Investing

What If Other Tech Unicorns Had IPOs as 'Successful' as Snap's?

Douglas A. McIntyre

Published: March 9, 2017 6:20 am

Last Updated: January 12, 2020 2:08 pm

By Kashif, Investment Analyst at PrivCo, a private company financial intelligence platform

Here are the absurd numbers to expect if other unicorns get as lucky as Snap did in its IPO.

At PrivCo, we specialize in intelligence about private companies. We’ve been particularly enamored by the Snap saga (from startup to unicorn to decacorn to IPO) because it’s got all the things a private company could ever ask for: an interesting and evolving product, global popularity, rapid growth, and the kind of hype that almost guarantees a “successful” exit, at least for initial investors.

We were fortunate to be on the floor of the NYSE to witness the hysteria behind Snap’s IPO last Thursday, which was historic and unprecedented for several reasons. Despite the riskiness of being a consumer-facing tech company that is losing over $500mn a year with declining active user growth and fierce competition, Snap was able to raise over $3bn at a $24bn valuation, with its market cap soaring to around $36bn by the close of the first trading day (using fully diluted shares).

Traders were giddy about the largest such IPO in over three years, but the party quickly came to a screeching halt.

As happens with so many tech companies that go public and reach sky-high valuations amid investor fanfare, Snap’s stock has fallen nearly 30% from its second day session highs. The reason? Analysts seem to finally be catching up to the fact that the company poses incredibly large risks for the price–but it’s a little too late for them to warn investors who bought Snap stock at values exceeding CBS, Deere, CVS, or even Target.

We’ve been saying for some time that Snap would be the bellwether for IPO activity in 2017, especially after three years of declines in IPO volume in U.S. markets. Indeed, we’ve written extensively about the privately-held companies which are most likely to go public in 2017 and the incredible macro/market risks facing all IPO candidates regardless of company health. In the short period of time since those forecasts, many companies have announced they will not IPO due to market conditions or the need to show greater progress first.
For those companies still in the running to go public, Snap just did them a huge favor: by demonstrating that there’s still some investor enthusiasm for highly risky ventures, it may have created a temporary window for other unicorns to follow.

What if the same enthusiasm around Snap spilled over to other tech unicorns — what would these IPOs look like?

We searched through PrivCo’s private company database to determine the valuations, multiples, and growth that should be expected of some upcoming unicorn IPOs if they were to experience the same “pop” that Snap did. The results are presented below.

Methodology

We first assembled a list of tech unicorns that are most likely to go public in the next year or so, which includes Airbnb, Dropbox, Slack, SpaceX, Spotify, and Uber. We assume that each unicorn on the list will seek to IPO at its IPO target price (if target price is known) or at 10% above its most recent valuation (if the target price is not known).

On its hypothetical first day of trading, assuming it follows Snap’s trajectory, the unicorn’s share price will “pop” from the IPO price in order to achieve a Price-to-Sales (P/S) ratio and valuation that is 1.5x its pre-IPO figures–roughly the same pop that Snap achieved on the close of its first trading day.

When this new, higher valuation is divided by the P/S ratio of a comparable company — for instance, Snap and Facebook (7.0x P/S), or Dropbox and Box (7.2x P/S) — we can determine the expected sales figure that the unicorn must attain to achieve the same multiple as its comparable peer. In short, this is the revenue that investors should be expecting from a unicorn given what investors are paying for its closest peers.

Another key finding is the growth percentage needed to achieve this expected sales figure. The higher the pace of growth needed to meet the new sales figure as a result of the pop, the more difficult it is and the longer it will take for a given unicorn to achieve it. Below we explain the analysis on some select unicorns from the list above.

Uber The king of unicorns has several fires to extinguish before its IPO: protests over driver wages, opposition from taxi industries, lawsuits over employment status, a callous disregard for transportation regulations (and tech to circumvent local law enforcement), passenger safety concerns, rampant sexism, and a vocal CEO with no filter, just to name a few. That’s on top of $3bn in losses in 2016 alone, mostly stemming from the high subsidies needed to capture market share as ridesharing becomes increasingly commoditized. Uber’s competition is stiff, with Lyft and other ridesharing services nipping at its heels in the U.S., which is its most lucrative and competitive market. Globally, Uber struggles against well-funded rivals. It supposedly lost over $2bn in China alone over the last two years, eventually giving up the world’s largest market to Didi Chuxing in return for an investment in the company. If Uber’s IPO received the same first-day reception as Snap, its valuation would skyrocket to over $112bn and that valuation would require it to grow revenue from $5.5bn to over $15bn. That’s a 286% increase from 2016, and with all the aforementioned headwinds, such a jump in revenue would be difficult to achieve in the foreseeable future. Slack There are few unicorns who have been cut as much slack as Slack itself. The enterprise chat platform has become enormously popular among work teams (at least in small to midsize businesses) and boasts a huge app/plugin ecosystem built from its flexible API, in turn drawing in even more users. Despite its incredibly rapid traction in user growth and engagement, as well as $600mn in funding, Slack’s revenues have been tepid at best. This is partly due to its freemium model, which gives users significant functionality without paying a cent, as well as its pay-as-you-use enterprise plans, which lets companies pay only for active accounts in spite of purchasing more seats. With Microsoft releasing its competing Teams platform next week, Slack had better step it up. While Slack has become ubiquitous in the workplace, Microsoft is working to better integrate its super-expensive LinkedIn aquisition into Teams and has a great shot at becoming the first real workplace social network and collaboration platform, increasing its appeal versus Slack’s mostly chat-oriented product. From a purely financial perspective, Slack has the most challenging uphill climb among all the other unicorns we gauged. If Slack were to experience a Snap-like IPO, its valuation would be an eye-popping $6bn. With just $85mn in 2016 revenue, Slack would need to grow its revenues by an impossible 1000% to meet LinkedIn’s relatively modest 7.2x P/S multiple before its sale to Microsoft. Dropbox It’s been three long years since Dropbox raised any cash. In early 2014 the company received almost $1bn in VC funding and loans, but with 1,500 employees to feed and operating income still in the red, that cash is likely dwindling. Going public is probably the only option left. Since that last raise, cloud storage has become a commodity dominated by cloud services giants like Google, Microsoft, and Amazon, who each offer dozens more services for both enterprises and consumers on top of their (often free) storage solutions. Dropbox has struggled to come up with a similar suite of services it could use to prop up its once-pionieering-but-now-unremarkable cloud storage offerings. While it continues to rapidly grow its user base, it’s becoming difficult to imagine Dropbox as anything more than a one-trick pony. We used our bold imaginations to envision Dropbox as a hypothetical publicly traded company to see what a Snap-like IPO could mean for its financials. With the pop that Snap had on its first trading day, Dropbox’ valuation would jump to about $16.5bn and its revenue, at $700mn in 2016, would need to hit $2.3bn at a whopping 327% growth rate. At its current pace of slowing growth and competitors already capturing most of the market, such a huge jump in revenue could be a stretch. Conclusion: Revenue growth expectations are pretty high for all these unicorns, and it’s not clear if any of them will make it there. Snap’s IPO put some serious pressure on a company that already shows signs of slowing down. But other unicorns with a similar hypothetical public offering would feel even more pressure to grow, namely Slack and SpaceX. The remaining companies, while seemingly in a better situation than those above, would have valuations that require a 300% improvement in revenue to stack up against comparable peers.

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