Tech IPOs have been known to soar. Exponentially so. That fabled hockey-stick curve is the thing that every early investor and company founder hopes will appear on a stock chart after going public. Anything short of it, and the narrative around the company can be a resounding “meh.”
That's precisely what happened to meal-kit delivery service Blue Apron, which opened for public trading Thursday morning at $10 per share—far below the proposed IPO range of $15 to $17—and closed at $10. The tech press proclaimed that Blue Apron’s IPO had a rough start, that it wasn’t looking pretty, and that Amazon, with its recent acquisition of the upscale grocer Whole Foods for $13.7 billion, was looming over the company’s IPO.
And yes, Amazon undoubtedly played a role in Blue Apron's modest IPO. Beyond the Whole Foods acquisition—which could position Amazon to be Blue Apron's biggest future competitor—Amazon pioneered the model of “growth before profits,” riding that strategy to become one of the most mind-blowingly lucrative companies in the history of tech. Blue Apron, in going public, likely hoped to emulate that same Silicon Valley blueprint of success: launch, grow, go public, profit. Instead, it diverged from that path pretty visibly. But Wall Street, especially nowadays, is showing far more skepticism towards buzzy tech startups. “Public equity investors aren’t just looking for revenue growth but also signs of profitability,” says Eric Kim, cofounder and managing partner of the venture capital firm Goodwater Capital. They looked for this in Blue Apron too.
The surprising thing is, judging by Blue Apron’s moves, it seemed to understand—and adjusted to accommodate Wall Street. “Blue Apron did what many other tech companies will do: bite the bullet on valuation in exchange for the benefits of being a public company,” says Kathleen Smith, principal of Renaissance Capital LLC, a manager of IPO-focused exchange-traded funds. Could Silicon Valley now be much more open to reconciling with Wall Street’s business expectations? Blue Apron’s IPO certainly seems to be an example of that.
It’s not that Blue Apron didn’t think very highly of itself at the start of the IPO process. When the company first proposed a price for its shares earlier this month, it set an IPO range that put the company’s value at more than $3 billion. Then, facing investor skepticism, the company lowered its IPO price Wednesday night to $10 per share—the low end of the $10 to $11 per share range it issued earlier in the day—and closed at $10 per share on Thursday, with 0 percent growth. That values the company at $1.89 billion, even less than the $2.2 billion value its last fund-raising round implied when the company was still private two years ago.
One big reason public investors were skeptical of Blue Apron’s value? It’s still losing money. Yes, the company actually turned a small profit in the first quarter of 2016. But in the same period one year later, it lost $52 million. “It intentionally made itself unprofitable,” says Goodwater Capital’s Kim. It did so to pull in more revenue. The company grew its revenue tenfold between 2014 and 2016, from $77 million to $795 million.
To do that, Blue Apron spent enormously on marketing. In 2014 it spent $14 million to target ads and special discounts for new customers; by 2016 that figure was $144 million. With increasing competition from other meal-kit companies like HelloFresh and Purple Carrot, it’s unlikely that Blue Apron will be able to let up in the marketing department soon.
At the same time, it’s unclear that Blue Apron customers are staying loyal to the company, at least according to Goodwater Capital’s data, says Kim. Of the 2,600 American consumers the VC firm surveyed in June, 42 percent wanted to increase their use of Blue Apron, while 44 percent wanted to decrease theirs. This implies a high churn rate. Many customers leave Blue Apron’s meal-subscription service after trying it out. “If you are retaining high customers at a high rate, it’s absolutely the right bet” for a company to prioritize growth before profits, Kim says. That's what worked for Amazon, for example. But it’s not clear that this model applies to Blue Apron.
Still, that Blue Apron changed course and slashed its IPO price shows that it was ultimately willing to concede to Wall Street’s expectations. Renaissance Capital’s Smith thinks this will prove to be a smart decision for the company. The electronics payment company Square made the same concession to Wall Street when it went public. After facing much investor skepticism, Square finally priced its IPO shares at $9, lower than the initial proposed range of $11 to $13 a share. A year and a half later, Square is now trading at 160 percent above its IPO price. Blue Apron seems to be taking the same long view of the public market, Smith says. “I think Blue Apron is the beginning of a trend where, if companies want to go public, this is what has to be done,” she says.
Historically, Wall Street looked to Silicon Valley for guidance on the next big innovation and the next startup that would grow to be a tech giant. But lately, Silicon Valley seems to be learning the realities of Wall Street, Kim argues. The gap between the Silicon Valley’s hyper-growth mindset and Wall Street’s rational investing is closing. You saw it with Snap’s IPO earlier this year, and the beginnings of the philosophy all the way back with Square’s IPO at the end of 2015. “That gap will be bridged and they’ll come even closer together,” Kim predicts. “The fundamentals are important.”
