Spring Is Coming For IPOs

Some of the most valuable new companies are still private, but more may cash in soon

- Alex Barinka

Don’t be so afraid of a down round.

That may be the message Silicon Valley takes from the initial public offering of Dropbox Inc. on March 22. In the weeks before the cloud-storage company’s stock market debut, it first targeted a price of $18 a share on the high end, giving the company a market valuation of $7.1 billion. That would have been about a third lower than the $10 billion it was valued at in its previous round of private fund raising—earning the IPO the “down round” stigma.

Things worked out better. Dropbox ultimately sold the stock for $21 a share, pulling its valuation past $8 billion. And by the end of its first trading day, it rose an additional 36 percent, to a total value of $11.1 billion. On the one hand, there’s a chance Dropbox could have raised more money, since investors were willing to value the company a good bit higher than where the shares sold. But it was a sign that companies shouldn’t see the risk of a valuation haircut as an absolute obstacle to going public. In recent years, concerns about not living up to lofty private valuations slowed the IPO pipeline.

Grumbles about the IPO market being broken have grown louder as tech giants such as Uber Technologies Inc. and Airbnb Inc. wait to go public. Jay Clayton, head of the U.S. Securities and Exchange Commission, and New York Stock Exchange President Tom Farley have both said the listing process dissuades companies from going public.

But IPOs have been making a quiet comeback. More than $12 billion in stock has been sold in new U.S. listings this year, up a third from the same period in 2017. January’s $8 billion was the biggest month since Alibaba Group Holding Ltd. raised $25 billion in its September 2014 IPO. Maybe public equities aren’t passé, after all.