[“IPO Scorecard” is a column born out of widespread concerns that we’re in a tech bubble. It looks at the performance of prior private investments in newly public companies to track how later-stage investments are impacting company valuations. See the rest of the IPO Scorecard series here.]

Updated April 15/16 to reflect Etsy’s $16 pricing and $31 opening price, revise several figures, and remove coauthor details.

To Gurley, Cuban, Koppelman, Moritz, Reeves, Lashinsky if you’re looking for an example of your Valuation Inflation Bubble theory, Etsy is not your story.

To quantify the merit of the tech bubble warnings, I’m keeping a scorecard of late-stage returns based on newly IPO’d companies. I’ll be monitoring the returns these late-stage investors achieve from the pricing of the last private round to the IPO pricing, IPO opening print, and stock price at time of lock-up expiry.

It is important to think about this from the perspective of the Wall Street investors that are crossing over — that is, investing not just pre-IPO as VC firms do, but also post-IPO. In the case of Etsy, which is expected to begin public trading on Thursday, that crossover investor is Tiger Global.

Historically these investors have been allocated stock on an IPO and then bought the remainder (the bigger portion) of their position in the open market like anyone else. They now have realized they have the ability to arbitrage the purchase price with private round stock. The question is, is that working?

Etsy’s last private round was its Series F, which was a dual tranche round. Here are the details:

Series F Pref (May 2012)

  • Share price: $6.90
  • Size: 5.8M shares ($40M proceeds)
  • Participants: Accel $17M, Breyer $2M, Index $12M, Union Square $4.7M

Series F Extended (April 2014)

  • Share price: $10.60
  • Size: 3.3M shares ($35M proceeds)
  • Participants: Tiger Global (Crossover)

From what I understand, the Etsy IPO is currently many times oversubscribed. The original pricing range is $14 – $16, and the IPO is priced at the high end at $16 and will conservatively trade to $23 (in line with GRUB) on day 1.

If that’s the case, Tiger Global had the option to purchase stock at $10.60 (with 18 months of illiquidity until expiry) or $23 — the delta here is massive.

Let’s look at what the corresponding returns would be given these assumptions:

Based on a $16 IPO price:

If the Series F preferred investor held the stock for 3 years and saw a 1.3x or 132 percent return, that’s an annualized return of 33 percent.

If the Series F extended investor, i.e. Tiger Global, held the stock for 1 year, they’d see an annualized return of 51 percent.

You would be hard pressed to find public market returns like that anywhere, let alone on a promising private company that could almost guarantee a short-term IPO exit.

Based on a conservative estimated opening print (the first time funds are able to purchase additional stock outside of allocation) of $23:

The Series F preferred investor would see a 2.3x return, equating to a 50 percent annualized return.

The Series F extended investor, i.e. Tiger Global, would see a 1.2x return equating to an annualized return of 117 percent.

To shed some light on valuation, Etsy is being valued on a multiple of sales basis. The company expects to do about $250 million in revenue this year and to grow at about a 30 percent clip (relatively in line with GRUB and TRUE). Trading in line with GRUB (the higher multiple) gets the stock to $23.

Update:

[UPDATE:

The Etsy IPO opened at $31 ($8 higher than my conservative $23 projection).

What should we make of this?

Tiger Global, in Etsy’s last private round, purchased stock at $10.60.  We can assume that Tiger Global always had an interest in becoming a long-term shareholder of Etsy stock. We can also assume they planned on participating in the IPO but wouldn’t get as much stock as they wanted allocated to them at the $16 deal price (no fund gets as much stock as they want).

So their options were to buy stock at $10.60 12 months ago or purchase stock in the open market at a minimum of $31 (stock traded substantially higher post opening print).

Based on the $31 open, the revised return profile from the dual tranche Series F (the last round) now looks like this:

The Series F preferred investor would see a 3.5x return, equating to a 65 percent annualized return.

The Series F extended investor, i.e. Tiger Global, would see a 1.9x return equating to an annualized return of 190 percent.]

Not all IPOs will look like this, but it is important for us to take a quantitative approach to such passionate warnings of a bubble.

With annualized returns of 50+ percent (and all the way up to 117 percent) for late-stage investors, the private round inflation trend has room to continue and should continue as smart investors take advantage of private round access to get cheaper entry points.

I think we can safely chalk up a win to the late-stage investors here.

Jeremy Abelson is founder and portfolio manager at Irving Investors.