Warning: this is a very superficial post only to share a few thoughts.
I pay attention to IPOs of iconic companies, and of course to all the ones in the hardware space. Here are some notes about this particular one.
It’s Good News For Hardware Startups
It’s an IPO in our space! And with good momentum so far!
Ok it took a while (15 years — Roku was founded in 2002) and they raised over US$200 million to get there. Still, the current valuation is quite good at US$2.35 billion. At IPO it was worth a bit over half the current valuation, still over the symbolic US$1 billion mark.
I’m not sure what the valuation was was for their last investment round by News Corp (US$45 million in 2015), but maybe US$400–500 million? Of course most shares are not sold yet, but it seems like a fine return for everyone. Also it was a quick exit for the last investors (2 years) and the velocity affects the returns (doubling your money every 2 years is better than 10x in 10 years) so they should be quite happy still.
For reference, one company that priced almost too well for their own good is Facebook, who optimized their IPO price (and how much they paid bankers), but then suffered from a price slump. It might have been tolerable on the PR side as Zuckerberg wanted public investors to think long term, but it had a painful effect internally on the morale of the people building the service. Eventually all is well for everyone, but it must have been tough to deal with in-house.
IPO Pop = Money Left On Table
While the media seems to always make it sound like good news, a big jump in valuation after the IPO is NOT good news for… the founders. It means their company didn’t benefit as much as it could. If the price doubles, that means they sold too cheap.
Who benefits? IPO investors (retail and institutional) and the underwriters (investment bank who shopped the deal). There is even a “greenshoe option” which allows the latter to buy extra shares at a fixed (lower price).
Essentially the bank always wins, and want to please their institutional friends (their long-term and repeat customers) as much as they can. And the bank controls the media narrative too. Company founders can’t really complain they are getting short-changed and have to smile all the way.
Roku Is Not Profitable And Is Shifting Its Business Model
They are growing their more profitable “platform business”, while the hardware business is apparently losing money. After the IPO, the CEO said that he didn’t see a future in streaming boxes. On the platform side, Netflix and YouTube don’t share ad revenue with Roku.
So I started to wonder “who owns Roku boxes?”. Is it young people? Old people like those who have legacy AOL accounts? I just don’t know.
Last, can Roku compete with other offers from Netflix, Amazon, Apple, Google and the other big guys? One might wonder if Roku didn’t IPO at their peak. Time will tell.
I feel that in recent years so much of the growth is privatized (via VC/PE funding) that public markets are sometimes left with companies who basically have no other choice but to go public, but do not have a lot of life left in them. It’s a far cry from an Apple or a Intel, who IPO early and had many years of growth to share with public investors.
Will someone bring back old school IPOs?