Manipulating the Entire IPO Market With Just $250 Million

Wolf Richter's picture

Wolf Richter

Tech isn’t exactly booming, as we’ve seen from numerous revenue and earnings debacles. Most recently, Intel’s: revenues were down 1% from 2012 and 2.4% from 2011. Net income was down 13% from 2012 and 25% from 2011. Looking forward, they’d be flat, CEO Brian Krzanich warned. In 2013, the PC industry just saw its worst decline in shipments ever.

Dell and HP announced big layoffs. Other tech companies too are “realigning” their workforce. And after rumors started spinning out of control on Friday, Intel confirmed that it too would axe 5% of its workforce of about 105,000 “to align our resources to meet the needs of our business.” Revelations of how the NSA has compromised products and services of US tech companies caused orders to collapse in China, Russia, and other countries, where orders were supposed to grow at big double-digit rates. It left IBM, Cisco, and brethren with a mess on their hands [read.... Costs Of NSA Scandal To Bleed US Tech For Years].

But that hasn’t kept valuations of tech startups from being pushed into the stratosphere. Turns out, it’s relatively easy these days. By the stroke of a pen and $250 million, an elite club decided amongst each other that the “valuation” of on-line storage provider Dropbox was close to $10 billion.

BlackRock, the world’s largest money manager with $4.3 trillion in assets, is leading the deal, according to unnamed sources of the Wall Street Journal. The elite club includes “previous backers,” and they included Goldman Sachs, Sequoia Capital, Index Ventures, and Accel Partner. In 2011, Dropbox had raised $250 million from these previous backers. The deal valued it at $4 billion. With the above stroke of a pen, the value of their investments has jumped 150%. With that same stroke of the pen, they also jacked up the future valuations of all other IPOs, and many more billions will be made – just like Twitter’s IPO helped jack up Dropbox’s valuation.  

Unlike certain other highfliers, like Pinterest, which raised $225 million last year in a deal that valued it at $3.8 billion though it hasn’t even figured out how to generate revenues, Dropbox has measurable revenues. Not a lot – about what a large Ford dealership might rake in, without the profits. Growth has been dramatic: In 2010, it had $12 million in revenues; in 2011, $46 million; in 2012, $116 million, and in 2013, more than $200 million, according to these unnamed sources. It has 200 million users, as co-founder and CEO Drew Houston claimed in November, up by a factor of 10 over the last three years.

But growth is slowing. So it has been trying to refocus. Instead of only going after consumers, it’s trying to reel in corporate customers with its cloud storage services. Everyone and his dog is in this business, including Microsoft, IBM, Google, Amazon, and another furiously hyped startup, Box, which has a $2 billion valuation and is planning to sell its inflated shares to the public this year.

Dropbox calls its cloud services “safe and secure.” But in April, it was widely reported that it wasn’t hard to hack into the service and then use it as a vector to deliver malware to a corporate network that could wreak all sorts of havoc and pilfer the digital crown jewels. Many corporate customers have now blacklisted Dropbox.

Unperturbed, the members of the elite club decided out of the blue that it had a $10 billion valuation, printing an instant billionaire (Drew Houston) and a lot of multi-millionaires. All for just $250 million. For BlackRock, it was petty cash.

But inflating Dropbox’s valuation to $10 billion manipulates the entire IPO market that depends on buzz and hype and folly to rationalize these ridiculous valuations. Unnamed sources “leaking” these valuations to the media are part of it. It balloons the valuations of other startups. It creates that “healthy” IPO market where money doesn’t matter, where revenues and profits are irrelevant, and where custom-fabricated metrics are used to sell these shares to the public – mostly mutual funds that bury them in your portfolio.

Even the SEC, which hardly ever warns about anything, warned about these newfangled metrics that are designed, as Chair Mary Jo White said, “to illustrate the size and growth” of these outfits that lack outmoded metrics, such as revenues and profits. She and her staff were particularly concerned that “the true meaning of the metric (or more importantly the link from metric to income and eventual profitability) may not be clear or even identified.”

So Dropbox’s 200 million users? A cute metric, sure. “It sounds good,” to use White’s words. But it says nothing about revenues and “eventual profitability.” In fact, “the connection may not necessarily be there.” Investors are supposed to be impressed and hand over their money. It’s all part of the IPO buzz and hype that characterize a “healthy” IPO market.

“Healthy” for whom? Goldman and other members of that elite club.

The purpose is to rationalize to the public that this deal is worth buying so that they will pile in and drive up the value even further. It makes the IPO market look “healthy.” Hopefully, the exuberance will last until the original investors get to dump their shares, take their hard-earned money, and move on. A similar wealth transfer takes place when a corporation prints a truckload of its shares to buy the startup, at the expense of existing shareholders. Happens all the time.

There will be a few successes out of the hundreds of IPOs spilling out of a “healthy” IPO market, and they’ll be held up forever to whet your appetite. The rest will languish in mutual funds and retirement accounts, where they eat into people’s wealth and hopes. Many of them will become penny stocks.

It isn’t often that the public is this blind to these machinations. It only happens during times of stock market exuberance, when nothing can go wrong, when stocks can only go up, and when high prices only justify even higher prices. When it all goes to heck, as it periodically does, the window of the “healthy” IPO market closes. At that point, IPOs receive actual scrutiny, buzz and hype fall on deaf ears, rationality reigns, and hardly any IPOs make it out of the gate. Those are the long years between stock market bubbles.

Corporate earnings growth slowed to almost zero, as did growth in capital expenditures, cash-flow, and sales, and corporations hold more debt than they did in 2009, wrote Societe Generale’s exasperated Global Quantitative Research team. “Thank goodness equities went up in 2013, otherwise it might have been a rather depressing year.” Read.... The Corporate Malaise That The Stock Market Is Furiously Ignoring (for now)

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pitz's picture

My God, $10B for a ftp site?  Just when you thought you saw it all...

disabledvet's picture says over 200 million users actually. if i understand it correctly it would appear to be free online storage.

can't speak to the valuation but if all us "internet people" are heading to same watering hole all the time then we really don't need a lot of storage.

since this works across all platforms and devices in effect "all you would need a device to connect you to your drop box."

in effect "remote hosting."

in theory this makes "computing" much simpler...i don't need all that storage or computing power per se. Not a new idea either...but because of "mobility apps" (cell phones with data plans) i could see where this is a big deal.

i'm still waiting for a solar powered cell phone so i'll never have to worry about a dead battery ever again. Solar powered laptop will do as well. I'm sick and tired of having to plug things in...period.

Midnight Rider's picture

What good are 200 million Dropbox users if 95% of them have free accounts? Maybe they're mining the data you're storing on their servers?

MarcusAurelius's picture

Well I guess the tech bubble is somewhere in the archives of time (being only fifteen years or so) with the sheeple. It doesn't matter what the company is there are a few who get ridiculously rich which the majority stagnate or lose. I know why people do this but it still boggles my mind. 

It is too bad people don't take the time to learn how the market really works by trading it. It would become clear to them in an instant that it is set up, short-term, medium-term or long-term to separate you from your money by setting  up traders. If you see the set up you can position yourself. If you can't you are the sucker. 

The financial industry exits to serve itself. Period. 

Arthur's picture

Good point.


Stock market manipulation vs. stock manipulation.  Legal to pump the market in general.

I like the point but would have appreciated a lot more depth.

For example, by (artificially??) inflating the value of their holdings, the debt/asset ratio changes allowing certain firms to increase their ability to leverage.   How much are these "elites" really benefiting?


Dollar Bill Hiccup's picture

MOAR free money for the not the masses!

Push it, gin it, shove it, rocket it, to the moon!

Just because they can.


StychoKiller's picture

Hmm, so all I need is one absolutely insane ideer and I too can get my Ponzi on!

teslaberry's picture

solar city. 100 million in REVENUE and over 6 billion market cap. 

7 fold increase in price in under 9 months.

TheRideNeverEnds's picture

Hard drive manufactures like WDC seem to be unaffected by record declines in PC sales also seeing that they are up over 100% in the last twelve months with price targets being raised almost daily.


buy buy buy

Vampyroteuthis infernalis's picture

Since when did any of these evaluations matter since 2001? It is all hot air!

AldousHuxley's picture

dotcom bubble 1.0 was all about page hits which they translated into ad revenue

they cheated on uniqueness of those page hits and didn't account for depreciating $/click payouts as irrelevant ad shown briefly before navigating to another link has no PR value.


dotcom bubble 2.0 is all about lifetime user value.

200,000,000 users X $50 value per user = $10,000,000,000 valuation.


except the "lifetime" of a user is where they cheat. in reality user is a onetime user, but they forecast lifetime value over number of years. Also such metric will depreciate as value of free user will be found to be worthless.


perhaps the value is blackmailing your personal the user agreements carefully to note that THEY don't own YOUR content.

mvsjcl's picture

This is all about keeping the derivative house of cards from collapsing.

pitz's picture

The travesty is that the scammers weren't completely flushed out in the collapse.  They just picked up where they left off, stopped hiring American engineers (most tech workers are now foreigners these days on H-1B guest worker visas, while Americans submit their resumes by the thousands), and miraculously still manage to receive investment.