The Roblox Gambit

So it turns out that Roblox is worth $29.5 billion.

That’s the lesson the market learned this week when the gaming platform company announced that it had raised $520 million in an epic Series H.

For a company valued at just $4 billion last February when it raised $150 million in a round led by Andreessen Horowitz, that new valuation could be considered a victory. But is it?

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For all the griping amongst private-market capitalists that public-market capitalists are ripping off their investments as they look to cross the private-public divide through an IPO, it’s hard to square a company’s valuation going from $4 billion to nearly $30 billion in just 11 months.

Sure, you could argue that Roblox enjoyed an epic 2020, thanks in part to COVID-19. That helped its valuation. But there’s a lot of space between $4 billion and $29.5 billion, and recall that its February Series G valued Roblox at around 7.3x its Q4 2019 revenue run rate.

The same company at its new $29.5 billion valuation is now priced at just over 30x its Q3 2020 run rate (the most recent quarter for which we have data today).

Perhaps Roblox was right to hold off on its IPO, raise a huge block of cash at a new valuation and pursue a direct listing. But it’s hard to fret heavily about private-market complaints concerning startup value when the IPO facilitators are hardly the only folks making trips to the bank with a wheelbarrow.

All that is preamble. This morning, let’s talk about Roblox’s flotation strategy. Why is the company raising private market money and then floating instead of raising public market money on its path to trading as a public company? And does its strategy solve the major flaws that the IPO process appears to have? Let’s get into it.

The ol’ raise-and-float

One way to go public is to file an S-1, prepare a presentation, go on a roadshow, drive interest in your shares and work with bankers to price the shares you want to sell at a dollar amount all parties can agree to. The next morning, your shares begin to trade, and you count the money you raised.

That is a traditional IPO, admittedly simplified.

There are issues in there, namely that the price discovery mechanism has proved to be uncertain, especially when it comes to the public offerings of companies considered attractive investments by the active retail trading market. Why? The hotter the company, the fewer shares that are available for trade at the start of its life as a public firm — the very opposite of that which is happening on the demand side.

Lots of demand, few shares and up goes the price. Then up go the complaints that Wall Street is a bunch of thieves. Hearing this from other capital players is always whimsical to some degree, but let’s stick to our theme.

Another way to go public is to not price your shares, not sell a chunk of equity in your debut and merely start to trade. That is a direct listing, again admittedly simplified.

This solves the pricing problem. Presumably more shares are available to trade early on as more folks can sell and the company doesn’t “set” a price for itself in the same manner as an IPO. So, it can’t sell shares at $5 in its public offering, only to open at $50 and thus earn the opprobrium of a slice of the billionaire class.

But what a direct listing does not do is raise money. So! There are two options, as I see it:

• Sell shares, then direct list.
• Direct list, then sell shares.

The first is what Roblox decided to do, taking on a half-billion dollars before embarking on a direct listing. Recall that after some IPOs had bonkers first-day performances, Roblox delayed its own public offering, choosing to take this route instead. Why? It didn’t want its employees, which were to have some ability to sell in the public offering, to get underpriced.

Now we can get into our questions. First: What does this private round, public flotation combo solve?

The recent $29.5 billion valuation is still a guess, after all, and if Roblox winds up trading higher than that figure on its first day, what has changed other than that the company now has a more limited base of putatively long-term public shareholders?

And if Roblox loses ground from its new share price, it can still look as bad as a company that priced an IPO at $45 and then dropped! But this is the less likely of the two scenarios, at least from what we imagine to be the investor perspective; they would not put a half-billion into a wager that was set to lose steam out of the gate, right?

So we have to assume that Roblox’s Series H investors are hoping that they got a deal on the company’s stock — not as good as the folks in that Series G, mind — which means that Roblox was still mispriced compared to its current market value.

What to do? Our second question: Why not direct list, and then hold a first, secondary offering? That solves the pricing issue! Nothing else, including Unity’s auction-method, seems to actually solve the issue, so we’re somewhat perplexed.

The Roblox direct listing will lay down some groundwork for new conventional wisdom when it comes to pricing public listings and which methods are good to use. A big thanks to the gaming company for running this experiment for us.

Call it the Roblox Gambit if you’d like. We’ll have more as we get closer to its flotation. But I still don’t get how this is really the solution to the IPO pricing problem.

Roblox raises at $29.5 billion valuation, readies for direct listing