Are Tech Unicorns Scared of IPOs?Author: Max Odenthal
“Tech unicorns”, as technology start-ups valued at over $1 billion have come to be known, used to seem in a hurry to offer their young, prosperous businesses on the stock market. Social media giant Facebook, for instance, went public in 2012 and Twitter followed suit in 2013. Now, however, tech unicorns seem to be shying away from IPOs, preferring to raise money in other ways. Last year, only 30 tech companies went public in the United States, half the IPOs of the previous year and the smallest number since the 2008-9 financial crisis. What is causing tech companies to shy away from IPOs?
Well, one reason is clearly the complexity of due diligence process that startup companies have to go through. As far as virtual data room’s popularity is still growing, a vast amount of companies still remain unaware of this great tool.
Another reason for the lack of recent IPOs in the tech industry is the enormous amount of money that tech unicorns were able to raise privately last year. In June 2015, the home-sharing platform AirBnB, which is valued at $25 Billion, managed to raise $1.5 million in a private funding round. Didi Kuaidi, a taxi-hailing app from China similar to Uber, managed to raise $3 billion from private investors last year. With a private funding atmosphere that is this generous, it’s no surprise that tech unicorns prefer to forego the risk represented by the fluctuations of the stock market.
Is the market a friendly place right now?
The current trends in the U.S. stock market, as well as the poor performance of tech IPOs in 2015, present more reason for U.S. companies to forego public offerings this year. Equities performed badly in the first two months of this year, with the S&P 500 falling by six per cent in the first week of January and another five per cent by the end of February. Market volatility has remained high, with large fluctuations due in part to oil prices, meaning that unicorns have difficulty finding a safe time frame within which to launch their IPOs. This deterrent is further backed up by the catastrophic IPOs carried out by tech unicorns last year. For instance, an online craft retailer, Etsy, which increased its share value by 88 per cent on the first day of trading, joined the 10 worst performing stocks of any publicly offered US company by the end of the year. Its shares traded well below their $16 IPO value.
Some are fearless
However, despite most unicorns deciding to forego public offerings, 2016 is not all bad news for IPOs. Many tech companies are still making plans for IPOs that they can implement when conditions become more favorable. IPOs also still provide a valuable springboard for companies that have not quite attained unicorn status, but may well reach billion-dollar valuations in the near future. Apptus, for instance, a “quote-to-cash” tech company that provides services such as invoicing, is set to increase its market potential (now already $31 billion) to over $40 billion by 2018. However, with a current revenue of only $120 million, Apptus cannot attract the same kind of astronomical private funding that larger unicorns such as AirBnB can, and is looking to undertake an IPO at an opportune moment this year. In addition, although public IPO filings, such as that of cloud storage company Nutanix, have been few and far between among unicorns, plenty of them are said to have filed confidentially this year.
So what are the reasons?
Unicorns are unlikely to maintain their reservations about IPOs for a number of reasons. Firstly, an IPO remains an important step in the timeline of any great start-up. Going public gives entrepreneurial ventures publicity that can help legitimize their outfits, which are often small. Employees holding equity in these companies also gain a market for their stock, making the start-ups more attractive places to work for the top talent. In addition, publicly trading companies’ stock immediately rewards them for new ventures such as mergers and acquisitions, rather than periodically as is the case with private funding. Experts, such as Silicon Valley IPO adviser Lise Buyer, agree that IPOs remain the ultimate goal for any ambitious unicorn.
Tech unicorns, therefore, are opportunistic rather than scared when it comes to IPOs. With a turbulent market, any intelligent business owner, especially of a unicorn that already has impressive performance, will be cautious of the risk of an IPO. Alternatives like venture capital funding will only exacerbate this. Trends indicate, however, that the lull in IPO activity will not last long. Private funding of start-ups has taken a nosedive this year, depriving unicorns of their primary alternative to IPOs. According to Dow Jones, venture capital funding of start-ups has plummeted by 25 per cent in the first quarter of this year, the largest decrease seen since the dotcom bubble burst in the early 2000s. In the United States, only 884 deals were made between venture capitalists and start-ups, the lowest number in the last 4 years. This lull in funding means that tech start-ups are finding it harder to stay afloat: Shuddle, for instance, dubbed the “Uber for kids”, joined the long list of bankrupted start-ups in April. Unicorn owners, therefore, might find themselves scared into, rather than away from, IPOs to maintain their sky-high funds in an increasingly chilly venture capital environment.