From Lyft to Pinterest to Zoom, with Uber, Slack or Airbnb potentially joining them soon, this could be the biggest year for tech Initial Public Offerings (IPOs) ever. And when you consider last year’s figures, that means seriously big. But what’s driving the trend?
2018 IPOs included big names like Spotify, Sonos, Docusign, Eventbrite, Farfetch or Dropbox. Tech IPOs went global: seven of the 15 $1bn tech IPOs were Chinese. And there were more ‘unicorn’ $1bn valuations than ever before: 18 (2010, by contrast, saw just three).
These high values are down to better capitalisation and bigger revenues, points out Bob Blee, head of the corporate finance group at Silicon Valley Bank.
“In 2018, average trailing twelve-month revenue prior to IPO was $182 million vs. $92 million in 2010,” he says. “Another topline trend has been the shift to recurring revenue models. With this approach, today’s software-as-a-service companies, for example, have more predictable and durable financial results, which appeal to investors and increase valuation multiples.”
But with continuing uncertainty around global markets – economic slowdown in China, recession rumbles in the US – going to IPO in 2019 could be a sign that tech companies are looking to go public as soon as possible, before a downturn hits.
When the economy goes down, the IPO market suffers. Both early investors, founders and eligible employees will be looking to make as much as possible out of an IPO. And a tanking market isn’t a great place to do that – although big names are unlikely to suffer too badly.
No IPO is an island
The tech IPO trend is also affecting whether or not other start-ups decide to go public, as Conor Sen, portfolio manager for New River Investments, points out in Bloomberg Opinion.
He says the ‘race for liquidity’ dynamic is what makes 2019 different. When tech companies stayed private, supply was limited – helping to support their price and valuations – and there was plenty of public money available.
“But what happens when a glut of companies decides to go public all at once?” he asks. “That glut of supply, both in terms of the money raised during IPOs and then the secondary effect of employees selling their shares, could end up weighing on the prices of not just publicly traded tech stocks but also the valuations of companies that choose to remain private.”
The new mafia
That ripple effect could also see a wave of new start-ups, suggests the Financial Times’s San Francisco correspondent Hannah Kuchler.
When PayPal was sold to eBay in 2002, founders and early employees made big bucks which they used to create new companies. Two of the best known of the ‘PayPal mafia’ are Facebook backer and Palantir founder Peter Thiel, and Elon Musk, who co-founded Tesla and set his sights on Mars with SpaceX.
The new mafia is already beginning to organise, she points out. “About 100 former Uber employees have set up Moving Capital, an investor syndicate, to invest in start-ups from other former Uber employees. Josh Mohrer, a former Uber executive co-founding the fund, told TechCrunch it will invest in things that are “Uber-adjacent”, such as marketplaces and transportation start-ups.”
IPO as alternative investment
And the popularity of IPOs means that they’re not just accessible to the big players, but are growing in popularity as an alternative investment, along with gold, crowdfunding and cryptos.
Apps like Goldex have made it easy to buy and sell gold at the touch of a button, making an old, slow process fit for purpose. Now, apps like SquareBook are aiming to do the same for IPOs.
SquareBook provides an alternative to what it calls ‘the overly elaborate fandango’ of the IPO process, providing a modern platform that not only gives control back to the company issuing its shares, but also gives retail investors the same access to information, investment opportunities and pricing in IPO transactions that big institutions have.
It remains to be seen if 2019 will break the record activity of 2018. However, what is clear is that the rush to IPOs isn’t likely to slow down any time soon.
Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this it does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.