The year of the disappearing lock-up

That startup founders are in the driver’s seat has been plain for a while now. Consider the extent to which funding has soared, with investors reportedly plugging a record $93 billion into early-stage U.S. startups last year — triple what they raised five years earlier. Consider that the median valuation for seed- and early-stage startups doubled over the same period.

Consider also the continued rise of dual-class shares that provide founders with outsize voting power. Almost 30% of IPOs between 2017 and 2019 had dual-class structures, and that number likely increased between 2019 and the end of last year.

But another, less discussed proof point about how far founders can push their investors — and eventually bankers —  in a frothy market centers on disappearing lock-up periods. Typically a 90- to 180-day window after a company begins to trade publicly — time during which founders, investors, and employees agree not to sell their shares to show their faith in the company and instill confidence in new shareholders — lock-ups aren’t just slowly slipping away. Instead, according to new research from Renaissance Capital, which manages IPO-focused exchange traded funds, early lock-up provisions “exploded” last year.

According to the outfit’s findings, fully one-quarter of the year’s IPOs (or 91 offers) had provisions that allowed for early lock-up releases. That’s more than five times the number in 2020. Unsurprisingly, tech IPOs accounted for 60 of the new issuers with early lock-up provisions, or 66% of the group.

You might recall reading at the time about some of these offerings, including that of Coupang and Robinhood. In the case of Coupang, South Korea’s biggest e-commerce retailer, it announced an early stock lockup agreement release for about 34 million shares just one week into its March debut on the NYSE based on a specific condition — that its stock needed to close at or above its IPO price of $35 — that was quickly satisfied. (The shares today trade at roughly $26 apiece.)

When Robinhood began trading at the end of July, employees were allowed to sell 15% of their holdings immediately and another 15% three months later.

Other companies to loosen lock-ups include Snowflake, the data warehousing company that went public in the fall of 2020 and allowed employees to sell as much as 25% of their vested stock three months afterward; Airbnb, which went public in December 2020 and allowed employees to sell up to 15% of their shares in its first seven trading days; and DoorDash, whose underwriters similarly agreed to cut in half the company’s 180-day lockup agreement for some shares after it also went public in December 2020.

Dutch Bros, Allbirds, The Honest Company, TuSimple, and Affirm also featured early lock-up provisions, notes Renaissance’s report.

Lock-up periods have never been required by the Securities & Exchange Commission but were long considered a good faith sign to outsiders and even helped some public market shareholders plan their stock purchases. (Often, a company’s shares will fall in price following a traditional lock-up as early investors unload their shares en masse, driving up the supply of available shares. When Uber’s lockup period ended in 2019, for example, its shares dropped to 43% below their IPO price as newly sold shares flooded the market.)

So what’s going on exactly? A number of trends have since conspired to whittle away such measures, from the longer stretch that many companies now operate as privately held concerns (creating greater demand for liquidity by insiders), to the advent of direct listings. Just one of 12 direct listings to date has featured a lockup, that of Palantir.

The rise last year of special purpose acquisition companies, or SPACs, is yet another factor. As the New York Times reported last spring, many related deals contain language that restricts sponsors from selling shares for a year from the day the deal is completed, but there are much faster ways out. According to one popular provision, if a SPAC’s shares trade slightly above their initial pricing for more than 20 days in a 30-day period, the lockup provision vanishes. Sometimes, the terms are even more porous. Indeed, when ride-hail giant Grab began to trade publicly last month following a tie-up with a blank-check company, more than 20% of shares held by company shareholders were immediately tradable after the merger.

The unifying thread here is that all involve founding teams who demanded, and received, more flexible lock-up terms from their investors, who also largely benefit from the trend. (What VC would prefer to have his or her hand’s tied for three to six months after a public offering?)

In the meantime, as Renaissance notes in its new report, lockups aren’t just fewer in number but they’re becoming more difficult to track. As the report observes: “Instead of a simple reduction in lock-up days, early releases are now regularly based on earnings dates or blackout periods that are undetermined at the time of the IPO. The release date may also be a moving target, dependent upon the share price hitting a certain threshold (for example, once shares are 33% above the IPO for 10 out of 15 consecutive trading days).”

More, it adds, “Early releases are often buried in complex legalese, and may be vague regarding the actual number of shares released . . .”

The big question is whether public market shareholders care about the increasing disappearance of lock-up periods, and right now, there isn’t a strong case to make why they should. While SPACs have significantly underperformed typical IPOs, direct listings — perhaps because they are far fewer in number — have performed better.

As for the broader market, U.S. stocks enjoyed a record-setting year in 2021, so investors aren’t likely to push back on much until that changes.

Warby Parker makes it clear that direct listings are unicorn-friendly

Another day, another direct listing. The once-exotic method of going public is increasingly popular with venture-backed companies as they look to list without running head-first into the IPO pricing issues that have bedeviled a number of high-profile public offerings in the last year.

Precisely who is underpricing whom in those situations is a fun, if slightly academic, question.

Today’s direct listing was Warby Parker, a heavily venture-backed DTC company in the eyewear space. Warby has long had a strong e-commerce component, though it has a growing retail footprint to support its digital sales efforts.

Warby’s direct listing has proved a success. The company not only listed, but did so at a price point that was above its final private-market valuation, and its shares appreciated rapidly during its first day of trading. For the DTC market, the results partially combat the odor that 2020’s ill-fated Casper IPO left lingering around the startup business model category.

Before we close the books on direct listing week, a few quick thoughts on the Warby listing. I found a few healthy things in the debut, and one that’s ever so slightly less sanative. Let’s have some fun!

Good news for DTC startups

In the wake of Casper’s underpowered and rapidly descending public offering, DTC startups got a bit of a bad rap. Rising channel advertising costs biting more deeply into customer acquisition costs while software revenue multiples scaled to new heights thanks to the pandemic and an accelerating digital transformation made the model of actually making physical goods and selling them to consumers seem a bit old-hat.

Coinbase sets direct listing reference price at $250/share, valuing the company at as much as $65B

Coinbase, the American cryptocurrency trading giant, has set a reference price for its direct listing at $250 per share. According to the company’s most recent SEC filing, it has a fully diluted share count of 261.3 million, giving the company a valuation of $65.3 billion. Using a simple share count of 196,760,122 provided in its most recent S-1/A filing, Coinbase would be worth a slimmer $49.2 billion.

Regardless of which share count is used to calculate the company’s valuation, its new worth is miles above its final private price set in 2018 when the company was worth $8 billion.

Immediate chatter following the company’s direct listing reference price was that the price could be low. While Coinbase will not suffer usual venture capital censure if its shares quickly appreciate as it is not selling stock in its flotation, it would still be slightly humorous if its set reference price was merely a reference to an overly conservative estimate of its worth.

Its private backers are in for a bonanza either way. Around four years ago in 2017 Coinbase was worth just $1.6 billion, according to Crunchbase data. For investors in that round, let alone its earlier fundraises, the valuation implied by a $250 per-share price represents a multiple of around 40x from the price that they paid.

The Coinbase direct listing was turbocharged recently when the company provided a first-look at its Q1 2021 performance. As TechCrunch reported at the time, the company’s recent growth was impressive, with revenue scaling from $585.1 million in Q4 2020, to $1.8 billion in the first three months of this year. The new numbers set an already-hot company’s public debut on fire.

Place your bets now concerning where Coinbase might open, and how high its value may rise. It’s going to be quite the show.

Coinbase’s monster Q1 in context

In the first quarter of 2021, American consumer cryptocurrency trading giant Coinbase grew sharply, generating strong profits at the same time.

For Coinbase, the disclosure of its preliminary Q1 2021 results comes a week ahead of its direct listing, an event that will see the company begin to trade publicly. As it is both cash rich and well known, Coinbase is foregoing a traditional IPO in favor of the more exotic method of going public.

In its release, Coinbase disclosed the following metrics, which TechCrunch has compared to metrics from its S-1 filing:

  • Monthly transacting users (MTUs) of 6.1 million, up from 2.8 million at the end of 2020.
  • Platform assets of $223 billion, up from $90.3 billion at the end of 2020.
  • Trading volume of $335 billion, up from $193.1 billion at the end of 2020.
  • Revenue of $1.8 billion, up from $585.1 million in Q4 2020.
  • Net income of “approximately $730 million to $800 million,” up from $178.8 million in Q4 2020.
  • Adjusted EBITDA of “approximately $1.1 billion,” up from $287.7 million in Q4 2020.

The growth of Coinbase from Q4 2020 to Q1 2021 is so extreme that the company’s year-over-year comparisons are farcical. For example, in Q1 2020 Coinbase’s revenues were $190.6 million, or just under 11% of its Q1 2021 top line. The company’s adjusted profits alone in Q1 2021 were more than five times its year-ago revenues.

The new numbers may help solidify some valuation marks that the company has been discussed as approaching, like the $100 billion threshold, or even boost them.

The company did present some warnings in its public release, noting that cryptocurrency price “cycles can be highly volatile, and as a result, [Coinbase] measure[s] [its] performance over price cycles in lieu of quarterly results.” The company also stated that future declines in crypto trading activity will not slow its investment:

MTUs, Trading Volume, and therefore transaction revenue currently fluctuate, potentially materially, with Bitcoin price and crypto asset volatility. This revenue unpredictability, in turn, impacts our profitability on a quarter-to-quarter basis. In terms of expenses, we intend to prioritize investment, including in periods where we may see a decrease in Bitcoin price. This is because we believe that scale is central to achieving our mission and it is still early in the development of this industry. [Emphasis: TechCrunch]

Or more simply, it is willing to sacrifice future profitability if its revenues decline, as it is building for the future instead of hewing to more near-term investor expectations. At least Coinbase is being clear in its messaging to investors: Don’t buy Coinbase stock expecting the company to tune its results to quarterly expectations.

Looking ahead, Coinbase did provide some guidance for its full-year results. For 2021, the company provided three scenarios. The first “assumes an increase in crypto market capitalization and moderate-to-high crypto asset price volatility,” leading to 7 million MTUs. The second “assumes flat crypto market capitalization and low-to-moderate crypto asset price volatility” and 5.5 million MTUs. The third “assumes a significant decrease in crypto market capitalization, similar to the decrease observed in 2018, and low levels of crypto asset price volatility thereafter” and 4 million MTUs for the year.

But don’t think that Coinbase is anticipation stagnant growth, simply because its best scenario anticipates mere growth from 6.1 million MTUs to 7 million MTUs. The company wrote in its release under the headline “institutional revenue” that it expects “meaningful growth in 2021 driven by transaction and custody revenue given the increased institutional interest in the crypto asset class.”

Coinbase’s quarter was bonkers good. But so was the performance of cryptocurrencies themselves. A bet on the company’s shares, then, could easily be seen as a bet on the value of bitcoin and its ilk. April 14 is going to be a fun day to watch.

Welcome to Bloxburg, public investors

As Roblox began to trade today, the company’s shares shot above its reference price of $45 per share. Currently, Roblox is trading at $71.10 per share, up just over 60% from the reference price that it announced last night. That effort finally set a directional value of sorts on Roblox’s shares before it floated on the public markets. 

Roblox, a gaming company aimed at children and powered by an internal economy and third-party development activity, has had a tumultuous if exciting path to the public markets. The company initially intended to list in a traditional IPO, but after enthusiastic market conditions sent the value of some public-offering shares higher after they began to trade, Roblox hit pause.

The former startup then raised a Series H round of capital, a $520 million investment that boosted the value of Roblox from around $4 billion to $29.5 billion. TechCrunch jokes that, far from IPOs mispricing IPOs, that $4 billion price set in early 2020 was the real theft, given where the company was valued just a year later. Sure, the pandemic was good for Roblox, but seeing a 5x repricing in four quarters was hilarious.

Regardless. At $45 per share, Roblox’s direct listing reference price, the company was worth $29.1 billion, per Renaissance Capital, an IPO-focused group. Barron’s placed the number at $29.3 billion. No matter which is closer to the truth, they were both right next to the company’s final private price.

So, the Series H investors nailed the value of Roblox, or the company merely tied its reference price to that price. Either way, we had a pretty clear Series H direct listing reference price handoff.

The company’s performance today makes that effort appear somewhat meaningless as both prices were wildly under what traders were willing to cough up during its first day of trading; naturally, we’ll keep tabs on its price as time continues, and one day is not a trend, but seeing Roblox trade so very far above its direct listing reference price and final private valuation appears to undercut the argument that this sort of debut can sort out pricing issues inherent in more traditional IPOs.

To understand the company’s early trading activity, however, we need to understand just how well Roblox performed in Q4 2020. When we last noodled on the company’s valuation, we only had data through the third quarter of last year. Now we have data through December 31, 2020. Let’s check how much Roblox grew in that final period, and if it helps explain how the company managed that epic Series H markup.

Gaming is popular, who knew

Five takeaways from Coinbase’s S-1

The Coinbase S-1 is out! And hot damn, did the company have a good fourth quarter.

TechCrunch has a first look at the company’s headline numbers. But in case you’ve been busy, the key things to understand are that Coinbase was an impressive company in 2019 with more than a half-billion in revenue and a modest net loss. In 2020, the company grew sharply to more than $1.2 billion in revenue, providing it with lots of net income.

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The company’s Q4 2020 was about as big as its entire 2019 in revenue terms, albeit much more profitable because the sum was concentrated in a single quarter instead of spread out over four.

However, beyond the top-level numbers are a host of details to explore. I want to dig more deeply into Coinbase’s user numbers, its asset mix, its growing subscription incomes, its competitive landscape and who owns what in the company. At the end, we’ll riff on a chart that discusses the correlation between crypto assets and the stock market, just for fun.

Sound good? You can read along in the S-1 here if you want, and I will provide page numbers as we go.

Inside Coinbase’s direct listing

To make things simpler, we’ll frame our digging in the form of questions, starting with: How many users did Coinbase need to generate its huge 2020 revenue gains?

The answer: not as many as I expected. In 2019, Coinbase generated $533.7 million from what it describes as 1 million “Monthly Transacting Users” (page 14). That works out to $533.7 in revenue per MTU for the year.

In 2020, Coinbase generated $1.28 billion in revenue off of 2.8 million MTUs, which works out to around $457 apiece during the year. That’s a bit lower, but not terribly so. And given that the company’s transaction margins ranged in the mid-80s percent during much of 2020, each Coinbase active trader was still quite valuable, even at a lower revenue point.

As we noted in our first look at the company’s economics, Coinbase’s metrics are highly variable. Its MTU figure is no exception. Observe the following chart from its S-1 filing (page 95):

Coinbase’s Q1 2018 was nearly as popular in MTU terms as its final quarter of 2020. And from that point in time, the company’s MTUs fell 70 percent to its Q1 2019 nadir. That’s a lot of variance.

The company itself notes in its filing that “MTUs have historically been correlated with both the price of Bitcoin and Crypto Asset Volatility,” though the company does point out that it expects such correlations to diminish over time.

The answer to our question is that it only takes a few million MTUs for Coinbase to be a huge business. But the other side of that point is that Coinbase has shown twice in two years (2018, 2019) that the number of traders on its platform can decline.

What assets do Coinbase users hold? This is a question that I am sure many of you crypto enthusiasts have. But first, what does the Coinbase user asset base look like? Like this, historically (page 96):

Holy shit, right? The chart shows two things. First, the rapid appreciation of cryptocurrencies overall, which you can spy in the upward kick of the black line. And then the blue bars show how the assets on Coinbase’s platform grew from $17 billion at the start of 2020 to $90 billion by year’s end.

Coinbase files to go public in a key listing for the cryptocurrency category

This morning Coinbase, an American cryptocurrency exchange, released an S-1 filing ahead of its direct listing. The company’s public debut has been hotly anticipated thanks to recent activity amongst bitcoin and other blockchain-based assets, the company’s controversial political positions, and its spiking valuation on private exchanges.

Coinbase’s financials show a company that grew rapidly from 2019 to 2020. More than that, the company also crossed the threshold into unadjusted profitability; it’s common amongst quickly-growing tech companies to lean more heavily on adjusted profit and other more flattering metrics.

In 2019 Coinbase $30.4 million against $533.7 million in revenue. In 2020 the company’s net income rose to $127.5 million against $1.28 billion in revenue.

The crypto unicorn grew just over 139% in 2020, a massive improvement on its 2019 results. The company’s scale and growth help us understand why some investors are bidding its value up to as much as $100 billion on the private markets.

Coinbase has highly variable revenues. The company posted revenues of $190.6 million in Q1 2020, a number that dipped to $186.4 million in the second quarter. Then Coinbase’s topline accelerated in Q3 2020 to $315.4 million, and $585.1 million in the final quarter of 2020.

It’s easy to see why Coinbase is moving forward with its direct listing now; the company just posted an excellent quarter.

In that outsized fourth-quarter period, Coinbase generated operating income of $226.6 million, and net income of $176.8 million. Those represent high-quality profitability improvements from preceding periods, and provide Coinbase with attractive end-of-year profit margins.

The cryptocurrency exchange generates the vast majority of its revenues from transaction revenues, as anticipated. Coinbase also has a comparatively modest “subscription and services” revenue category, which was worth around $20.7 million in Q4 2020 revenues.

Finally, Coinbase swun from operating cash flow negative in 2019 to incredibly cash-flow positive in 2020. However, the $3.0 billion in positive operating cash flow that Coinbase generated last year includes “$2.7 billion related to cash from the change in custodial funds due to customers,” diminishing the number to a more understandable scale.

This is a first look, but Coinbase is a quickly growing, profitable unicorn that looks more than ready for its direct listing. The question ahead of investors is merely how to value Coinbase’s revenue growth as it does track with broader market interest in cryptocurrencies, a historically fluid quantity.