 32 percent for storage company Box Inc.
Square on Friday set a price range that values the company at up to US$4.2 billion, about a third less than the US$6 billion valuation at its last private fundraising.
The San Francisco-based company faces not only a market that has lost its appetite for stratospheric valuations, but also investor uncertainty about the company’s ability to compete in the crowded payments space as well as its leadership’s dedication. Square’s chief executive officer Jack Dorsey is also chief executive officer of Twitter Inc.
Square’s push to go public before the end of the year suggests that next year might be a more hostile environment to raise cash, according to bankers.
With its losses up and revenue growth slowing, analysts said Square needs the financing from an initial public offering.
The challenge of maintaining valuations goes beyond tech companies headed for Wall Street.
Within the past two months, many start-ups raising a Series B, or a funding round for mid-stage companies, have struggled to keep their valuations intact, Shasta Ventures co-founder Rob Coneybeer said.
“You are definitely seeing companies taking longer to raise money,” he said. “You are definitely seeing companies coming back to raise money at a lower valuation.”
Late-stage private companies are also finding it tougher to raise cash at the same valuation.
“If you’re an investor in the pre-initial public offering market, you’re going to start questioning your methodology,” Redpoint Ventures venture capitalist Tomasz Tunguz said.
“The valuation of the public market is ultimately the one that’s going to win,” he added.
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