- This is a real-life Jurassic Park project…
- We’re keeping a close eye on this biotech unicorn…
- Be wary of this overvalued IPO…
Yesterday we had a look at the record number of initial public offerings (IPOs) in the third quarter. It typically tends to be the slowest of the year as there are two summer months where much of Wall Street is on holiday, and companies tend to avoid it because their IPO will simply get less attention.
Not this year.
There were 94 IPOs in the third quarter alone. And that’s on the back of an already record-breaking first half of 2021… All amidst a global pandemic. And I fully expect the fourth quarter will be just as exciting based on what I’m seeing now. 2021 will be one for the record books.
So where is all this coming from? How is it all possible?
Regular readers of my work will know the answer as I predicted the arrival of this flood of IPOs back in 2017 and have been positioning investors in the best new public companies for the last few years.
The answer can be seen in one simple chart. It’s a massive shift that occurred over the last two decades.
Source: Jay Ritter, Warrington College of Business, University of Florida
Twenty years ago, the median age of a technology company going public was a mere four years, and the median valuation at the time of the IPO was $493 million. Today, things are completely different.
The median age is now 12 years – that’s an eight-year increase compared to 20 years ago. Venture capital, private equity, and other institutional capital have intentionally been keeping the most exciting and promising companies private for an extended period of time – more than a decade – intending to keep the best returns for themselves.
It has almost been like removing an asset class from the public markets. But there is a limit.
Most venture capital funds have an 8–10-year time horizon. And that means that after a decade, they need to look to exit positions and ultimately close down the fund. To do that the companies in the fund need to be acquired, merged, or exit via an IPO.
And that is exactly what has been happening.
Thousands of private companies have been lining up for their turn to go public, primarily via an IPO or a special purpose acquisition corporation (SPAC). No need to worry, the pipeline is full, and we can expect a robust IPO and SPAC market for the next couple of years. There are simply too many private growth companies that have been around for eight years or more that need to access the public markets.
And this batch of companies is particularly exciting. Almost all of them were born after the global financial crisis. Even if their businesses aren’t technology per se, they tend to be digital-first companies – they employ the latest technology to enable their business.
That makes them highly disruptive to incumbents and precisely the kinds of investments that we look for at Brownstone Research. These are the kinds of companies that outperform the market indexes and the best hedge funds. This is where we want exposure, especially in times of near-zero interest rates and inflation.
For any Bleeding Edge subscribers who are interested in these kinds of investments, my confidential briefing on Apple’s big move will disappear tomorrow evening. If you haven’t yet caught the replay of my live broadcast, then please make sure to do so quickly.
The investment opportunities I discuss are very time-sensitive. Simply click here to watch…
Bringing woolly mammoths back to life…
George Church, the Harvard biologist known as a pioneer of DNA sequencing and gene editing, has founded yet another biotech company that’s working on a tech straight out of science fiction.
The new company is called Colossal, and it just raised $15 million in its seed round. That’s a lot of money, especially when you hear what the money will be used for. If it wasn’t for Church’s credibility and his involvement in moonshot-type companies, I doubt this raise would have happened.
The investment is closely related to CRISPR technology. As readers may recall, CRISPR technology can “edit” our DNA as if it were software code. It is a way to “program” the genome or mutate the DNA. In the past, I’ve referred to CRISPR as “the God Key” for its potential to cure thousands of genetic diseases.
In this instance, George Church’s new company will use CRISPR for de-extinction. The company is aiming to re-engineer Asian elephants to make them genetically similar to the extinct woolly mammoth.
I’m not kidding at all. It is a real-life Jurassic Park project enabled by genetic editing technology. This is wild… and it gets crazier.
Colossal plans to deploy these mammoths in the Arctic tundra. It claims the introduction of woolly mammoths into this area of the world will combat climate change.
Melting permafrost releases huge volumes of methane – a potent greenhouse gas – into the atmosphere. Mammoths could potentially slow this down since they tend to knock over large trees. This reduces the amount of heat trapped in the tundra, allowing the land to remain frozen.
These fallen trees also rejuvenate the land and turn the area into a more grassland environment that reflects heat.
It is a pretty bold plan.
First, it requires the successful mutation of the Asian elephant. George Church already has the technology to genetically alter organisms at the embryo level. This is needed because if this is done naturally, it would require decades. Asian elephants have a gestation period of 22 months. With a pace that slow, George likely wouldn’t live long enough to complete the study.
Using CRISPR technology at the embryo level makes this project possible.
Currently, the plan is to birth tens of thousands of these animals using these artificial embryos and release them into the tundra. I know, this sounds nuts… Genetically engineering elephant embryos to bring back the woolly mammoth to life, in the thousands, using artificial embryos, so that it can all happen in a matter of years.
Tell that to a friend and see what they say!
Incredibly, some smart money is paying attention… The main investors on this project are notable Silicon Valley venture capital firms Breyer Capital and Draper Associates. Billionaire Thomas Tull, who owns a film production company, is also involved. See what I mean by Jurassic Park? There may be more behind the story than we think
What’s a bit interesting here is Colossal has no business model for how to turn this de-extinction product into a revenue-producing business. So these investors are taking a real shot in the dark.
I have to admit, this is a pretty wild story. I will be very interested to watch how it plays out. Maybe the end result is a Jurassic Park-style movie? Or the creation of plants and animals that have more robust characteristics which will help improve food production?
Either way, this will be a fun one to watch…
Another biotech unicorn is made…
Let’s turn to a different “mammoth” story for our next topic…
Biotech company Mammoth Biosciences just hit unicorn status after getting $195 million in funding this year.
To get readers up to speed, Mammoth Biosciences uses CRISPR technology for molecular diagnostics. In other words, it uses CRISPR to test for genetic diseases. Notably, it was co-founded by Jennifer Doudna, who was one of the original inventors of CRISPR technology back in 2012. We touched on Mammoth Bio back in February 2020 when it completed its Series B funding round.
The company has done a lot of research on genetic engineering but hasn’t quite picked out the direction it wants to go yet. What we do know is it aims to create treatments for tissues that are hard to target, such as the central nervous system or lungs.
And Mammoth Bio has already inked deals with Agilent and GlaxoSmithKline. It’s a name to watch in the space.
What makes Mammoth so compelling is that it develops very small enzymes – Cas-14 and Casɸ. These small gene editing treatments are better able to fit into delivery vehicles and pack more features in the treatment.
This is important since Mammoth plans to create in vivo therapeutic approaches. For in vivo therapies, we inject the treatment directly into a body part or organ.
It is simpler and cheaper to administer the CRISPR technology in this way. It is also believed to lead to higher levels of efficacy in delivering the payload and addressing the disease. It contrasts ex vivo therapies, in which cells are extracted, edited, and reinserted.
And one of my favorite companies that pioneered in vivo approaches has a major announcement coming up…
Tomorrow, Editas Medicine will make its in vivo results from its EDIT-101 trial public. The company is developing a cure for a progressive form of blindness.
I’m very excited to hear what its results are. If they’re as impressive as I believe they will be, I expect the CRISPR industry as a whole will get a boost on the heels of its positive news…
The next Snowflake…
For our final story today, let’s catch up with Databricks, which just raised an impressive $1.6 billion.
The company was founded in 2013. I look at Databricks as a next-generation data infrastructure play targeted at the world of machine learning. We can think of it as an Amazon Web Services that is highly focused on certain kinds of data applications. They have great tech that is widely used in the industry.
And its monster raise gives the company a $38 billion valuation.
This comes on the back of a previous raise we discussed in February where Databricks raised $1 billion at a $28 billion valuation. In other words, Databricks certainly didn’t need the money. The growth here is absolutely incredible. It has now gone from $0 to $38 billion in about eight years.
But the part that stood out to me with this deal was who was involved.
The investment bank Morgan Stanley was the lead investor. This is not how investment banks tend to invest. They traditionally act as intermediaries between companies and the financial markets – for instance, arranging debt financing or issuing shares of stock in an initial public offering (IPO).
Witnessing them in a financing round like this is odd, and it tells me this company is clearly on track to go public. My guess would be next year.
And another sign of an impending IPO is that the business is being compared to another data warehousing company called Snowflake.
As a reminder, Snowflake went public in September of last year and became the largest software IPO in history. It saw its shares surge more than 111% on its market debut. Today, the company has an enterprise value (EV) of $91 billion.
It generated $851 million in revenue last year, resulting in a 107 enterprise value-to-sales (EV/sales) ratio. That’s a valuation that is equivalent to 107 years of sales, not profits. That simply doesn’t make any sense. At an EV/sales of 107, I don’t care how fast Snowflake is growing. Anybody who invests in a company at these levels will lose their shorts.
And Databricks is sending us a similar warning sign…
It’s currently generating $425 million in revenue and is on track to hit $1 billion for 2022. Based on its current revenue and $38 billion valuation, Databricks sits at an EV/sales of 89. That is also far too rich for me. Even if the company hits $1 billion in sales next year, it would still have an EV/sales of 38.
For comparison, a company like Apple has an EV/sales of 7; high-growth, high gross margin software companies will typically trade in the 12–15 EV/sales range right now. This is what makes Snowflake’s and Databricks’ valuations so crazy.
With all that said, I wouldn’t be surprised a bit if Databricks has a spectacular IPO… But normal retail investors will be locked out of the big spike on the day of the IPO. It will likely open up way above its IPO price. For those who want to speculate and have access to pre-IPO shares, this might be interesting.
But buyer beware. Valuations like these are fleeting. They never last. Any small hiccup in terms of sales projections, market growth, or market adoption will quickly lead to some unhappy investors…
And we’ll be waiting patiently for the overreactions to pick up shares at valuations that will guarantee strong investment returns.
Editor, The Bleeding Edge
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