The Actual Lesson of the Snowflake IPO

On Wednesday, Snowflake (SNOW) went public in one of the extremely anticipated IPOs ever. 

Snowflake is a cloud information platform that helps corporations effectively set up and analyze enormous databases. The corporate’s income is rising at a speedy 133% year-over-year fee.

Snowflake’s IPO priced at $120 for a valuation of $33 billion. That alone made Snowflake essentially the most priceless software program firm ever on the time of their IPO, in response to Fortune.

There are two major issues right here for these of us who’re “retail traders.” First, solely well-connected traders acquired in on the preliminary $120 worth. Demand for this deal was so excessive that shares opened to the general public at $245 and had been buying and selling at $290 at 12:47PM EDT on Wednesday.

So until they occurred to have a connection at a serious funding financial institution or Snowflake, most traders most likely didn’t get in on the $120 IPO worth. Warren Buffett’s Berkshire Hathaway — and different well-connected companies — invested at that worth. However the remainder of us didn’t have that choice.

The second downside is that on its first day of buying and selling, Snowflake was already valued at greater than a $60 billion market capitalization! As a comparability, Twitter at the moment trades at a market capitalization of $32 billion. It’s true that Snowflake is rising a lot quicker than Twitter. But it surely additionally solely has a fraction of the income which Twitter does and is at the moment shedding much more cash.

The difficulty is that this week is the primary time most traders will get an opportunity to purchase Snowflake shares. And it’s already price greater than $60 billion. Snowflake is a powerful and disruptive firm, true. However at that prime of a valuation, there’s solely a lot upside left (and fairly a little bit of threat). The most important positive aspects had been already made by Snowflake’s early non-public traders. The general public by no means acquired an opportunity to purchase when it was nonetheless small. 

Yet one more factor. In February of this yr, Snowflake raised $479 million at a $12.four billion valuation from non-public traders. What might have presumably modified between February and as we speak that made the corporate 5x extra priceless? I imagine the spike can solely be defined by the bubbly monetary setting we’re in as we speak.

Personal markets are the place tech development occurs

Snowflake isn’t the one scorching tech firm to IPO at a loopy valuation. Right this moment it’s uncommon to see any scorching tech firm IPO at a valuation of lower than just a few billion {dollars}. Simply take Uber’s IPO at an $84 billion market cap and the way Fb was price $104 billion when it went public as a few examples. These are monstrously massive IPO valuations. And Snowflake is true up there with them.

These days when a very scorching tech firm goes public, it’s typically already a giant and mature enterprise. And nearly all of traders’ positive aspects had been made in non-public markets.

This is among the primary causes I proceed to spend money on non-public startups. It’s one of many solely methods to get entry to very fast-growing corporations as we speak. In fact, there’s additionally extra threat concerned in non-public markets. However that’s balanced out by the upper upside potential. Startup investing additionally requires much more endurance than buying and selling shares — however in my expertise that’s a profit and never a bug.