a16z Podcast | On Recent IPOs and Comparing Private vs. Public Valuations

Square's IPO Context and Pricing

• Square's IPO priced below its last private round valuation ($6 billion), triggering a "ratchet" provision that reset the price for early private investors to match the lower public offering price.
• The stock closed 45% above its initial IPO price on the first day of trading.
• Approximately 10% of shares were floated, with the majority remaining held by insiders subject to a 180-day lockup period.
• The deal faced a "risk-off" market environment compared to previous tech IPOs, where investors were less willing to credit future growth forecasts without immediate proof points.

Divergence in Private vs. Public Valuation Methodologies

• No Universal Formula: Valuation remains an art rather than a science; while both sectors use revenue multiples, EBITDA multiples, and Discounted Cash Flow (DCF) models, there is no single agreed-upon framework.
• Time Horizon Differences: Private investors typically look 3–4+ years out to a "steady state," whereas public investors generally analyze 12–24 months, leading to variance in acceptable growth and margin assumptions.
• Proof of Concept: Public investors are more discriminating, requiring visible software/data revenue in financial statements before granting premium multiples, whereas private VCs often invest based on a broader, unproven vision of market creation.
• Business Model Ambiguity: Debate centered on valuing Square as a "payments business" (current majority revenue) versus a "software and data platform" (future growth opportunity), with the market currently leaning toward the conservative payments valuation.
• Leadership Perception: Some analysts noted that Square's dual CEO role (Jack Dorsey) may have impacted the willingness to assign "forward credit" regarding future execution.

Structural Mechanisms and Investor Protections

• Ratchets: The Square deal utilized a ratchet structure providing dollar-for-dollar downside protection if the IPO price fell below the last private round, a mechanism not standard for early-stage VCs (who typically receive partial anti-dilution protection).
• Market Discipline: Public markets impose strict reporting (Sarbanes-Oxley, Reg FD) and quarterly scrutiny, creating a "daily report card" that forces faster growth acceleration compared to private markets.
• Lockup Periods: Underwriters typically enforce 180-day lockups on insider shares to allow the stock to "season" and reduce volatility before additional float enters the market.

IPO Success Metrics and Market Health

• Definition of Success: Success is defined not by the first-day "pop" (media metric) but by the ability to raise capital for growth, sustain performance post-lockup, and consistently beat earnings guidance over multiple quarters.
• Beating the Raise: Companies aim for a "beat and raise" strategy where they exceed quarterly expectations and subsequently increase forward guidance to build market credibility.
• Market Appetite: Despite the Square pricing controversy, the week was deemed successful due to robust trading activity in concurrent IPOs (Match Group, Mimecast), signaling continued market liquidity.
• Future Outlook: The sector expects increased IPO activity, with Atlassian cited as a likely upcoming candidate, driven by the availability of late-stage capital and a healthy M&A environment facilitated by public stock currencies.

Valuation Variables and Unit Economics

• Key Inputs: Valuations are driven by growth rates, Total Addressable Market (TAM), unit-level economics, and defensibility (e.g., network effects, barriers to entry).
• SaaS Premium: Recurring, contracted revenue commands higher multiples due to predictability, representing a higher quality of earnings compared to non-contracted revenue.
• Hyper-Growth Challenges: Valuing companies growing at 100%–400% is difficult due to the uncertainty of sustaining such steep growth curves over the long term.
• Market Sentiment: Public valuation often involves "whisper numbers" where investors assign a higher growth rate than the company's formal model predicts, driving post-IPO appreciation.