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Will Unicorns Start Migrating to the IPO Market? Good News for Small Investors

By Linda McDonough on January 10, 2018

The land of unicorns is getting crowded. And the cornucopia of capital that these rare creatures feed on may be getting a bit thin.

A unicorn is a private company with a valuation greater than $1 billion. The supply of money chasing these private investments grew rapidly over the past several years, sending valuations to the moon.

As of December 2017, there were over 250 companies considered unicorns.

Most of these unicorns are young and fast growing. You likely know some of them: Airbnb, Pinterest and Elon Musk’s rocket favorite, Space-X. Almost all are growing quickly but losing money. That means they require a constant feed of cash to stay in business.

Money pouring into private equity funds grew rapidly in the past few years, providing a robust source of capital for these private companies. As the growing supply competed for a spot with the fastest growing companies, unicorn valuations skyrocketed.

However, a recent investment in Uber by Japanese investor Softbank, left a dark cloud over unicorn land. This investment values the company at a 30% discount to its prior level.

This is good news for the IPO market, the second source of funding for private companies. If private companies see a hint of weakness in private valuations, they might opt for the public markets.

While the discount might be due to the size of Softbank’s investment, I think it’s a warning sign for other companies hoping to grow into unicorns.

The U.S. IPO market suffered one of its worst years in 2016. Last year improved markedly with 70% more deals priced. The deals priced in 2017 generated an average $260 million per deal, up 19% from 2016 levels.

The nine deals priced in December are up an average 22% in less than a month. Industry source lists 17 deals sitting in the pipeline. Although not every one of these will result in a final IPO, there is no shortage of companies taking the public route.

Many companies prefer to stay private to avoid the scrutiny of public markets. But Softbank’s power to force out ex-Uber CEO Travis Kalanick shows the control that private investors have over company operations. Suddenly the risk of losing control due to being a public company is not so ominous.

Some private companies may eye the gains of recent successful deals and decide to go that route. One look at SmartGlobal (NSDQ: SGH), up 222% since its May 2017 debut certainly makes the public markets look appetizing.

This is great news for the little investor. Most of us don’t have access to private equity funds which require large upfront investments. If more companies choose the IPO route, as I predict they will, the riches will be accessible to investors large and small.

I’ve found some terrific investment recommendations in my Profit Catalyst Alert service from the IPO market. I expect 2018 to be a banner year for these investments.


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