By Therese Poletti, MarketWatch
Opinion: While recent tech IPOs have popped, there is a lot of
money available to companies that want to avoid the process
Don't let the recent strong initial public offerings fool you:
Tech startups are still avoiding Wall Street en masse, and there is
big money offering them investments to stay private in multiple
ways.
Last week's debut of data-center company Switch Inc
(http://www.marketwatch.com/story/switch-ipo-stock-soars-more-than-20-on-first-day-of-trading-2017-10-06).
brought in half a billion dollars for the third-largest tech IPO
this year, and streaming-video device maker Roku Inc. saw its
valuation double in its first two trading days
(http://www.marketwatch.com/story/roku-ipo-valuation-doubles-in-less-than-two-sessions-2017-09-29).
They follow more recognizable names that went public earlier this
year and have struggled to live up to their initial valuations:
Snapchat parent company Snap Inc.(SNAP) and meal-kit delivery
company Blue Apron Holdings . These companies all bravely went
forth, where even bigger companies still fear to tread.
However, the tech companies with some of the largest private
valuations continue to sit on the sidelines, preferring to remain
mostly silent on IPO plans. Uber Technologies Inc., Airbnb Inc.,
Pinterest Inc., Palantir Technologies Inc. and Dropbox Inc. are
just a handful of companies valued at $10 billion or more in
venture capital investments that have not publicly filed for an
IPO, and there are dozens more companies with valuations of more
than $1 billion.
Roku IPO: 5 things to know about the streaming device company
(http://www.marketwatch.com/story/roku-ipo-5-things-to-know-about-the-streaming-device-company-2017-09-05)
Instead, many of those so-called unicorns are looking for any
other avenues to raise funds, avoiding the type of roller-coaster
performance Snap has experienced, which could show that companies'
lofty private valuations could mean a harsher reception from public
investors when a deal gets to market. Even with the recent rebound
in its shares
(http://www.marketwatch.com/story/snap-stock-surges-114-in-best-trading-day-since-ipo-2017-10-11),
Snap still is trading below its IPO price of $17.
"There was a time when too much money was in the IPO market,"
said Kathleen Smith, principal at Renaissance Capital, a manager of
IPO ETFs. "Now you might say there is a lot of excess capital in
the private market, it has produced excessive private valuations
that aren't holding up in the public market."
Read: JOBS Act is causing IPOs to be underpriced, but execs
still benefit
(http://www.marketwatch.com/story/jobs-act-is-causing-ipos-to-be-underpriced-but-execs-still-benefit-2017-10-10)
Last year was the worst drought in IPOs
(http://www.marketwatch.com/story/trivago-brings-depressing-year-for-ipos-to-a-close-2016-12-16)since
a major downturn in 2009 resulting from the economic collapse. Jay
Ritter, a Cordell professor of finance at the University of
Florida, counts only 74 operating companies in the U.S. as going
public in 2016,
(https://site.warrington.ufl.edu/ritter/files/2017/08/IPOs2016Statistics.pdf)
excluding entities like ADRs, closed-end funds, REITs, SPACs, penny
stocks and others, the lowest since 2009.
This year has rebounded slightly. Through three quarters, 20
tech IPOS have raised $6.7 billion, according to Renaissance
Capital, compared with 16 tech IPOs that raised $2.1 billion in the
same period in 2016. There have been 121 total IPOs in the U.S. so
far this year, raising $31.2 billion, compared with 102 total deals
in 2016, raising $21.6 billion, according to data from PwC
(http://usblogs.pwc.com/deals/declining-q3-ipo-activity-triggers-many-questions-q3-2017-capital-markets-watch/?WT.i_asset_id=AD.OD.NL_Q3%202017%20Capital%20Markets%20Watch_10FY18&WT.mc_id=5877&WT.i_dcsvid=deals%40braincomm.com).
"Based on the tech deals scheduled over the next two weeks --
CarGurus
(http://www.marketwatch.com/story/cargurus-prices-ipo-above-expected-range-at-16-a-share-2017-10-11),
LiveXLive Media, MongoDB, Sea -- and what we see in the pipeline,
we think that 2017 could see twice the number of tech IPOs as in
2016," Smith said.
Don't miss: 5 things to know about the MongoDB IPO
(http://www.marketwatch.com/story/mongodb-ipo-5-things-to-know-about-database-software-unicorn-2017-10-06)
Still, the total is unlikely to live up to previous years.
According to PwC, there were 229 IPOs in 2013, 276 in 2014 and 169
in 2015.
That is not surprising, as companies with valuations in the
unicorn stratosphere are fearful of experiencing a "down round" IPO
like Cloudera Inc. (CLDR) , which went public at less than half the
valuation it had received in a private investment led by Intel
Capital
(http://www.marketwatch.com/story/four-things-to-know-about-the-cloudera-ipo-2017-04-18).
Those fears have helped change the attitude among tech
entrepreneurs, who once embraced the IPO as a major event in
growing a company.
"It is no longer that Holy Grail," said Barrett Daniels, Chief
Executive of Nextstep Advisory, a consulting firm that advises
companies on going public. "The way it currently works, it has
become much more of a burden. The amount of work involved doesn't
match up with the benefits that come out from the other side."
Daniels noted that because so much private money has been
available, companies can get the funding they used to count on from
an IPO from other avenues. Those avenues are multiplying seemingly
by the day, and could disrupt the IPO market for years.
Read also: Snap backlash, Facebook capitulation won't stop
founder-friendly stock structures
(http://www.marketwatch.com/story/snap-backlash-facebook-capitulation-wont-stop-multi-class-stock-structures-2017-09-22)
Right now, startups are keying on five distinct funding
opportunities available to later-stage companies that want to avoid
a traditional IPO.
1) Initial coin offerings. ICOs are using the cryptocurrency
based on the Ethereum blockchain to raise funding from a range of
investors at an increasing rate, as this list shows
(http://www.marketwatch.com/story/what-are-icos-and-why-is-the-sec-taking-steps-to-protect-investors-from-them-2017-07-27).
Companies attract investors looking for the next big crypto score
by releasing their own digital currency in exchange, typically, for
an investment in bitcoin. In 2014, ethereum raised $18 million in
bitcoin and is now trading with a market cap of about $19 billion.
But ICOs probably represent the riskiest strategy, with a growing
chorus of naysayers
(http://www.marketwatch.com/story/bitcoin-is-a-bubble-says-the-head-of-the-worlds-largest-hedge-fund-2017-09-19)
calling it a bubble.
2) The SoftBank Vision Fund. With $93 billion burning a hole in
its pocket via a new fund, Japanese tech conglomerate SoftBank
Group Corp. (9984.TO) is helping many companies avoid going public
for a while. Slack, the office messaging service, raised $250
million in a financing round led by SoftBank
(http://www.marketwatch.com/story/slack-raises-250-million-funding-round-led-by-softbank-2017-09-18)
that valued the company at $5.1 billion. WeWork Companies Inc.,
which rents shared office spaces, received $4.4 billion from the
SoftBank Vision Fund that valued the startup at $20 billion
(http://www.marketwatch.com/story/softbank-raises-its-wework-investment-to-44-billion-2017-08-24),
and its chief executive explained that valuation in a way that
probably would not fly on Wall Street.
"Our valuation and size today are much more based on our energy
and spirituality than it is on a multiple of revenue," Adam Neumann
told Forbes
(https://www.forbes.com/sites/stevenbertoni/2017/10/02/the-way-we-work/#30a65e811b18).
3) SPAC. Venture capital investors Chamath Palihapitiya and Ian
Osborne recently went public with a special purpose acquisition
company, or SPAC, called Social Capital Hedosophia
(http://www.marketwatch.com/story/new-investment-vehicle-gives-tech-startups-an-alternative-to-ipo-2017-08-23).
The company, formed as what is called a blank check company, has
the mission of creating "an alternative path to a traditional IPO
for disruptive and agile technology companies to achieve their
long-term objectives and overcome key deterrents to becoming
public."
In other words, the SPAC's only reason for being is taking the
money it raised from Wall Street and buying an as-yet-unnamed
startup or startups, or stakes in those companies. Much like
investors who turn over capital to venture capital shops and hope
that they find a winner, investors in Social Capital Hedosphia are
doing the same.
4) A direct listing. Spotify AB, the streaming music company, is
planning to resurrect the direct listing, which would place its
shares directly on Wall Street without the formal process of an
IPO. This kind of deal would provide liquidity for investors who
lent the company money on the condition that it go public this year
(http://www.marketwatch.com/story/spotify-is-considering-a-direct-listing-instead-of-traditional-ipo-2017-04-06),
but would not raise any new funds for the Stockholm-based company.
Currently, the SEC is reviewing its plan and it could list later
this year or early next year
(https://www.bloomberg.com/news/articles/2017-08-21/sec-is-said-to-study-spotify-plan-to-bypass-ipo-in-nyse-listing),
Bloomberg News recently reported.
5) Mergers and acquisitions. Getting acquired is by far the most
frequent way that investors see returns on their private
investments. According to Ted Smith, co-founder and president of
Union Square Advisors, about 80% of young companies end up getting
acquired while 20% go public, a general 80/20 rule that he says
goes back as far as the mid-1990s.
"VCs are fairly cautious about the IPO market," Smith said.
"Generally speaking, many of those are going to end up doing
M&A." It isn't going to be another banner year for mergers, as
it was in 2015 and 2016, he said, but there will still be a lot of
deal activity.
Of course, startups are also going the same route that has been
popular for the past decade: Continuing to raise venture funds or
convertible debt from the same group of Sand Hill Road investors.
That habit is leading to a much older crop of companies going
public: Roku, for example, was a decade old when it went public and
investment bankers began calling on the company to go public as
long ago as 2012
(http://www.marketwatch.com/story/roku-is-in-a-sweet-spot-in-shifting-tv-land-2012-03-06).
"As these unicorns get older and larger, there is a pull between
investors and management," said Rohit Kulkarni, managing director,
private investment research at SharesPost, a private secondary
market.
Whether any of the big-name startups like Uber and Airbnb go
public before they are as mature as Roku is an important question
for 2018 and beyond. In many cases, public investors appear to be
missing out on the biggest growth spurts, but getting the chance to
invest at a more rational valuation.
As Daniels of Nextstep noted, "The public is now the smarter
investor than the private investor."
(END) Dow Jones Newswires
October 13, 2017 07:07 ET (11:07 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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