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After Lyft and TradeWeb went with their IPOs, another big company decided to do the same. Pinterest has already begun to prep for this by slashing its IPO target by billions of dollars.
Pinterest is seeking a valuation of up to $9 billion when it debuts on the public market this spring, which will rake in hundreds of millions for each of its founders and other major stakeholders.
Pinterest’s valuation was said to be $12 billion nearly two years ago when it raised its last round of funding. The company plans to sell 75 million Class A shares at $15 to $17 per share when it starts trading on the New York Stock Exchange under the symbol “PINS,” according to a regulatory filing.
The company was founded in 2010 by Ben Silbermann, Evan Sharp and Paul Sciarra, the last of whom parted ways with the company early in its history. Over the years, Pinterest has tried to evolve from being a digital scrapbooking service to a visual discovery tool, positioning it as a potential competitor to products like Google Search.
Pinterest’s Dual-Class Share Structure
However, unfortunately for Pinterest, they are using dual-class structure to concentrate voting power among major stakeholders. These stakeholders will own Class B shares.
Just for a reminder, Lyft (LYFT) also went public on March 29 with an IPO price of $72. Investors were mostly betting on Lyft’s prospects for future growth, especially if they are disrupting an existing business.
Lyft recently lost activist investor Carl Icahn, reportedly in response to the firm’s decision to use a dual-class share structure. Higher-class shares leave the Lyft founders in absolute control of the company – and ordinary investors with little way to remove them. Mr. Icahn above most other people knows the dangers of a company getting stuck with a board of co-founders.
However, unlike Lyft, whose founders are the sole owners of Class B shares, other major stakeholders in Pinterest like Andreessen Horowitz, co-founders Benjamin Silbermann and Evan Sharp and FirstMark will also own this class of stock.
Elliot Lutzker, corporate and securities partner at Davidoff Hutcher & Citron says:
“People are looking at Lyft and realizing that even if the road show goes extremely well and there is a lot of demand, you can’t overprice the offering. Investors are looking more at business fundamentals. Not every company is an Amazon that can afford to lose money for years and years while growing,”
Like its peers, Pinterest loses money. But the company, which generates revenue from advertising, is burning less cash than Lyft or Uber. Last month, Pinterest revealed it lost $63 million on revenue of $756 million in 2018. Pinterest is also growing quickly, reporting a 60 percent jump in revenue from 2017 to 2018.
If Pinterest goes public below its last private market valuation, that will not be a first for this generation of highly valued start-ups.
Box, a cloud storage company, went public in 2015 at $1.6 billion, below its $2.4 billion private market valuation. The company now trades at a $2.8 billion market capitalization. Square, a payments company that was worth $6 billion in the private market, went public in 2015 at a $2.9 billion valuation. Square now has a $31 billion market capitalization.
Nicole Tanenbaum, chief investment strategist at Chequers Financial Management said:
“There is a stigma attached to coming to market with a down round, whether it’s in the private market or the public market, because it undermines confidence. This has certainly changed the landscape and created some concern for the future tech IPOs to come.”
Kathleen Smith, a principal at Renaissance Capital claims that the Lyft and Pinterest scenarios highlight the disconnect between private and public valuations. In the past, companies typically saw their valuations grow as they transitioned from private financing to the public market.
In its S-1 filing, Pinterest said that one of the risk factors is that it could fail to penetrate new demographics. Still, Pinterest flaunts its coveted user demographics, claiming more than half of all U.S. millennials. Pinterest said “eight out of 10 moms” are on its platform, adding that “are often the primary decision-makers when it comes to buying products and services for their household.”
But companies are now staying private longer and have access to larger pools of private capital, she said. In some cases, private valuations fail to justify themselves, as newly public companies see their stock prices and market caps flounder.