It's been exactly a week since Snap Inc.'s initial public offering, and already the parent company of Snapchat has become a case study in how investor sentiment can be as ephemeral as a disappearing message.
Snap stock soared on its first and second days of trading. But when markets reopened on Monday, the party was over. Next came the hangover.
After several analysts issued their initial coverage of the stock with a "sell rating," share prices began to fall. Snap closed the day below its opening trading price of $24.47, then dropped a further 10% on Tuesday. With analysts' median valuation closer to $16 a share, Snap might be looking at more pain in the near future.
Or, it might rebound to new heights. The truth is that I don't know. Snap isn't the first buzzed-about startup to have a tumultuous start to its life as a publicly traded company, and it won't be the last.
History Repeats Itself
Consider the example of Facebook, the company that Snap optimists (Snapomists?) suggest could provide a template for future profitability. In 2012, Facebook set the record for the highest opening day trading volume for a newly listed stock. The company that Mark Zuckerberg had launched only a few years earlier in a Harvard dorm room raised $16 billion in a single day - the third largest IPO in U.S. history.
Yet the Wall Street Journal rightly described Facebook's IPO as a "fiasco." Technical glitches on the NASDAQ exchange delayed Facebook's launch, and things only got worse once trading began. After initially shooting up to $45 a share, the stock plummeted back to its initial offer price of $38, an up-and-down swing that implied Facebook had added $20 billion of value, then lost it all, in just four and a half hours.
Fast forward to today, when Facebook trades at more than three times its initial offer price. That's also more than three times its first day peak, an example of a short-term stock price fluctuation seeming much smaller when viewed in the rear view mirror.
Unless It Doesn't
But the lesson isn't that "things always work out, eventually." Two high-flying startups that have struggled as of late help illustrate the point.
Zynga and Groupon both had their IPOs less than a year before Facebook's. After their first days of trading, Zynga closed 5% below its offer price, while Groupon surged 31% above its offer price.
Based on these one day snapshots, Groupon, Facebook, and Zynga would appear to be the good, the bad, and the ugly, respectively. But based on the subsequent five years, the only thing that can be said with any certainty is that judging a stock on first day results is about as useful as picking a marathon winner after the first 100 yards of the race.
Growing Up in Public
An IPO is widely thought of as being the ultimate sign of a startup "making it." It's the highest profile, and in many cases, most lucrative of possible exits. It's also the most uncertain: whereas an acquisition locks in a startup's worth, an IPO subjects it to the ongoing valuation of public markets. To paraphrase a line from Spider-Man, with greater access to capital comes greater scrutiny.
No surprise, then, that startups have been delaying going public. Deeper pools of private capital, along with better developed secondary markets where employees can cash out their equity stakes, make it possible for a startups to grow to unicorn size and beyond without floating a stock offering.
Uber (still the world's most valuable startup despite having a week that more than rivals Snap's in terms of unwanted headlines) is, even the most conservative estimates, worth roughly thirty times what Microsoft was at the time of its IPO three decades ago. Times have certainly changed.
What hasn't changed, however, is the need for startups to maintain cultures of internal stability that can withstand the slings and arrows of life as a public company. This is especially important because startups often face a post-exit talent exodus. Employees, like investors, don't respond well when they sense a company lacks a clear vision for the future.