Initial public offerings set a new record last year. The trickle down effect means a funding boom for the start-ups that hope to become the next Coinbase or Robinhood. CBInsights reports 959 unicorns are now valued at $1bn or more. The majority are US tech companies. Many are headed for public markets.
Amid the record-breaking numbers expect to see some moderation in valuations this year. After an initial bump, shares in some of last year’s most widely anticipated market debuts have taken a sharp downturn. Some trade below their listing price, including Coinbase.
A broad sell off in tech stocks over the past month is likely to weigh on the valuation multiples of the companies pursuing growth at any cost. Tesla boss Elon Musk has made his feelings about soaring start-up valuations clear, tweeting that if history is any guide, not many unicorns will make it through the next recession.
There is further cause for caution. The start-ups making their way to markets are not concentrated in the fintech and software sectors known for high margins. Many of the largest companies making IPO plans have been around for years without turning a profit.
Take grocery delivery service Instacart, last valued at $39bn. It is reported to have tripled revenue in 2020 but is surrounded by well funded start-up competitors willing to forgo profits and offer discounted deliveries.
Reddit, which has more than 52m daily users, is also likely to attract attention after propelling the meme stock craze of 2021. The social media company was created in 2005 and remains unprofitable.
Last valued at $10bn it has made a concerted effort to build up digital advertising in recent years and is expected to report about $350m in revenue this year. This, however, is just 0.3 per cent of Meta’s forecast annual revenue. Another way to look at the company is user value. Divide Meta’s equity value by its 1.93bn daily users and each is worth $479. Reddit’s private valuation divided by its last daily user count puts each user at $192 a piece. Reddit will struggle to prove that this gap should narrow.
