The Successful IPO That Almost Didn’t Happen

If you are a regular reader of the tech press, and especially its financial tranches, you’ve likely read about the Stitch Fix IPO.

Overall, the IPO was a success. The liquidity event raised quite a lot of capital for the company, started the process of freeing its shares for general trade, and so forth. But the IPO was executed at a lower-per share price than the firm anticipated, casting a pall over the debut to some degree.

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So Stitch Fix raised less money at a lower valuation than it had expected. It then failed to excite on its first day. That particular mix of elements led to debate about whether the IPO was a success or not. (It was, just not as big an initial success as some had hoped.)

But since all that, the firm’s shares have rallied sharply above its reduced IPO price, and we’ve learned that the IPO could have been scrapped due to interest from a major private investor.

The combination of those two puts us into an odd situation of wondering about paths not taken for the newly-public unicorn. First, let’s trace the company’s path to IPO, dial in what its IPO accomplished, and then ask how well that said investor might have acted as a substitute.

Guess Who

The saucy and delightful Dan Primack published a detail concerning Stitch Fix this morning that, in hindsight, is unsurprising.

In short: Softbank wanted to pour its vast amount of funds into Stitch Fix. And while our unicorn didn’t take the deal, this allows us to add some points to our summary of its IPO timeline.

(For the below, note that Stitch Fix’s fiscal year ends with July, so it’s fiscal 2014 period, for example, ends right in the middle of the calendar year.) Here’s the history:

• January 2011. Stitch Fix raises $750,000 seed round (source).
• February 2013. Stitch Fix raises $4.75 million Series A (source).
• October 2013. Stitch Fix raises $12 million Series B, valuing the company at around $41 million (source, source).
• June 2014. Stitch Fix raises $25 million Series C, valuing the company at around $330 million (source, source).
• Stitch Fix fiscal 2014 revenue. $73.23 million (source).
• Stitch Fix fiscal 2015 revenue. $342.9 million (source).
• Stitch Fix fiscal 2016 revenue. $730.3 million (source).
• Stitch Fix fiscal 2017 revenue. $977.1 million (source).
• October 2017. Stitch Fix files to go public (source).
• November 16 2017. Stitch Fix prices IPO at $15 per share (source).
• November 17 2017. Stitch Fix goes public (source).

Now, in that timeline, we need to insert the Softbank option. It probably fits somewhere in October, I’d think, which puts the potential investment far, far after the clothing company had done the hard work of growing to nearly $1 billion in revenue. Unsurprising for a late-stage investor, of course.

What Did Stitch Fix Want?

The Stitch Fix IPO accomplished a lot for the company:

1. It provided long-term liquidity (even exit liquidity, really) to extant shareholders.
2. It raised cash for the company.
3. It bolstered the profile of the firm by showing off its history of profits and huge revenue growth.
4. As a now-public company, the firm’s shareholders have greater insight into the company’s performance and management.
5. It created a market for the company’s shares that will allow the firm to appreciate (or depreciate) more rapidly following its success (or failures).

Let’s detail each in quick order. Following each, we’ll contrast the Softbank idea to see how much of the flotation the Vision Fund could have pulled off.

Liquidity

IPOs are good liquidity sources, as they can cash out shareholders once pertinent lockup periods have expired. Selling a minority stake, even if it includes a secondary component, won’t manage the same level of liquidity. And we know that Stitch Fix wanted liquidity.

It’s natural to presume that Stitch Fix’s various investors are happy to have the option to unwind some, or all, of their position in the company. To date, those investors have only accrued paper gains. But we know a bit more than that, however, when it comes to the company’s demand for liquidity (the following are from the company’s S-1).

1. Stitch Fix spent $11.83 million buying shares from its denizens in December 2016. Of that sum, $1 million (minus $5) went to the CEO who took part in the transaction.
2. Stitch Fix’s now-former COO sold just over $1.9 million in shares to an external group in January 2017.
3. Stitch Fix’s CEO had intended to sell 1 million shares in the IPO, but declined to do so when the firm price under its range.

So we can easily see that there was pent-up demand for liquidity from investors, employees, and executives. The IPO scratches each itch.

The Softbank Way

Had Softbank dropped a bucket of cash onto Stitch Fix instead of the unicorn going public, it likely (I’ll bet you breakfast) would have included some form of secondary. But it likely wouldn’t be enough for full liquidity to both investors and employees. Thus the Softbank deal would have been related, but not as comprehensive in regards to shareholder liquidity.

Cash

Stitch Fix raised less money than it wanted to, and it did so at a per-share price that was under its expectations. This forms the core of the “troubled IPO” narrative.

That point is compounded by the fact that the company had previously valued itself at a price that external parties were not willing to meet at the time of its IPO.

We know that Stitch Fix wanted to debut at a higher per-share price, as it set its price range above where it eventually went public ($18-$20, before winding up at $15). But those figures are all under what the company was last valued at, namely $22.61 per share. That is the price that the firm bought its own shares at from holding parties at a total of $11.83 million, including the CEO. $22.61 is also the price at which the former COO sold shares earlier this year.

Stitch Fix had $110 million in cash-on-hand at the time of its IPO, and it was operating cash-flow positive. Indeed, it appears given the firm’s investing cash expenses, that it was free-cash-flow positive as well. As such, Stitch Fix not only didn’t need more money to continue operating, but the firm also had a ready nine-figures of cash to invest as it wished.

All this goes to say that the firm didn’t need more money. Of course, when it comes to cash, more is always better. But there is a level of sufficiency at play in Stitch Fix’s IPO. Box, for example, needed cash when it went public. The ecommerce company did not.

The Softbank Way

Who wants to bet that Softbank would have been willing to disburse more than the $120 million that the firm raised in its IPO? Precisely. But, as we have noted, the firm didn’t need more money, really, so it was looking at potentially more dilution at the cost of a fixed-valuation that would not appreciate with its growth. So, at best, Softbank can offer more of what the company didn’t really need more of, with fewer advantages.

The Rest

Through its IPO, Stitch Fix got the chance to generate this sort of financial-results-driven headline, something that it wouldn’t have been able to do if it had instead merely sold some of itself to Softbank & Friends. For some companies, going public can be a good way to win over certain customers who may feel safer making a long-term bet on a financially healthy vendor. (For Stitch Fix, it’s unclear on how useful that might prove, but it’s worth mentioning.)

The forced financial transparency provided by an S-1 — the IPO process is only so flexible, and GAAP isn’t — can be beneficial to a company as well. It details investor interests, and for regular employees, it lays bare what is going well and what is not. At some private companies, operating results can be utterly opaque, making decisions like exercising options more difficult than they have to be.

As a final note on transparency, we are in weird times at the moment. Today, when founder-control is held aloft by VCs hoping to find their very own Zuckerberg, there may be some merit to normal corporate processes like functional voting. Snap is a decent example of why this might be a good idea in practice, at least for now, as it wallows below its IPO price and far below its early trading range.

Softbank wouldn’t have brought much of any of the above, which are all elements of both friction and advantage at the same time; transparency can be good, but it can be a pain; voting can be good, but can also be a pain if an external activist gets involved.

So What?

Initially, I expected to dig around in the Stitch Fix sitch and find a decent balance between the IPO and the private cash infusion, but it didn’t shake out that way.

What will prove interesting is how much of an example Stitch Fix provides to other unicorns that get offers from Softbank or similar entities. I bet most take the private funds.

But Stitch Fix, an incredibly capital-efficient company that has shown other firms how to grow sans burning bars full of cash, does business in its own way—including going public instead of hunkering down and missing all-time public market highs.

Illustration: Li-Anne Dias