The past 12 months have provided us with a boom period for tech IPOs that we haven’t seen since the height of the dotcom boom of the late 1990s. As companies scramble to go public off the back of greater consumer dependencies on digital transformation and a far more active investment market, we’re seeing IPOs and their proceeds climb to unprecedented levels. However, the temptation to go public may not be a healthy one for most tech startups.
Driven in part by the growth of SPAC-based mergers, the IPO market have enticed more tech companies to IPO in 2021.
As we can see from the data above, 552 IPOs were launched in the US across the first half of 2021 alone – comfortably surpassing the total for the entire year of 2020 and already more-than doubling 2019’s figures.
As the visualisation above shows, tech IPOs rarely stray from the limelight when it comes to going public, with significant levels of interest from institutional investors and retail alike. However, evidence suggests technology companies are among the most disappointing in terms of the returns they provide on investments.
Traditionally tech companies wait longer before they launch an IPO. This trend usually means that the companies that go public later have little room for the explosive growth that some investors attach to the prospect of floating on a public market. However, the favourable market conditions of the past year has led to widespread FOMO across tech firms – particularly those looking to capitalise on recent boosts to their bottom line in the wake of more tech usage during the pandemic.
Mixed Fortunes for Tech IPOs
Many darlings of the tech industry can experience mixed fortunes in the wake of launching their IPOs. There are plenty of reasons why this could be the case, but they can often be found within the fundamentals of the business itself.
As we can see from the table above, many of the big name tech IPOs in the past have arrived on Wall Street whilst remaining largely unprofitable. This sample shows that over half of the listings had losses of $100 million or more in the 12 months before going public.
These issues with cash flow aren’t likely to be enough for investors to overlook a company, and the majority of big tech companies typically post high levels of growth alongside significant losses. After all, scaling costs money, and both public and private investors have become accustomed to seeing the companies they’re invested in posting significant losses on their path to becoming large players on the stock market.
However, losses are still key to the trajectory of companies, and different losses can mean different things – for example, some adverse bottom lines can be driven by fixed expenses and business decisions, while others are based on marketing spend, margins and aggressive price setting to help bolster market share.
These factors can impact companies in various ways, and may show ambitious scaling companies in a way that makes them seem like cash guzzling loss-leaders and slow-growth companies with prudent marketing campaigns appear to be fiscal geniuses.
The Perfect Storm for Listings
The pandemic has helped to cause a perfect storm for tech IPO listings around the world. Despite the initial public offerings market grinding to a halt in early 2020, the market came roaring back in the second half of the year, with high profile listings like Palantir and DoorDash among the biggest names to go public. We also saw Snowflake become the world’s largest software IPO.
“The returns and proceeds really highlight what a strong this year was, especially in the second half as tech and biotech bounced back given their demand in the pandemic,” noted Matt Kennedy, senior strategist at Renaissance Capital.
“Those two areas—health and technology—were the two legs of the IPO market. IPOs proved resilient, which you might not have expected heading into the second quarter, given there was briefly a flight to safety before risk appetites soared again and the demand for growth companies fueled these record return and high valuations,” Kennedy explained.
The market was further bolstered by the influx of unprecedented levels of new retail investors arriving to buy into the stocks that they like the most. The implications of global lockdowns meant that individuals had more access to government stimulus packages and greater levels of free time to begin researching the markets.
“A great number of retail investors buy shares of the companies, which are well known and highly volatile, and post hundreds of percent market cap gains, yearly. Such investors are often referred to as Robin Hoods, they like investing into technology, biopharma, and SPAC companies,” said Maxim Manturov, head of investment research at Freedom Finance Europe.
“People in the US traded about 90% more stocks than the week before they received their stimulation funds. Goldman Sachs recently raised its expectations for stock demand by retail investors in 2021, from $100B to $350B,” Manturov elaborated.
As a result, we saw far greater levels of investor interest in tech stocks in the second half of 2020, which helped to pave the way for some high profile IPOs over recent months, with company valuations soaring in the process.
Patience is a Virtue
Although tech IPOs appear to generally struggle to return initial investments over the long term, the reason for this is that tech companies generally prefer to exercise patience when it comes to going public.
In taking longer before startups arrive on Wall Street, companies can afford themselves far more autonomy in terms of its scaling options and the direction the company takes. This can be particularly appealing for CEOs who have strong visions of where they want their company to be without having to answer to shareholders who may question the approach.
It’s also become easier to access private funding, and for tech companies to undertake larger and more frequent private financing rounds ahead of their IPOs, allowing firms to prepare better for their IPO by building maturity and implementing consistent long-term strategies.
While this approach has won appeal among tech startups, there are a few exceptions to the rule in the case of Amazon and Apple – with both companies going public within five years, enabling investors to take advantage of growing valuations.
The virtue of patience is a key reason why tech IPOs may not deliver the significant returns that some investors crave. Going public at a later stage of maturity means that much of the company’s scaling has already been done – leaving less room for growth.
Maxim Manturov notes that “In 2021, the IPO market looks very much full: we already had Affirm, Qualtrics, Bumble, Coupang, Coursera, UiPath, Marqeta, and others, and will soon have Robinhood and Duolingo.
In 2022, the IPO market will largely depend on which companies are being expected. For instance, many are expecting an IPO from Stripe, an online payment platform that could go public both in 2021 or 2022. AvidXchange, a billing and payment automation solution vendor, is also being expected very much. Founded in 2000, this company processes transactions worth over $140B, annually. Overall, it is currently a complicated task to understand what the 2022 IPO market may look like.”
It’s for this reason that the current IPO boom is something of a poisoned chalice for tech startups. The lure of significant levels of fundraising and a high valuation attached to the company may be too tempting to avoid, but for companies posting losses at an early stage of development, going public at this time and risking the loss of autonomy may be a case of too much too soon.