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Tech Bubble Pops: Dropbox Warned It Can't IPO At Its "Private Valuation"
While the full story of the unprecedented collapse of Theranos, its $9 billion "valuation", and its "wunderkind" founder Elizabeth Holmes has yet to be written, many are already wondering if this will be the catalyst that exposes just how naked the startup unicorn emperors have been all along.
Luckily, we don't have to wait that long: according to the WSJ, the second tech bubble, one which has seen nearly 200 tech "unicorns" rising out of the ZIRP ashes in the past few years and promptly attaining valuations of over $1 billion, is bursting.
Take IPO-hopeful Dropbox.com. Back in January 2014, TechCrunch wrote the following when the company was revealed to have just hit its $10 billion valuation round:
Dropbox has raised a massive $250 million funding round, valuing the company at $10 billion according to the Wall Street Journal. The new funding round is led by a BlackRock fund, according to the WSJ, which cites “two people familiar with the deal” as the source of the report.
This is actually the second time that Dropbox has raised $250 million: It did so in 2011 in a round that included Goldman Sachs, Sequoia, Index Ventures and Accel Partners. Back in November, a rumor about an additional $250 million raise put the valuation of the company at a supposed $8 billion, which, based on various revenue estimates, could have been viewed as anywhere from expensive to cheap.
A $2 billion increase in the valuation of a company with no profits in two months: what could possibly go wrong?
Well, a few things.
As we showed in January of last year, more so than in the public markets, the full scale of the tech bubble was best visible in private market "valuations", where a handful of billionaires and venture capitals would flip hot startup shares to each other at ever greater valuations, to mark soaring profits if only on paper.
The problem emerged when the investors in these bloated, money-losing ventures decided the time has come to cash out.
Which brings us back to Dropbox.com.
According to the WSJ, Dropbox Inc. had no trouble boosting its valuation to $10 billion from $4 billion early last year, turning the online storage provider’s chief executive into one of Silicon Valley’s newest paper billionaires.
But the euphoria has begun to fade. Investment bankers caution that the San Francisco company might be unable to go public at $10 billion, much less deliver a big pop to recent investors and employees who hoped to strike it rich, according to people familiar with the matter.
Worse, some of the investors are already doing what is the #1 "verboten" anathema in the start up world: reducing their value on private investments before a company has gone public. Such as BlackRock, which led the $350 million deal that more than doubled Dropbox’s valuation, and has since cut its estimate of the company’s per-share value by 24%, securities filings show.
As we warned last January, sooner or later, the specter of unsustainable valuations would come to roost. That time has come as Dropbox has become a "portent of wider trouble for startups that found it easy to attract money at sky’s-the-limit valuations in the continuing technology boom. The market for initial public offerings has turned chilly and inhospitable, largely because technology companies have sought valuations above what public investors are willing to pay."
From the WSJ:
Many U.S. based companies that went public this year have seen their stock prices suffer, posting a median return of zero compared with their IPO price. Investors who bought shares after the IPOs began trading, often the first chance many individual investors get, are down by a median of 13%.
And as of Friday, at least 11 of 49 venture-capital-backed U.S. technology companies with IPOs since the start of 2014 traded below the per-share value where they last raised money as a private company, an analysis of stock-sale documents by The Wall Street Journal shows.
Don't expect to hear much about the following "bombed" IPOs on CNBC - they may suggest not all is well in the land of mark-to-unicorn valuations.
The bad news: with startup valuations already in the stratosphere, they are now locked in a valuation limbo, where they can't afford a down round, but they also can't go public.
The data suggest that even some of the most promising startups in Silicon Valley might be worth far less in the eyes of the rest of the investment world. The risk is that the lackluster reception for tech startups in the stock market could ricochet through companies that are still private.
The worse news: even retail investors have realized that the second tech bubble is precisely that:
New York City firefighter Brian Gitman bought 250 shares of LendingClub during the IPO and held on to them as the price slid. He regrets it.
Knowing that big-name investors put money into LendingClub when it was private gave Mr. Gitman, 33 years old, a false sense of security, he says. “It feels like that should be like the bumper in bowling,” he says.
Henry Ellenbogen, who manages T. Rowe Price’s technology investments, says the gap between what private and public investors are willing to pay is starting to narrow. “When times are good and valuations are strong, people think they have liquidity in the private markets, but that is illusory,” he says.
Back to Dropbox which finds itself in a dilemma: go public at a vastly lower valuation, admitting the smoke and mirrors...
At Dropbox, the valuation dilemma looms large. Drew Houston, the company’s chief executive, rebuffed a takeover offer in 2009 by Apple Inc. co-founder Steve Jobs. The size of the offer wasn’t disclosed. Dropbox now has 400 million registered users, who share and store files through its Web service.
Most of them use Dropbox for free, though the company says more than 130,000 businesses pay at least $900 a year for a minimum of five employees. Customers include News Corp, which publishes The Wall Street Journal.
Online storage is fast becoming commoditized, and Dropbox now competes with Apple, Google Inc., Microsoft Corp. and Amazon.com Inc., the world’s four largest tech companies by stock-market value.
Dropbox says it is expanding its business beyond data storage. Last week, the company released a document-collaboration tool called Paper.
“Others can chatter about valuations,” a Dropbox spokeswoman said in a statement. “We’re hard at work building an enduring business.”
... or it can do what every other successful business resorts to when times are tough: its own, organic cash flow.
Good luck with that.
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I don't understand how these 'wunderkinds', universally from ivy league schools and high social connections, but with technical skills varying between marginal to wholly theoretical, ever get to the IPO stage.
What rational actors fund these people out of their garages in the first place?
Bill Gates is an example. What MS come up with under him other than stealing others work and marketing it using boatloads of inexplicable VC capital???
Why, rational actors with free money and connections, of course.
Good! As a tech muhself, we say f#ck you Tech Bubble 2.0!
Anyone who buys this crap deserves to be broke.
Awesome article! Makes me want to get in and get a slice of the action!
Definition of a Tech IPO Corporation: Collecting your private data so Big Brother doesn't have to.
in bill gates' defense, not all of microsoft's success is based on theft. an enormous part of the success was given away to them by ibm for absolutely nothing because ibm's boss knew gates' mom through charity work.
http://www.zdnet.com/article/tiny-microsoft-overtakes-the-mighty-ibm/
Xerox, too, Jeff. Where do you think the Mouse and the Graphical User Interface came from? (Xerox's Palo Alto Research Center, or PARC for short)
MS sold IBM an operating system MS didn't even own. See Pirates of Silicon Valley.
Didn't Jobs steal the mouse and the GUI from Xerox?
MS is not an example, they had products and revenues from day one. Due to Gates' family connections, sure, but even so, they were totally old school compared to the current social media bubble in Silicon Valley.
Dropbox isn't even that great anyways. Google Drive and Amazon AWS already wrote it's obituary.
Their customer service is very poor as well. The best they can hope for is that a tech giant will buy them out and integrate their cloud storage services as part of their expansion plan.
They have no future as an independent cloud service.
Yeah but the name is cool so millions of Apple users flock there - for free it seems.
Can anything be more of a commodity than cloud storage? Hello Amazon!
Amazon will be the next bubble to burst, once investors realize how heavily exposed AWS is to the unicorn startups. Once the unicorns die, AWS revenue is going to take a BIG hit.
Google's probably not in great shape either. Ever notice how much of the advertising on Google is actually from start-ups as well? Its like some sort of giant circle jerk, with these social media tech companies just passing money around. No wonder they can't pay dividends, there's no real actual value creation!
Do valuations matter when the Fed is constantly buying every stock and is promising NIRP and more QE soon?
American exceptionalism guarantees exceptional value for US stocks - like Apple being worth more than the entire Russian stock market.
Forward - to more fraud
Queue the temper tantrums from the 20-somethings in the Silicon Valley.
This one's going to be epic.
There's 20-somethings in the Silicon Valley? That aren't instant-deportees because they're on the H-1B visa? That's news to me.
STAZHIT.COM will be doing an IPO soon ... too.
(we expect to make millions)
Who will be the Netscape 2.0 ?
Who? How about www.ifonly.com ?
Call Steve Jobs! Tell him I changed my mind!! What? When??
I live in my van in San Francisco. When I started seeing the ads for this company on the sides of public busses offering "Experiences" I knew the jig was up: www.ifonly.com
The doors on their cars will open the same as everybody else. Sad.
Looking for investors for my new virtual bridge startup.
The Tech? Cars drive up to the edge and are then hurled across via a pneaumatic booster then caught on the other side and gently set down to continue on their way.
Quick set up anywhere.
Never washes out.
Each vehicle pays via bluetooth scan. No payment, no hurle.
Valuation $100,000,000
Do you plan to expand beyond Brooklyn?
Yeah, it's going to Dropbox like no tomorrow.
Dropbox it like it's hot.
Dropbox is actually a great service and was quite innovative when it first came out. But now everyone is copying them and offering the same thing for free. Hard to compete with free.
Are the VC's of these companies so greedy they'll forestall an IPO in order to pump up valuations? Why wait to IPO? How come SnapChat hasn't gone public? Paper waalth means nothing if they don't pawn it off on "investors".
Woah, someone's FTP site isn't worth $10B? Who would've ever imagined that?
And the one bedroom apartment they live in isn't worth $6,000 per month either.
LOOK OUT BELOW!................TIMBER!!!
Shush - don't question the wunderkinds or they might start questioning the wundergrans!
PH
if calpers won't buy it you know it's crap
EAT SHIT, TECH CIRCLE JERK PRIVATE EQUITY BASTARDS!!!!!!!!!!!!!!!!
Funny, that I should see an article on this. I'm trying to raise funds for my product, with the VC and Micro VC crowd and it has been a learning experience! My product is 'low tech' data, but it's actually five times faster than an App, because it's a physical object (Patented Car Data Card) that you hold in your hand, versus the App. The Card? You whip it out of your wallet or glovebox in two seconds. The App? You get your phone out, unlock it, go to the screen with the App, find it among the dozen or two dozen apps you already have, and then have it load. Average time 10-15 seconds. Good luck with a slow load up, poor signal, low battery, etc.
Yet, all these young techies think that the App is friggin' everything! All these VC firms have websites looking for 'Disruptive Technology', 'Big Data', the 'Next Big Thing' and yet, they turn me down, because my deal doesn't 'fit' in, with the super-techno world they're dreaming up. I already have agreements signed with multi-billion dollar Corporations! One email from a Billionaire last night, gave me the usual 'fit' excuse and added that Tesla is going to do, what my card does. I had to laugh! These guys all live in a Tesla-Porsche-Audi world of high altitude and I sent him a response, telling him, that Tesla doesn't even have a production line or a profit yet and my market is aimed at the masses. You know, the Chevy-Ford-Toyota-Nissan crowd, not the high flyers.
They forget, that Simple often overides Stupid.
Have you contacted the strategics like Chevy-Ford-Toyota? There may be a fit there.
Also, if your patent is strong, write back to said billionaire and tell him, "Well, if Tesla does actually do what my product does, I'll sure them for IP infringemnt"
Wait. Don't do that. I'm NO fan of patent trolls, but if they are assholes and won't discuss licensing / integrating your tech, then just WAIT. Let them do it and then have your lawyers demand damages and royalties.
Good luck!
Dup
Silicon Valley has always been a den of thieves. One out of a hundred startups goes on to have sustaining billion-dollar incomes and some of those are fruity, like Amazon, like Tesla.
Theranos is a prime example, what's their breakthru? They dilute tiny blood samples with water! Four hundred million dollars in VC capital, and that's their plan? Caveat emptor.
Dropbox stayed too long at the fair? Waited too long? Oh, I hate when that happens! LOL
I worked briefly for some schmucks, back in the 2000 bubble, who were racing to get their POS on the IPO market, and I believe they missed it by that much, too. Oh well.
Hot potatoes!
we have an obligation to add the Unicorn to the endangered species list.
...oh it's already on it?.....
wait what.... you mean it's all fantasy....
They're not extinct yet. One pooped some Skittles on my lawn last night.
These guys will sell to the next sap on AngelList.
There's always another willing idiot to hold the bag.
Every human has the greed gene. Every single one.