Quick thoughts on J.P. Morgan's EOTM report

I have had the chance to take a look at J.P. Morgan's recent Eye On The Market (EOTM) report on released on February 17th, 2016. There are some very interesting comments that should give some nervous venture market observers some consolation, whereas practitioners like us more or less have the maths worked out all the time.

Even when post-IPO performance is negative, unicorn investors can still reap substantial gains depending upon their original basis and timing of exit. IPO valuations for these unicorns was on average 55% higher than final private round valuations, which were in turn 75%-100% higher than rounds before that. As a result, unicorn investors often have a large cushion before post- IPO declines erase gains. Later round investors can face more risk, particularly when IPO valuations are below final round valuations, as was the case with 3 of the companies above (Zynga, Square and Box).
— J.P. Morgan EOTM Report @ February 17, 2016

Basically what it meant is that despite all the crying-out-louds among market watchers – notably innocent journalists – about how start public internet companies have fallen below their IPO price (more correctly, closing prices on IPO days), late-stage investors still mostly make money even if they haven't sold the shares already. This is before one even factors in all the provisions they enjoy, provided that these provisions don't block IPOs or M&A exits in a bad way:

Some unicorns might be boxed in by rounds of high valuation fundraises that provided blocking rights, ratchets or senior liquidation preferences to new investors (see table). Blocking rights allow investors to prevent a public offering if the IPO price is not above the implied valuation from a prior round of financing. Ratchets provide additional shares to certain investors if the IPO is below a predetermined level, diluting other investors. A liquidation preference refers to the way that sales proceeds are distributed amongst different investors; a senior liquidation preference effectively moves the recipient to the top of the queue. These 3 shareholder provisions can hamper future fund-raising, or impede M&A exits to strategic buyers at lower, more realistic valuations. In an environment of extreme optimism in 2014/early 2015, I wonder whether some liquidation preferences or ratchets were granted too readily by management in exchange for new capital.
— J.P. Morgan EOTM Report @ February 17, 2016

For us as early-stage investors, these observations have long-term implication. On the other hand, as long as our entrepreneurs focus on building great products, great teams, great companies, great rapport with their consumers and manage the cash burns properly, I am pretty sure many of them will see successful exits in one way or another regardless of the market conditions.

Just some quick thoughts.

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