Can a fattened unicorn still run? A lot is riding on that answer.
Spotify, Dropbox and a provider of cloud-based security software called Zscaler all filed initial papers last month to list their shares with the public. That puts all three in line to complete their offerings before this month is out.
Zscaler is expected to price later this week, while Spotify is hosting an investor broadcast on Thursday in preparation for a direct listing that could take place later this month or early next.
All three belong to the vaunted group of privately held tech companies commonly known as “unicorns,” meaning their private valuations have met or exceeded $1 billion. They will be the first among this club to brave the IPO waters this year and Spotify will be the largest since the listing of Snap SNAP 1.30% chat parent Snap Inc. a year ago.
Chinese smartphone maker Xiaomi, last valued at a whopping $46 billion, reportedly is considering a dual listing for later this year, though no public filings to that end have yet been made.
Spotify, Dropbox and Zscaler are all very different businesses, which means public investors will likely respond differently to each one. But all must deal with high expectations right out of the gate.
Private money has gushed into pre-IPO tech companies over the past few years, precisely in the hopes that public investors will eventually cash them out. The number of private companies valued at more than $1 billion currently sits at 169, up 72% over the last three years, according to the Wall Street Journal’s tracking.
But even in this crew, expectations vary widely. Of the seven unicorns to brave the IPO waters last year, the best performers relative to their private valuations were MuleSoft and Okta. Both are smaller enterprise software providers that had been privately valued at just a little over $1 billion.
Both managed to price their offerings at respective premiums of 43% and 29% to their last private valuation levels. Both, incidentally, have also seen their share prices double or more from their IPOs levels.
That bodes well for Zscaler, last valued privately at $1 billion. Spotify and Dropbox, last valued at $20 billion and $10 billion, respectively, have a much higher bar to leap over. Spotify most of all, since it plans to skip the formal IPO process in favor of a direct listing. The company also has the most challenging business model, with low gross margins due to the royalties it pays to music labels.
Spotify and Dropbox both benefit from the visibility of being well-known companies that offer very popular services. That, of course, is why private investors have already crowded in. Public investors may profit more by questioning the wisdom of the crowds.
Write to Dan Gallagher at dan.gallagher@wsj.com