The enterprise value of Google pre-IPO (initial public offer) was estimated to be between $33 billion and $40 billion (based on a S&P’s pre-IPO Google report). Google listed on Nasdaq on 19 August 2004 at $85, the low end of its revised price expectation of $85-95.
Its market capitalization was valued at $23 billion at that time. Google or should I say Alphabet Inc.’s Class C shares listed on Nasdaq under GOOG symbol at the time of writing this article (21 January 2015 9:44pm India time) trades at $713.55, giving it a market capitalization of $495.2 billion.
Simple math states that Google created more value for its investors post IPO ($472.2 billion) than its pre-IPO ($23 billion). Of course, one may argue that the select few who invested early in Google (pre-IPO) shared larger bits of the smaller pie than the many who shared smaller bits of the bigger pie (post-IPO).
But the undeniable fact is that Google created more enterprise value after its rocky IPO in 2004. That “more” is a staggering 1,575%—which means a $10,000 investment into GOOG in 2004 would have become $167,894 today (accounting for a stock split)!
Now let us take a look at the phenomenon of private share trading of unlisted unicorn and decacorn start-ups which has become commonplace. Not sure the term start-ups really applies to these companies anymore! Given the relative easy availability of hyper-funds, the incentive to go public has been reduced, creating a private primary and secondary market where paper stock options have assumed real value. It’s now been used as a tool to retain talent by allowing employees to sell their stock options in this private market.
But this is going to have a fall-on effect. All these unicorn and decacorn private companies that have delayed listing on the stock exchanges will list at some point of time in their life-cycle. The danger is the value created that the mass investor will participate in. This value may be marginal compared to the privileged investor who invested early on (pre-IPO).
The market will already assume the growth numbers and value created at the time of listing. As the listing of these companies is not happening earlier in their life-cycle, the created value keeps decreasing as they keep delaying. The depressed listing of Box and Square in 2015 are two such examples.
If Google were born in 2010, it would probably still not have gone for an IPO in 2016 (like many of our favourite unicorns today) and listed much later than it achieved its $23 billion market cap value, thereby decreasing the IPO participant value as it continuously delays its listing in public markets.
Public markets are the real test. When these unicorns (read Uber, Flipkart, Xiaomi, Ola, etc) list the aura of the celeb founders, the novelty of the business model and the innovation of the product/service would have worn off.
All that the retail investors look at is the numbers on a spreadsheet. And these numbers sit alongside that of pharma, oil and gas, auto, retail and other companies. It is usually the math that wins over press mentions.
This begs the question. Will you fall for the honey trap and participate by investing when these unicorns eventually list? If yes, what is your value expectation?
Arvinder Gujral is Director Business Development APAC for Twitter overseeing its strategic partnerships. Connect with him on Twitter @arvindergujral