WeWork Postpones IPO丨Reflection on Tech Unicorns' Haircut

Tommy ZHOU

High PE to low IPO valuation phenomenon

In reflection, we summarized a few reasoning behind the high PE to low IPO valuation phenomenon:

1. Private Market Optimism:Private companies fund raise by going through a sequencing procedure, commonly from Series A to B to C, only carrying valuation forward and higher. Unlike public markets investors, where short-sellers and activism are more common-leading to skepticism, private market investors are more optimistic in general.

2. Preference Shares vs Common Stock: Private investors often sign side-letters and other enhance-ments to increase their shareholder's rights, to acquire what's commonly known as "Preference Shares".Once IPO, the preference share's value will lessen to be common stocks, in-effect decreasing the company's valuation as well.

3.AccountingPractices: Privatecompanies aren't subject to the strict accounting practices public companies must use. WeWork for example, presented investors with a metric called "community-adjusted EBITA." It excluded big expenses, including some rent costs that would usually be reported using GAAP.

Valuation is fundamental to good investing. While tricky, it never hurts to transfer knowledge across different fields, private or public.