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THE IPO is dead, live the IPO. When the pandemic hit in March, initial public offerings, particularly by technology startups, were predicted to be among the early victims. After all, who wants to go public in a once-in-a-century crisis?
Not many people, it turns out. In the past few months IPOs, who all resigned by the end of May, have returned with a vengeance in America. None of Silicon Valley’s recent and upcoming ads is that of Ant Group. The payment representative of Alibaba, an online giant, wants to raise a record $ 30 billion in China in October, which the company could value at $ 200 billion. But America’s technology startups have raised $ 10 billion this year (see Chart 1) – and there’s more to come. On August 19, Airbnb, which rents homes to travelers, submitted for a IPO. Other private ‘unicorns’ reportedly ready for public meadows include Snowflake Computing, which makes cloud software; DoorDash, which delivers food; and Instacart, which delivers groceries. Add Palantir, a crypto data management company that is preparing for a direct sale of existing shares in public markets, and the latest combined valuation of these five is $ 80 billion, according to Pitchbook, a data provider. Even if they only float a portion of their stock, billions worth of fresh tech stocks will soon go public.
This flurry of activity has not reached dotcom bubble territory since the turn of the century, when dozens of startups flocked every month. But there is a smell of “irrational exaggeration” in the air, discovers Lise Buyer, who has seen technological advancement since the very late 1990s and now helps start-ups with IPOs by Class V Group, an advisory firm. When Duck Creek, an insurance-tech company, went public on August 14, they closed nearly 50% higher. BigCommerce, an online shopping platform that ran a week earlier, saw its shares “pop” by more than 200%.
With the S&P 500 index of large American companies in a whole time, remember that covid-19 rose, the rationality of investors is certainly up for debate (see Buttonwood). But for many startups, the desire to go public is purely rational, for two reasons.
The first has to do with the financial markets themselves. Venture capitalists who had gone billions into unlisted companies began to chill at shady startups before the pandemic, after a few unicorn ads were disappointed (Lyft and Uber) or collapsed (WeWork). At the same time, rock-bottom interest rates are pushing public capital to seek returns. As a result, stock market investors are ready to accept high valuations, says Lauren Cummings of Morgan Stanley, an investment bank and a leading underwriter of IPOs. “There is insufficient demand from public investors,” says Brian Feinstein of Bessemer Venture Partners, a venture capital firm (VC) clever.
Startups want to slaughter it before it disappears. Many companies are therefore throwing away list plans that were put on hold in the throat of the drifting dudes and the WeWork snafu. Their business is strengthened because – and this is the second reason for the list lust – of startups – the pandemic has been many tech companies.
The five major platforms – Google, Amazon, Apple, Facebook and Microsoft from Alphabet – have flourished as self-isolating consumers spend more time and money online, and companies are splashing out on cloud computing services to work remotely. On August 19, Apple recently hit a market capitalization of $ 2trn, the first U.S. company to do so. Not-so-great tech has also benefited, including many companies that have recently gone public.
The pandemic has marked and accelerated a fundamental shift to digital companies, says Sarah Cannon of Index Ventures, a VC clever. The trend will last for decades, she predicted. Markets agree. The tech-heavy Renaissance IPO The index, which covers most of the listers of the past two years, has risen by more than 40% since January (see Chart 2). Zoom, whose video conferencing program has only become one in the midst of lockdowns, has seen its share price increase four times since floating in April 2019; it’s worth $ 78 billion. CrowdStrike, a cyber security company launched in June last year, has doubled in value since March.
One thing the last boom has done is highlight how unhappy startups and VC companies have grown with the current process of going public. It is cumbersome, with a lot of paperwork, and can take more than a year. It’s expensive too – and is seen as too cozy for Wall Street. Investment bank fees alone typically cost between 4% and 7% IPOthe proceeds, not accounting for attorneys and other advisors. Startups and VC companies point to large first-day pops as evidence that offers are underpriced to give the banks’ large investors a quick return. After all, those customers are regulars who need to be loved, while most startups only go public once.
Disgusting with the IPO process, combined with a renewed desire to become public, has led some companies to consider alternatives. One is a “direct mention” of the kind that Palantir is striving for, and that Spotify, a music streaming service, and Slack, a messaging company, have used it well. Asana, which sells web-based project management software, could be another unicorn to take the direct route. Direct ads use an electronic auction through the stock market to get startups a fairer price for their shares than investment bankers might. But they do not allow companies to raise new money. As a result, they are an option only for cash-rich businesses.
Another route that has gained prominence is the specialty purchasing company. This one SPACs, as they are briefly known, are shell companies that go public and promise to buy one or more private companies with the proceeds of the listing. The private company then completes the said shell through a reverse merger. SPACs have a dual history; many have underperformed the broader stock market. But the latter fate promises to repair the shortcomings while maintaining the benefits, which include direct negotiations on the purchase price that can make deals faster and more predictable. From January to early August 60 SPACs went public, increasing by $ 22.5 billion. In July, Bill Ackman, a hedge fund boss, launched a $ 5 billion-7 billion car, the largest to date.
It is unclear what Silicon Valley will include SPACs quite. The largest tech company that one has used is Nikola, a secret startup of zero-emission truck that now has a market capitalization of about $ 16 billion. Many entrepreneurs and their supporters would not allow their businesses to be sucked into a shell. Mar SPACs have a place in tech world. On August 18, Kevin Hartz, an early investor in Airbnb and Uber, launched one. Ribbit Capital, a VC firm, is likely to have another plan.
De IPOinstallation complex is not averse to direct ads as SPACs, even if they are less lucrative than the old-school ways. Bankers predict a diverse future of increasingly tailor-made floats that, say, target specific investors and determine in advance how long staff should hold on to their shares. As Greg Chamberlain of JPMorgan Chase, a banker, summed up: ‘Not all technology companies are the same. They have different goals. As long as startups want to pay, as everyone eventually does, they will need Wall Street to protect them.■
This article appeared in the Business section of the print edition under the heading “Partying like it 1999”
