Silicon Valley Unicorns: Proceed With Caution

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Every entrepreneur wants his or her startup company to be successful.  Founders measure success in different ways, but one way to measure success is to compare their market share to other comparable businesses in the industry.  When a startup company raises a tremendous amount of capital and their valuation soars to a $1 billion valuation as a private company, investment bankers and venture capitalists call them Unicorns.  Some of the most well known unicorns of today include AirBnB and DropBox. Many startups complete multiple rounds of financing with venture capitalists and desire to go public to raise additional capital.  However, many tech startups have crashed and burned despite exceeding their initial target price in their initial public offering (IPO).  Once a unicorn goes public, it frequently ends up being overvalued and its stock price plummets after the IPO. Startup Company Counsel cautions entrepreneurs that few startups can live up to the hype of the first-day stock price after their IPO, and it is highly recommended to seek advice from a seasoned Silicon Valley Startup attorney.

Many Silicon Valley tech startups that went public have suffered from overvalued stock prices in the first few days and weeks of trading.  The shares distributed to the public are not immediately traded on the retail market.  Shares distributed via an IPO, although traded on an exchange such as NASDAQ, are distributed to venture capitalists holding a stake in the company, CEOs, family and friends on the board of directors, and the investment banks.  Upon distribution, the share price can, and frequently does, rise, sometimes exceeding 50% of the initial share price.  Such a situation appears to create a desirable position for the company: the initial stock price raises a tremendous amount of capital.  Raising capital is the motivation for going public in the first place.  Notwithstanding, soaring stock prices create a distorted reality for the company because the companies are not worth the price investors pay on the open market.

The problem is perception.  Many tech startups who go public suffer when their stock price drastically decreases from the initial highs after the offering.  Stock prices will decline after the buzz from the IPO wears off.  Even if the company shows a strong balance sheet with good revenues and meets or exceeds earnings, the company faces the perception of a declining stock price.  Thus, a misconception is created that the company is failing.

The manner in which venture capitalists pursue their investment plays a role in the share price at the IPO.  Venture capitalists who commit several rounds of financing want their investment back, which they can recover when the company goes public.  Venture capitalists can put tremendous pressure on a startup to go public, especially one that is holding onto Unicorn status.  Venture capitalists can create excitement for the IPO. That serves to raise awareness and demand, which in turn raises the share price.   The investment bank releases a small portion of the shares on the first day of trading.  The marketing machine creates a demand for the shares. Because there is only a small percentage of shares circulated initially, the increased demand causes a spike in the price per share.

The investment bankers and the venture capitalists are the true winners at the IPO.  Individual investors can lose a lot of money buying into the hype.  Self-interested and greedy investors create a public relations problem for the company.  Public sentiment can take over leaving a lasting negative impression despite growth, expansion, and a healthy bottom line.  This is a cautionary tale for startups aspiring for unicorn status and going public.  There are a lot of interests in a startups IPO, and not all are necessarily aligned for the best interest of the startup.

Silicon Valley Startup Attorneys – Advise Startups On The Unicorn

Startup Company Counsel is a Silicon Valley business law firm comprised of knowledgeable business attorneys who are highly experienced in helping entrepreneurs start, run, and grow their business.  While having a Unicorn is few and far between, it is possible to achieve with the right attorney on your side.  The startup attorneys at Startup Company Counsel advise startups with their decision to take their business public to raise revenue.  Call us today at 408-441-7555 or fill out our online contact form with any questions you may have.

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