Two weeks ago, we reported that one of the numerous "unicorns" prancing around Silicon Valley was about to have a very rude wake up call when Dropbox was warned by its investment bankers that it would be unable to go public at a valuation anywhere near close to what its last private round (which had most recently risen to $10 billion from $4 billion a year ago) valued it at.
And while Dropbox's day of public reckoning approaches, another company realized today just how big the second "private" tech bubble, one we profiled first in January of 2014 [2], truly is. That company is Jack Dorsey's Square, which earlier today filed a prospectus in which it said that the "initial public offering price per share of Class A common stock will be between $11.00 and $13.00."
Assuming a mid-point price of $12 and applying the 322.9 million shares outstanding after the offering, it means a valuation of $3.9 billion. The problem is that in its last private fundraising round, Square was valued at about $6 billion according to ReCode [3].
Needless to say, IPOs are meant to come at a valuation that puts all the prior rounds of private investors "in the money." Not this time.
What does that mean, especially since as BuzzFeed reported previously [4], Square’s last round of private financing guaranteed investors at least a 20 percent return on investment.
Well, it means that if Square’s IPO share price was less than $18.55, Square would have to issue these Series E investors shares to make up the difference, or an automatic dilution for everyone else. And since that looks increasingly likely, and if Square ends up pricing its IPO at $12 a share — the midpoint of today’s range — it would have to issue these investors around 5.3 million additional shares, representing around 1.6 percent of all outstanding shares, according to today’s filing.
ReCode concludes what we said nearly two years ago:
Square’s IPO pricing will likely give credence to the growing belief that there are a whole host of private companies valued at $1 billion or more — “unicorns,” in Silicon Valley parlance — that wouldn’t sniff such a high valuation if they decided to go public. Square’s revenue is growing quickly, but the company is still generating large losses.
So the question facing all the other unicorns is simple: will they keep jumping from private round to private round, funding operations while increasing the valuation of the underlying to absolutely ludicrous levels, ones which can never be "cashed out" using a public route and pray for a strategic to swoop it up instead, or will the Valley finally have a rude wake up call, admit the past two years of bubble valuations were driven not by fundamentals but by excess liquidity, and scramble to go public in an attempt to cash out first before everyone else does?
We will know on December 16: if the Fed indeed does launched tightening by hiking 25 bps, watch as a record number of unicorns are downgrade to zerocorns in the nanosecond blink of an algorithmic CCD.
