Forget Snap, this next IPO will test if tech valuations can survive the public markets

Snap's effect on IPO market
Snap's effect on IPO market

MuleSoft — the next highly valued private tech company to go public — will really test whether tech valuations can survive public scrutiny, Kathleen Smith, Renaissance Capital chairman, said Monday on CNBC's "Squawk Alley."

The fast-growing, money-losing enterprise software company's pre-IPO valuation was $1.5 billion and it is trying to go public at a proposed $1.8 billion valuation, Smith noted. MuleSoft lost $50 million on $188 million in revenue in 2016, but its losses shrank from $65 million in 2015, and its revenue grew 70 percent from the previous year, according to its IPO filing. So investors will have to bet that trend will continue.

"Investors are going to take a good look at this, and we'll see if that continues the strong trend," she said.

MuleSoft CEO Greg Schott
Source: MuleSoft

That said, it's unlikely that the successful Snap IPO will turn out to be a bubble, Smith said.

"The average IPO so far this year has been priced below the midpoint of the range and the returns have been positive both from the IPO and also for post-IPO investors," she said.

"We think there still is a lot of price sensitivity in the market and Snap may be an opening for other [$1 billion start-ups], but there are many other IPOs that are being down at fairly reasonable levels," said Smith.

Investors in highly valued start-ups have been concerned about the willingness of public market investors buy into those companies at or above those high valuations, said Smith, also an IPO exchange-traded fund manager. Private investors are wary of taking a markdown on their investments, she said.

Retail investors have been willing to pay a premium for companies with name recognition, "quite frequently," she said. High-end parka maker Canada Goose — an important consumer IPO — will be pricing shares next week.