Anchoring — how a private round pricing affects the next round
I have no private info about Blue Apron. Based on its public info both pre-IPO and post-IPO, there are certain things worth noting.
At the end of the roadshow, the company announced that its IPO subscription price is $15. This is higher than their Series D in 2015, which was priced at $13.3269.
However, on the first transaction of its IPO on 6/30, the price was around $10.
This means investors who subscribed to IPO shares not only did not make any money on the 1st transaction, but instead lost 33% immediately.
This begs the question: who subscribed to the IPO shares during the roadshow?
Assuming the public market transactions are done by portfolio managers, hedge funds, mutual funds, banks, pension funds, etc, these people also trade in public markets. It’s hard to imagine that they changed their minds about the pricing so dramatically post book-building and pre-IPO, as no new public information should be available.
The only possibility is: people who had subscribed to IPO shares are quite different groups from the public market traders. And the most likely answers are the IPO share subscribers are the same group of private equity funds and asset managers that have been doing late-stage mega-rounds for startups.
If this is true, then the IPO pricing of $15 apparently suffers from a well-known psychology called anchoring — instead of doing a clean, forward-looking DCF valuation, the investors took the Series D pricing $13.3269 into account and felt that $15 was not too unreasonable and they should still have upside opportunities on IPO day (as all other IPOs).
Turns out $15 was very unreasonable. The IPO opened at $10. And Blue Apron actually continues to trade lower, closing yesterday (7/11) at $7.14.
So we know IPO subscribers, if they have not yet sold the stocks during the 7 days, have now lost more than 50%. But how about the private round investors like VCs?
We know Series D was priced in 2015 at $13.3269. Even though the 1st transaction on IPO day was $10, the subscription was at $15, higher than $13.3269. Hence it did not trigger anti-dilution terms of Series D investors. Series D shareholders’ conversion price for IPO is therefore $13.3269. As a result:
- Series D: ( $7.14 — $13.3269 ) / $13.3269 = — 46% (loss)
In its S-1 Form, Blue Apron had clarified that Series C (2014) investors will convert at a 5-for-1 basis. This was because Series D was a down-round ($13.3269) compared to Series C ($16.6586). The IPO conversion price for Series C investors is therefore 1/5 of $16.6586, which is $3.33172. The gain/loss for Series C investors currently is then:
- Series C: ( $7.14 — $3.33172 ) / $3.33172 = 114% (gain)
Not spectacular for a 3-year span for VCs but at least they still are making money — at least on paper. And this is all due to the rather nasty 5-for-1 anti-dilution right that they owned.
Series B and Series A investors came in at much lower share prices and returns are quite good.
- Series B multiple: $7.14 / $0.2197 = 32.5X
- Series A multiple: $7.14 / $0.0815 = 87.6X
For example, Series A shareholders would have been able to cash out $260M on their $2.974M investment. This should be enough to return a good 5X for a typical $50M fund with 15 portfolio companies, even if all other 14 portfolios go bankrupt. This is a good example of how VC home-run maths works out.
But that’s assuming today’s share price. As the VCs are still in lock-up period as insiders, prices (and therefore profit) might still go up or down. If I were to bet, I would say it’d more likely be down than up by the end of lock-up.
How about the founders?
Based on the S-1 form, co-founder & CEO Matthew B. Salzberg owns 47,421,343 shares of Class B. The current market value would be:
- 47,421,343 X $7.14 = $339M
Pretty darn good for a founder that had only created the company 5 years ago. But then again, he won’t be able to sell majority of the shares other than under the reasons for tax payments or buying a house as the company has just hit IPO. So the $339M is currently mostly paper value.
If I were Salzberg, I would probably be already looking for a potential buyer who has strong cash flows to fund Blue Apron’s current loss-making operations, because the $15-to-$10 debacle has already made it very difficult to do another new secondary issuance — and Blue Apron does need one as the money it raised in IPO is not enough to sustain it to turning operational cash flow positive.
Walmart, maybe?
Another problem would be: should the underwriters, led by Goldman Sachs and Morgan Stanley, be responsible for this? If they had seen a sharp divide between private equity investors ($15) and public traders ($10) during book-building, they should have advised the founders to lower the subscription price to below $10 even though the PE people have put in enough subscription at $15 to complete IPO.
But $10 would trigger Series D anti-dilution so maybe founders don’t want that and insisted on going at $15.
In any case Series D and IPO share subscribers are seriously screwed now. I won’t be surprised if lawsuits follow.
* Disclaimer: I am neither long nor short APRN.
Originally published at http://www.jmyang.com on July 12, 2017.
