Roughly 10 IPOs will be priced this week, making it the busiest week so far in 2017. Among them, Tintri, a San Francisco bay area cloud storage company, is pursuing an IPO with a valuation that implies a roughly 50% haircut to its private valuation in July 2015. This is one of the steepest valuation resets we have seen among VC-backed companies pursuing an IPO in the recent past. So, why is Tintri facing such a steep downround IPO? Three reasons:
#1. Tintri faces a long list of large competitors and continues to burn significant amount of capital.
#2. Tintri’s losses are growing faster than its revenues, increasing the uncertainty around its profitability outlook.
#3. Recent valuation trends for storage companies haven’t been encouraging, either. Nutanix shares have declined more than 50% since its first week highs, and trade marginally above its IPO price. Pure Storage shares have broken below its IPO price. Both SimpliVity and Nimble Storage were acquired by Hewlett Packard at a roughly 40% discount to their peak valuations.
So, despite such a negative backdrop, why invest in Tintri now? Three reasons.
#1. Downround IPOs have traded well so far. A down-round IPO isn’t the end of the road for VC-backed IPOs in 2017. We have seen such IPOs in the past. Recently, Cloudera went public with a 50% haircut to its private valuation. Square, Box, New Relic, and Apptio all went public below their private valuations, but today all four are trading above their IPO prices. Apigee also pursued a down-round IPO and was eventually acquired by Google at a solid premium. We estimate that roughly one in six VC-backed tech companies that go public do so with a haircut to the private valuation. Tintri is the 10th VC-backed IPO in 2017. So, 2017 down-round IPO proportion is within the historical range. All in, a valuation reset approved by a relatively efficient public market could be a healthy sign for the company and the overall VC ecosystem.
#2. Tintri is an attractive acquisition candidate. We believe Tintri is pursuing a large addressable market, and has demonstrated an impressive track record of building a solid partner ecosystem. However, it needs the backing of a large platform to succeed over the longer term. Large tech companies including Microsoft, Amazon, Google, IBM, and Cisco have big aspirations in this space.
#3. At IPO levels, Tintri presents an attractive GARP trade. At roughly $375 million in implied IPO market cap, Tintri would be trading below 3x TTM revenues. On the other hand, both Nutanix and Pure Storage are currently trading above 3x TTM revenues. While there are lots of moving parts here, for bargain hunters with a higher tolerance for risk, this is an opportunity. **GARP: Growth at a reasonable price (investing style)
If all goes well for Tintri later this week, key winners would be lots of employees based in the San Francisco Bay Area, and early investors including NEA and Lightspeed Venture Partners.
Tintri M&A Waterfall Chart
Tintri IPO Waterfall Chart
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