IPO No Longer A Priority For US Tech Firms
Even a few years ago, a young, innovative techie with a great startup idea would try every mean to take his company public. In 2014 too, many tech IPOs enjoyed soaring valuations in their Wall Street debut, raining cash on the companies and their investors. However, the tech IPO bubble is winding down this year, according to a Reuters report.
Five of the 12 US-based tech companies that went public this year, priced their shares at a valuation below or nearly the same as their private market value, compared to 24 percent of the 29 that went public in 2014. For example, Pure Storage, whose IPO earlier this month gave the data storage company a $3.1 billion market cap that almost matched its valuation in the private market.
The shift in the investing climate comes as payments company Square filed this week for its own IPO later this year, becoming a key private company valued at more than $1 billion, said the report.
“People are no longer out of their minds with valuations and expectations,” Adam Marcus, managing partner at OpenView Venture Partners in Boston told Reuters.
Among the companies that saw their values grow in last year’s IPO, the median increase from their value in the private market was 61 percent.
The difference is pretty stark when compared to last few years (with 2014 as the peak) when hot tech companies found no shortage of investors for their private financing and experienced massive valuations, and then demanded an even higher market cap in an IPO. But now the public market is less willing to play along, experts believe.
The report notes that the delays in going public can be attributed to the surge in funding from late stage investors, allowing tech startups to stay private longer. As their valuations grew in the private market, a big increase in the value of their shares in an IPO became harder to achieve. Some of the private tech companies that were expected to go public this year have put those plans off.
According to a report by research firm Renaissance Capital, which was published in September, technology companies’ share of US IPOs have fallen to a seven-year low, boding poorly for investors who have pumped billions of dollars into startups in hopes of a big payday. “Only 11% of U.S. IPOs so far in 2015 involved tech companies, according to new data from That is the lowest level since 2008, when the figure was 10% and the financial crisis was in full force. Meanwhile, shares in many of the companies that have gone public aren’t performing well,” it said.
The data sends a strong signal that the broader markets aren’t eager to buy everything venture capitalists are selling, threatening the outlook for what has been one of the most robust segments of the US investment landscape.
Despite this, many companies will go public in current market conditions, as those that have raised large rounds since 2013 are under pressure to return cash to their investors and employees in the next year, analysts believe, Square leading among those. The company filed for a public offering this week, proposing to raise at $275 million. But it, too, is expected to take a price cut.
With its CEO, Jack Dorsey, now also leading Twitter, some investors expect the company’s $6 billion valuation will be discounted to compensate for Dorsey’s half-time role.
The distaste for IPO may change in the coming years. David Erickson, a former banker and venture-capital adviser who is now a senior fellow at The Wharton School at the University of Pennsylvania told WSJ, “The dynamic may change in 2016 if private markets follow the lead of the public markets.” He adds, “It’s hard to assess how recent public market volatility has affected the private market, but it likely will.”
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