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GBA | 23 September 2017

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Are technology startups overvalued?

Are technology startups overvalued?

A new item on the agenda of investors in the technology ecosystem is the loss in value suffered by technology startups that go public.

Startups that are invested below their value may increase their share values in the stock exchange once they go public. However, it does not always work like that. When startups such as Square, Box, and Hortonworks went public, their values turned out to be lower than their investors had estimated.

Starting to operate in the New York Stock Exchange last week, Square had a share price of only $9. Its share prices increased by 45% in a short time, and the current value of the company is over 4 billion dollars. However, the company was estimated to be worth 6 billion dollars before the last round of investment, and going public caused it to lose one third of its value.

Groupon and Zynga were relatively bigger companies when they went public, and they did not even draw close to the value they had when they were private companies.

Considering all these, one thinks of the word ‘bubble’ which the technology ecosystem is familiar with. Questions have already begun to arise in entrepreneurship ecosystem. There is obviously a mistake here: Somewhere between their establishment and going public, these companies are overvalued, and the true picture is revealed once they go on the market.

Max Wolf, chief economist at Manhattan Venture Partners, says: “We will see many unicorns go public with lower values than estimated in the last private investment round” and adds that “this is like a long-term and healthy ‘reset’.”

Anand Sanwal, CEO of CB Insights, talks about a possible change in the investment habits of startups: “Companies sometimes have to go public for capital increase. After all, public offerings are a kind of money fund raising. This is why you can try your luck in markets open to public rather than seek private investments.”

Some are of the opinion that the gap between private investors and public investors poses no problems in the long run. It is likely that shares listed at low values on markets can be seen as opportunities or discounts by some public investors. This may be true; Facebook had problems when it went public three years ago, but now it has quintupled its value.

In an interview with TechCrunch, Atish Davda, CEO of EquityZen, said that the value at the public offering did not matter and that “what matters is how Square will fare in the next 10 years.” Phil Haslett, owner of EquityZen, adds: “If Square can overcome this instability, other companies may follow it.”

For many technology investors, loss in value after going public is only a temporary anomaly, and things will be alright in the long run. Only time will tell if this is true. One thing is certain, and it is that a new technology bubble will shake the cornerstones of the global enterpreneurship ecosystem.

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