Fed policies or the central bank put which has induced a US stock market mania has led to a fantastic yield chasing “pump” of the IPO markets that has rendered price discovery entirely shattered This means that eventually soon such snowballing misperceptions that has backed the current euphoric delusions will mutate into a “dump”.
Here is an excerpt from Analyst Wolf Richter at his Wolf Street. [bold mine]
At a valuation of $10 billion, it joins the top of the heap: app makers Uber ($18.2 billion) and Airbnb ($10 billion), cloud storage outfit Dropbox ($10 billion), and Palantir, the Intelligence Community’s darling ($9.3 billion).
Unlike the others in that group, Snapchat is marked by the absence of a business model and no discernable revenues. But there is hope that it could eventually pick up some revenues by advertising to its 100 million or so users, mostly teenagers and college students, without turning them off.
But in this climate, no revenues, no problem. Into the foreseeable future, the company will produce a thick stream of undisclosed red ink.
But the investment was an ingenious move.
For KPCB, a huge VC firm, the investment would amount to petty cash. Why did it do this deal? If it could exit at an enormous valuation of $20 billion, it would only double its money – a paltry multiple, given the risks. It would only make $20 million, still petty cash. But there was a reason….
By strategically deploying less than $30 million, KPCB, and DST Global before it, have ratcheted up Snapchat’s valuation from $2 billion to $10 billion. With the stroke of a pen, in a deal negotiated behind closed doors, they have created an additional $8 billion in “wealth” that is now percolating through the minds of employees with stock options and through the books of the early investment funds.
Snapchat’s new valuation isn’t an isolated event. It’s a product of all recent valuations, and it is itself now ricocheting around and is used to set the valuations at other startups. That’s the multiplier effect. What seemed like an absurd valuation yesterday becomes the norm tomorrow, on the time-honored principle that once a valuation is already absurd, it no longer faces resistance from any rational limit. And nothing stands in the way for the multiplier effect to ratchet valuations ever higher.
Nothing, except the potentially troublesome exit for these investors. Because, without exit, these paper gains will remain paper gains, and eventually will disintegrate into dust.
To exit gracefully, investors can sell the company via an IPO mostly to mutual funds and ETFs that are stashed in retirement funds and investment portfolios. Or they can sell it to giants like Facebook or Google that can pay cash (borrowed or not) or print their own currency by issuing shares, both of which come out of the pocket of current stockholders. At the far end of both transactions are mostly unwitting retail investors.
Read the rest here
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