Yesterday Reuters reported that Ripple Labs is buying back $285 million worth of stock from early investors and employees, citing sources. The tender offer allows owners to sell up to 6% of their stake, valuing the company at $11.3 billion.
Ripple confirmed the buyback to Reuters with CEO Brad Garlinghouse stating that Ripple has $1 billion in cash and $25 billion in crypto, mostly XRP. He also confirmed there are no plans for an IPO any time soon because of U.S. regulatory uncertainty.
It is exceptionally unusual for a pre-IPO company to buy back its own shares. However, Ripple isn’t just any company. Few startups hold the quantity of assets that Ripple has.
We haven’t seen Ripple’s balance sheet, but based on simple math, a valuation of $11.3 billion seems to represent around 44% of Ripple’s cash and crypto. And one would hope that Ripple’s intellectual property might be worth something.
Is Ripple’s XRP worth $25 billion?
But that calculation isn’t entirely accurate because valuing an escrowed stash of coins at the current market price is risky. According to Coingecko, the currently circulating XRP supply is 54.2 billion tokens out of a maximum of 100 billion. So Ripple has the balance of 45.8 billion tokens valued at yesterday’s price of 55 cents, which is around $25.2 billion. Using that figure is natural because that’s the available market price.
However, if Ripple released those tokens onto the market today, the price would drop significantly. Of course, it won’t do that because it has its escrow process. However, an investor using the current price to value locked-up tokens is FTX-risky, particularly when it’s such a large proportion of the total issuance.
So, an $11.3 billion valuation isn’t really a 56% discount.
That said, buying back stock is generally a vote of confidence by the company and its leaders. One could imagine CEO Garlinghouse saying, “We can buy you out at a big discount. We’ll take that!”
The fact that Ripple is in a position to do this is positive. Compared to its cash and XRP balance, $285 million is not huge.
Why investors might want an exit
One potential reason for investors exiting is the long time that has passed since Ripple’s early funding rounds between 2013 and 2016. Some venture funds might simply want an exit to secure their massive profits. Given an IPO was on the cards before the SEC litigation and no longer is, it might be the simplest explanation is the right one. The list of external investors is at the foot of this article.
Other investors may believe that Ripple will have to pay substantial penalties to the SEC.
Recall that Ripple only prevailed in part of its battle with the SEC. Judge Torres ruled in Ripple’s favor that anonymous XRP sales via exchanges to retail investors were not sales of securities. However, the judge found for the SEC regarding institutional sales. Those institutional sales totaled $1.3 billion when the case was filed and another $3 billion subsequently.
If Ripple has $1 billion in cash, it might need to sell more XRP to pay damages, depending on the penalty figure.
Investors might think this will put pressure on the value of XRP. Alternatively, over the longer term, perhaps they believe the value of XRP will be lower by the time Ripple sells its XRP stash.
What’s Ripple’s motivation?
A key issue is we don’t know why Ripple wants to buy back stock. There may be a lot of stock overhang because some investors want to exit. That could be pushing down Ripple’s stock valuation on secondary markets for private stocks such as Forge Global. Hence, this could be an exercise to prop up its stock price. That’s not dissimilar to Ripple’s actions in putting unlocked XRP back into escrow. News of a low stock price could impact XRP’s price and result in a vicious circle.
After all, the $11.3 billion valuation isn’t much higher than the $10 billion Series C valuation in December 2019. That was before the last crypto boom, and XRP was valued at around 20 cents then.
The most interesting piece of information will be which investors choose to sell.
As an aside, this is not the first time that Ripple has bought back stock. In early 2022 it repurchased its Series C $200 million funding, which originally valued the business at $10 billion. For the repurchase Ripple used a valuation of $15 billion. The company had a nasty falling out with lead Series C investor Tetragon, who wanted out after the SEC sued Ripple. A clause in the contract said a determination that XRP was a security would trigger a buyback.
Judging by the XRP price action, the buyback seems generally regarded as good news.
Early Ripple investors:
- Angel and Seed (2013) $9m: Google Ventures, Andreessen Horowitz, IDG Capital Partners, FF Angel, Lightspeed Venture Partners, The Bitcoin Opportunity Fund, Vast Ventures, Core Innovation Capital, Venture 51, Camp One Ventures, IDG Capital Partners, and a number of unnamed individuals.
- Series A (2015) $32m: Santander Innoventures, IDG Capital Partners, venture arms of CME Group, Seagate Technology, Jerry Yang’s AME Cloud Ventures, ChinaRock Capital Management, China Growth Capital and Wicklow Capital.
- Series B (2016) $55m: Standard Chartered, Accenture Ventures, SCB Digital Ventures and SBI Holdings. Plus some existing investors.
- Series C (2019) $200m: Tetragon, SBI, Route 66. (Bought out in 2022.)
