Anatomy of an IPO Valuation | WSJ

Unicorns are getting haircuts, meaning high-flying startups are seeing their valuations shrink when they go public. WSJ explains why differences in the private and public markets are bloating what these companies might actually be worth.
More from the Wall Street Journal:
Visit WSJ.com: www.wsj.com
Visit the WSJ Video Center: wsj.com/video
On Facebook: / videos
On Twitter: / wsj
On Snapchat: on.wsj.com/2ra...
#WSJ #IPO

[@jamesoo96571]

It is just a crime that WE company did not include the rent expenditures into ipo report, when rent is just 90% of their expenses

[@dongxuzhou4661]

agreed I was frustrated and considered this money laundering

[@khooshalseechurn4504]

They mentioned about accounting policies in wework's case

[@yourjai]

Its actually contravention of accounting standards as in reality WeWork does not give a true and fair view which is the soul of the accounting standards...

[@MrLiquidxIce]

skip to 4:20 its says EBITDA only excludes some rent costs.

[@Vedrajrm]

@@MrLiquidxIce I think that was in the case of private investors and not during IPO

[@anujmittal6190]

We need more of this type of videos (educational)

[@edorofish]

How can a company be overvalued by $32 billion dollars? That is a serious accounting problem! Almost criminal!!

[@pausucro1320]

its called speculation, its not accounting problems, they show their numbers, thats why they can IPO, its this idiot investors who evaluate non earning companies alot

[@falconeagle3655]

@@pausucro1320 Investors are not idiot as they have a lot of money. What do you have?

[@randomlife1943]

@@falconeagle3655 A brain perhaps. _Surprise, surprise_ you don't need money to have that

[@edorofish]

Pau Sucro I think someone over speculated!

[@owen-nd7om]

@@falconeagle3655 having a lot of money doesn't make you smart, and you can also invest with very little money.

[@ashishxx]

It is easier to convince one Pvt. investor to buy 1% stake for $10m and get valued at $1B, than to convince thousands of market participants of that valuation.

[@MangoMotors]

So many startups seem like scams. Over value, take the cash, shut it down, and start again

[@AverageAngel]

yeah i agree, initial founders and investors just using IPO to cash out all ownership, and we retail are left to hold the bag. No wonder why Warren Buffett has never bought an IPO during the IPO period

[@praddzzz]

Tao Of Millennials That is a good point. Something i never realized. Investing in companies with a history of atleast a few years or a decade in public.

[@AverageAngel]

@@praddzzz ​ Pradd Zzz yeah, that way you can at least avoid the companies that are major scams. The major scam ones won't last more than a couple of years. The IPO unicorns that are still around after that, then you can consider them as they are at least unlikely to be scams

[@alexipestov7002]

Of course, then you have companies like GE and Enron...

[@MangoMotors]

@@alexipestov7002 but GE at least produced real products that you could put a price on and therefore measure a company's worth by their sale performance. Companies like Uber and Wework are losing billions of dollars a year yet their are estimated to he worth billions of dollars? How are they worth something if they're not generating profit?

[@cocainebear3358]

Good tutorial to help value my cocaine trafficking company in preparation for the IPO next year

[@praddzzz]

Cocaine bear Remember to keep updating your smugglers submarine designs, the investors love a company with progress , lol

[@cocainebear3358]

Most definitely, we've hired some great submarine designers from Russia. We run accurate simulations in Subnautica to test designs

[@yourjai]

I want opinion of some expert like Heisenberg on your business model...

[@jokerace8227]

CIA usually kills off the competition.

[@ozzyfromspace]

Don't forget kids: $100 for 1% gives your company a $10k valuation, because your uncle likes you, not because your startup is actually worth that much. Private investors are like your uncle...always setting valuations, just because. I wish startups could just get back to basics: sustainable practices, sustainable profits, growth is not forever. I see so many people that might say, "imagine I owned 10% of a billion dollar company ($100M)". If you sell your position, you can only do it once. Imagine creating a business that makes you $100M yearly, so you can get $100M several times over. Point is, profits are actually really attractive. Growth can be quite the vanity metric, as most high-growth startups tend to be chronic money-losing businesses

[@ericlam2867]

The book Blitzscaling talks about the logic behind why these companies like Uber and WeWork do what they do. The thought process is illogical but for some like Facebook and Amazon it has paid off, they end up jumping into other markets to generate the bulk of their revenue Advertising (FB), AWS (Amazon). The book talks about how most of the time blitzscaling will blow up in the founders face. With so many companies using this illogical logic now, it makes it harder to compete when everyone is blitzscaling and there are no barriers to entry. More content like this WSJ. This video was great.

[@brianthrom6858]

Eric Lam The difference is that the unit economics always made sense with Amazon. Facebook made it off of the unexpected value of personal data and that they’re software

[@ericlam2867]

@@brianthrom6858 agreed

[@AmorosoGombe]

Facebook and Amazon blitzscaled at near zero marginal cost (at the start). Virtual blitzscaling is way cheaper than physical blitzscaling. I think We is a bad bet. Just as well the IPO was called off. They were going to needlessly hurt a lot of small public investors.

[@bachibouzoul]

" community Based EBITEDA excluding real estate costs "... For a real estate company 😂😂. And investors still signed checks after seeing this?

[@pratyush511]

bachibouzoul 😂😂😂

[@loresma77]

bachibouzoul but WeWork is a Tech Company!!!! 😤😤😤

[@KuzzatAltay]

Really appreciate this videos. Thanks to the people who made this!

[@SudaNIm103]

Of course; Private investment demand is driven by a desire for ”Margin” alone rather than real ”Utility” which creates perverse incentives.

[@zakirahman8763]

What would be real "utility"?

[@SudaNIm103]

Zaki Rahman, fair question; ”Utility” can be a broad, ambiguous concept, let me try to explain what I mean and what I’m getting at. In this context, “real utility” is related to the flawed but still useful “utility theory of value” and is akin to the actual net present value of the company’s assets, minus liabilities, plus the revenues from future products and/or services it will create. Although the actual value of “real utility” can never be know with certainty it is intrinsically the key factor “rational buyer and sellers” are trying to gage when they decided to buy or sell a stock. In simple idealistic terms if we could know with certainty that a company’s real utility today is worth $100 million with 5 million shares outstanding, each share would be worth exactly $20.00. Needless to say, in the real world it’s impossible to know what this “real utility” actually is, which creates some degree of risk and speculation in the market. Fortunately the ‘guiding hand of supply and demand’ has proven its ability to set and keep the price near what the market in general values which itself is generally functional of utility. (In reality perhaps not to the extent that ‘the utility theory of value’ would dictate but generally speaking) Yes many other factors are also at play, but it’s this notion of innate value vs market price that I’m referencing. ⁂ Established stocks in public markets traded at high volumes are in general aren’t likely to be wildly over or under priced for long it’s just not a stable state. IPOs, emerging from small pools of private ownership who by and large are wealthy, rather risk tolerant and ready for a big pay day. All parties are pushing to set the highest price attainable to get as much margin as possible with relatively little pushing back. They don’t care much about “real utility” more like “maximum utility one could possibly conceive and keep a straight face” Once public the game changes and if the new wonder company can’t deliver on all that hype, that guiding hand pushes back.

[@abhinavhansaraman2166]

@@SudaNIm103 I think Mariana Mazzucato has some interesting arguments on this ( could be someone else but I think it is her).

[@2OfficialFON]

I’m gonna have to watch this a couple of times.

[@carboy101]

Same

[@andypotanin]

I always thought it was called "preferred stock", not "preference stock". Great video!

[@beccadumonde]

Andy Potanin i think it depends and can be either. In school we learn it as preferred stock :)

[@skolarii]

IPOs are set higher so that private investors and VCs can cash out at public investor expense

[@Saurabh____]

We work is living in a fantacy world

[@flexch2011]

Yes we do , ppl live in fantasy land and it can never come down , not true ... American is a big company it self more and more ea yr...!

[@takoleta]

Thanks WSJ for this educational video. Worth very second. Keep making theses kind of videos

[@AntonioCostaRealEstate]

Old saying ....only fools rush in. Glorified office sublet company with loads of hype. And now understating rental costs , or 70 % of their cost structure ( someone suggested 90% , let’s not forget payroll , furniture expending, marketing ). You can run a successful co working enterprise , for as long as you own the real estate. And even then , you are still at risk of market saturation. This is a low barrier of entry type of industry.

[@cliffordlevy3918]

Buying and selling stocks is for suckers. You're competing against computer algorithms. Buying and holding low risk, dividend earning stocks and reinvesting the dividends is the way to go for the average Joe. I like residential heavy REITS and utilities. There will always be poor people who need an apartment. Utilities are almost always monopolies and people need power.

[@AmorosoGombe]

At last there is a trend towards sanity in start up valuation. 'We' has no real sustainable competitive advantage. It's just a trendy serviced office. I see so many real start ups with sensible products getting turned down then you see a company like 'We' being given billions of dollars and you have to really wonder about the sanity of some VCs.

[@abhinavhansaraman2166]

Hi, re accounting practices, if a private investor is not subject to the same accounting practices that public firms are, are, and if yes why, public firms like banks allowed to lend money to private investors? (remember reading somewhere that a good portion of Softbank's Funds are acquired from money obtained through loans from Japanese banks)

[@auwanho]

Why nobody is warning about tech start up bubbles.

[@abhinavhansaraman2166]

Hi, at around 3:00, you said that preference shares and common stock are valued the same. Why does this mean that common stock is over valued but not that pref shares are undervalued? would be great to hear from someone who could explain this. thank you.

[@auro1986]

how do they think of all this creative and complex process of stealing money?

[@KrutarthBhatt1]

Wsj content editor: this video might pull in dislikes Wsj intern: cool bruh,I will disable the counter! It is all cool in the hood.

[@codycast]

Always wondered why people who are just watching a video to watch a video concern themselves with how many likes or dislikes or if it has a counter. Who cares.

[@ETS186]

@@codycast wsj valuation is linked to their YT likes bro...

[@seanwang3072]

love how sqaure is worth over 50 billion now

[@ZakharPerez]

Finance101

[@johnmarano5430]

We could encourage derivative contracts on private companies. It would help with price discovery for everyone including the companies themselves; www.mintz.com/insights-center/viewpoints/2015-09-beware-use-derivatives-purchase-and-sale-private-shares I say let the price discovery begin!

[@okidokiyowyow356]

Softbank is too greedy.

[@AkshayVasant]

Wouldn't it be helpful to value preference stocks equal to common stocks, which will take care of the bloated value and give a real idea of the company's worth.

[@Mr_Battlefield]

I think they don't want to change to anything different because it's a crime what they are doing out in the public or private.

[@yakkyuu12]

I LAUGHED at the 1:22 mark!!! " analysts contend it carry's a BiAS to HIGHER price"!! There ARE FEW traders who DON'T understand the prices IPO's AND multitudes are ALL RETAIL MARK-UP prices --- AND WORSE! A 400% mark -up on IPO'S is on the LOW side and ALSO on MOST stocks!! The different TRANCHES of A,B,C levels are ALL getting in AT ABSURDLY low prices! It IS the NORM for management to become MULTI MILLIONAIRES ----- ON BAD IPO'S( just LOOK at Adam Neumann of WEWORK), he IS NOT the ANOMALY!! Wall street talks about the RISK of going public! there is NO RISK to the management!!! they ALREADY got theirs!! So WHAT, if they DIDN'T get BILLIONS-- the HUNDREDS of Millions will be MORE than sufficient! the REAL RISK is to the RETAIL investor!!! Who MAKE UP the MAJORITY that ARE NOW ---- DEPENDENT on the MARKETS for their retirement and EVEN their GENERAL Financial --- SURVIVAL!!

[@catalin90vlad]

Very good video

[@mountainman6172]

That very same Standford Business Study find out majority of these unicorns do not actually qualify for the "unicorn" valuation/status. Ponzi-scheme

[@yakkyuu12]

At 1:48 is a BIG LIE or lack of knowledge!; What REALLY happens to the SUPPOSED " constrained private investors" IS---- the NONPUBLIC AGREEMENT between the Private investors and the BROKERS HANDLING the IPO IS: 1) they make SURE they MARK -UP the PRICE( like retail stores, , but HIGHER!!) and THEN -- the Broker PUMPS the IPO to the RETAIL investor --- this JUST PUSHES the PRICE HIGHER --- then to CAP it OFF the BROKER AND LYING PRIVATE investors--- GIVE MUTUAL funds DEALS on their stocks PRICE----- IF the MUTUAL FUND HOLDS and PUTS MANY shares in a VARIETY of funds (this makes shares LOOK like they are HELD and a GOOD investment) This is JUST PART of what is CALLED" bootstrapping" in mutual funds!! To ADD insult to injury, the RETAIL investor who OWNS these FUNDS --- is UNKNOWINGLY--- HELPING keep the the share price UP and STABLE---- ALL so the INSIDERS(private AND - A - B- and C private investors can ALL --- MAKE A KILLING! The BEST PART for the PRIVATE investors--- it ALL LOOKS LEGAL and, is REALLY --- but SHOULD NOT BE AT ALL----WHY? Because--- the Private A, B, C, groups ALL HAVE NO REAL RISK!! They ALL KNOW --- WELL BEFORE the IPO--- they ARE going to "MAKE BANK"! and the RETAIL investor is GOING to make them JUST that MUCH RICHER!!! This TERRIBLE GAME, is played out-- over and over!! The ONLY WAY to SOLVE THIS---- AND IT WOULD SOLVE IT--PERIOD!! --- Is to MAKE the PRICE of WHAT ALL -- PRIVATE A,B,C , investors AND the INVESTMENT BANKS who are ARE HANDLING the IPO( and AFTER that)---- MAKE ALL those PRE IPO PRICES ----PUBLIC KNOWLEDGE--- ( NOT HIDDEN in the HEAPS of pages of the IPO) BUT ANNOUNCED publicly --- and REPEATEDLY, JUST before AND DAILY in the FIRST MONTH of TRADING! This way EVERYONE will be ABLE to REALLY be able CONCLUDE, what IS A FAIR PRICE!!

[@falconeagle3655]

Great video on point

[@mebootm]

The background moves. Anybody? 4:35

[@codycast]

Huh?

[@jonathanbarrow3975]

Really informative video. Besides this guys voice, super annoying. Many finance specialists agree, there’s no place like the market for evaluating performance and potential. Many VC’s and PE firms can get gassed up with a startups idea but then realize it’s not true value too late.

[@tribeard5424]

I take WSJ as serious as I do the thumbnail for this video

[@TPerm-hj4sf]

We was under valued by a factor of 3.1415 times.

[@aryankushwaha1964]

wasting money in drain

[@MCorpReview]

They juz want a first day bounce

[@abhaymaheshwari2725]

🤘

[@clubedoremo7067]

Que Porra é isso I am from brazil what Your station?

[@chrisli3295]

It’s a scam.

[@jiwookim]

1:54 *CORONA VIRUS* _IS THAT YOU?_

[@bartakin]

JUST OMIT THE TRUTH AND LOOK GOOD..THIS SELLS B/S

[@munozcampos]

Truvk Truvj

[@F_And]

Lol they took away likes