Unicorns filing: tech IPO pipeline heats up
June 2018 | FEATURE | CAPITAL MARKETS
Financier Worldwide Magazine
June 2018 Issue
Judging by the number of initial public offerings (IPOs) filed in the sector over the past six months, the unicorns are well and truly rising in tech, with high-momentum startups serving to warm the IPO pipeline.
Accentuating this proliferation were the high-profile IPOs launched by Dropbox, zScalar and Spotify Technology – all successful listings that are expected to inspire other unicorns to take the next step toward a public offering this year.
“The level of activity has been high, especially compared to recent years,” says Barrett Daniels, CEO of Nextstep Advisory Services. “This includes a significant amount of IPO activity going on behind the scenes with companies that are still in confidential mode. If the stock market holds up, this could be an outstanding year for IPOs and arguably the best since 2014, if not the best in over a decade.”
What, then, are the factors driving tech startups to embark on the IPO trail? “After a period of several years in which the IPO market has been underwhelming, a significant backlog has developed,” explains Mr Daniels. “The companies that make up this backlog, however, are now feeling significant pressure from their investors and employees to go public, while the markets are still accepting of such transactions.”
For Michael Sobel, co-founder and president of Scenic Advisement, it is the fact that tech companies are staying private for longer and growing bigger in the private markets that is proving significant. “The tech IPO space is now a $35bn-plus market and is growing,” he says. “A structural change is underway and this is impacting the level of IPO activity.”
“For different reasons, the Dropbox and zScalar IPOs set a good tone for 2018, very much in contrast to the negative tone set by Snap and Blue Apron in the first half of 2017,” notes Mr Daniels. “Dropbox showed that very large unicorns can get out without taking a haircut from their last private valuations if they have a good story and their financials are solid. At the same time, zScalar showed that the IPO window is still wide open for interesting tech companies with solid numbers, even if not a super sexy, consumer-based IPO. Both of these companies also did an excellent job of timing and pricing their IPOs.”
As far as Spotify’s direct listing is concerned, Mr Sobel views it as another illustration of how typical tech company funding models are being torn up. “Companies are now raising more money in the private markets and increasingly viewing the public markets more as a way of acquiring acquisition currency,” he says. “No longer is the pattern Series A through D then IPO; it now runs the gamut from A through Series Z.”
Bumper years ahead?
The IPO pipeline in 2018 is hot and set to get hotter, with many practitioners predicting bumper years ahead for tech IPO activity. “2018 will likely be an outstanding year for IPOs, one of the best in a long time,” opines Mr Daniels. “The broader markets have to hold up of course, but barring a market collapse, the 2018 IPO market should finish with a bang.”
Looking further ahead, IPO markets in 2019 and 2020 are also expected to be strong, with the backlog of IPO candidates getting larger and capital becoming more widely available. “Airbnb, Uber, WeWork, SoFi, Stripe and others have stated that they will not be going public in 2018, which means they will likely be 2019 or 2020 IPOs,” adds Mr Daniels. “These are the kind of companies that can almost single-handedly create a significant amount of IPO buzz and excitement in any given year.”
Mr Sobel, however, believes that the launch of an IPO is no longer the obvious endgame for tech companies. “They can raise enough money in the private markets at good valuations, which means that an IPO is no longer the only option,” he suggests. “We are seeing a big increase in private IPO, transactions conducted wholly in the private markets that provide employee and shareholder liquidity, as well as raising significant investment from long-term, global investors. This year, we have seen more private IPOs than public ones.”
With investor demand for high-growth and disruptive-tech stories likely to continue, it is highly likely that the IPO pipeline will remain hot in the second half of 2018 and well beyond.
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