Peter Fogel March 10, 2014
With venture capital-backed company valuations having hit new highs in 2013, there has been widespread discussion of a bubble in the industry. One potential indicator of a bubble is the percentage of companies going public that have failed to reach their target price. To gain some insight into the VC-backed IPO market, we looked at our data covering the last four years of public offerings and their initial share prices.
Only 20% of VC-backed companies that went public last year—when markets surged roughly 30% from the beginning to the end of the year—did so at prices below their initial offering range, while 25% of companies went public for a higher price than their target range. This year, however, a full third of companies have come in below their target filing range and fewer than 20% of companies have gone public at share prices above their filing range.
The 33.3% of VC-backed companies that have missed their IPO targets so far this year is the worst percentage since 2010, when nearly half of companies that went public failed to reach their filing range and only 16% of companies exceeded them (19% of companies have exceeded their targets so far this year). Granted, 2014 is still in its infancy, but the reasons for each year’s problems meeting share-price expectations are likely quite different. In 2010, the cause was likely a result of lacking investor appetite for higher risk growth companies in the aftermath of the financial crisis, whereas the decline so far this year could be a manifestation of valuations climbing ever higher. We have noted inseveral reports and blog articles that valuations are at historic highs and may be unjustified. Companies that may not be totally ready to hit the public market are seeking to seize the opportunity as stock valuations soar and have been accordingly pricing their IPOs higher than institutional investors may be willing to stomach.
2010 seemed to have more of a problem on the buy-side of the offerings, whereas in the first two months of 2014, companies hitting the market have been overeager. Part of this is due to the type of companies that are going public. Through the end of February this year, all but two VC-backed companies that have gone public are in the healthcare industry. The industry is notorious for companies missing their IPO targets. Since 2010, healthcare companies have made up 45% of VC-backed IPOs, yet have comprised almost 60% of companies that came in below their targets and only 20% of the companies that have exceeded them. Compare this to the IT industry—the second-most active industry to see companies debut on the public markets since 2010—in which only 19% of IPOs priced below their range over the last four years and almost 40% priced above their range.
In addition, the average difference in price from filing range to initial selling price has been growing over the last two years. Through the first two months of 2014, the average opening price per share for a company that opened below its IPO target was 39% below the average of the offering range. This speaks to the distortion in how companies view their valuation versus how institutions that participate in IPOs view them. Offering at a price 39% lower than anticipated represents a significant reduction in the perceived value of the company. Perhaps the public markets and the more risk-averse institutional investors that participate in IPOs are beginning to bring some sober analysis to the sky-high valuations floating around in VCs’ and their portfolio companies’ heads.